Fitch: Citi mortgage servicing sale part of bigger trend
Citigroup’s decision to exit mortgage servicing is part of a broader industry trend of non-bank servicers growing market share relative to banks which is likely to continue in 2017, says Fitch Ratings. Fitch does not expect this shift to have a significant impact on banking sector credit profiles. Rapid growth has brought operational challenges and elevated regulatory scrutiny to non-bank servicers, factors that are largely embedded within the below-investment-grade ratings assigned to such entities.
Yesterday Citi announced it will exit the mortgage servicing business by the end of 2018. The bank will sell the mortgage servicing rights (MSRs) to 780,000 mortgages of customers without a Citi retail relationship to New Residential for $980 million and will outsource the remaining MSRs to Cenlar.
New Residential is a mortgage REIT that uses Nationstar Mortgage to service its loans; Nationstar is the U.S.’s largest non-bank servicer. Nationstar had seen several quarters of portfolio declines before taking on the subservicing of approximately 200,000 loans from Seneca Mortgage in the latter part of 2016.
Mortgage servicing market share for non-banks has grown steadily over the past several years. A report from federal regulators noted that non-banks accounted for 32% of total mortgages serviced by the top 30 firms in 2015, up from just 7% in 2011. Much of the growth in MSRs for non-bank servicers in 2016 went to smaller, special servicers. Servicers with loan counts of less than 400,000 reported an average year-over-year growth rate of nearly 20% (weighted by portfolio size) in 3Q16 whereas the weighted average portfolio growth for all Fitch-rated servicers over the same period was only around 2%.
Citi’s announcement reflects a general shift by some large banks to reduce their mortgage service exposure as part of strategic plans to simplify business models. In the case of MSRs, this has been driven largely by increased regulatory scrutiny for banks that includes higher capital charges for servicing assets, which do not apply to the non-bank servicers. The Consumer Financial Protection Bureau (CFPB) also launched new mortgage servicing rules in 2014 and updated them in 2016.
A rising rate environment could also be a contributing, though not decisive, factor in banks’ decision-making regarding MSRs. Specifically, Fitch expects rising interest rates to lead to higher MSR valuations, which could push banks closer to the 10% regulatory cap, though the MSRs values remain below the cap for most large banks.
Not all banks are selling MSR assets; some smaller and regional banks, including Regions Financial and SunTrust Banks, remain interested in the sector. In addition, should the new administration replace the CFPB as part of a financial deregulation policy initiative, it could reduce some regulatory compliance burdens.
While non-bank special servicers generally maintain robust servicing platforms, rapid growth requires careful loan on-boarding and operational and regulatory compliance management, including of staff resources and technology. Rapid growth has historically impacted some servicers’ performance and compliance, which led to changes to their Fitch servicing ratings. Mortgage servicers have needed to focus on operational effectiveness and compliance as most encountered significantly enhanced regulatory scrutiny. In addition, large non-bank servicers have placed greater emphasis on advanced technological tools, including scripting and staffing solutions such as offshoring, to ensure that larger portfolios can be accommodated.
Fitch expects non-bank servicers to continue building market share, although the nature of that growth will likely shift. Notwithstanding the Citi-New Residential deal, Fitch believes that new loan originations among competing non-banks will likely drive growth more than the MSR sales and subservicing agreements with banks that dominated growth in recent years.