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Citi to sell $97B of MSRs to New Residential, to exit biz by end of '18

Citigroup Inc. is exiting the mortgage servicing rights business as it seeks to increase focus on origination and simplify CitiMortgage Inc.'s operations and improve returns.

CitiMortgage will sell about $97 billion unpaid principal balance of mortgage servicing rights and related servicer advances on 780,000 Fannie Mae and Freddie Mac loans of non-Citibank retail customers to New Residential Investment Corp.'s wholly owned subsidiary New Residential Mortgage LLC.

New Residential will pay a purchase price of approximately $950 million for mortgage servicing rights and about $32 million for related servicer advances. The acquisition is expected to close in the first quarter, subject to government-sponsored enterprise and regulatory approvals.

New Residential will finance a portion of the acquisition with the proceeds from an underwritten public offering of 49,170,250 common shares. New Residential Investment expects to grant the underwriters an option to purchase up to 7,375,537 additional common shares. The remainder of the proceeds will be used to make additional investments and for general corporate purposes.

Citi will continue to subservice the portfolio on behalf of New Residential Mortgage, pending receipt of approvals to transfer servicing to Nationstar Mortgage LLC pursuant to a subservicing agreement. Nationstar expects the transfer of mortgage servicing rights to begin in the second quarter and continue throughout the year.

Citigroup also entered into a subservicing agreement with Cenlar FSB for the remaining loans and other mortgage servicing rights not sold to New Residential Mortgage as it looks to completely exit the business by the end of 2018. Loan servicing on these assets are expected to be transferred to Cenlar beginning in 2018. Citi will retain loans of its retail banking clients but they will be included in the subservicing contract.

Citi expects the expense benefits from the transactions to begin to accrue in 2018 as servicing is transferred to Cenlar and to be fully realized in 2019. The transactions are expected to negatively impact Citi's pretax results by about $400 million, including a loss on sale and certain related transaction costs in the first quarter. Excluding these, the transactions are expected to have a minimal impact on operating revenues in 2017.

New Residential also reported preliminary financial results for the fourth quarter of 2016. GAAP net income per share is expected to be 87 cents to 91 cents and core earnings per share should be between 59 cents and 63 cents. For the full year, the company expects GAAP net income per share to be in the range of $2.09 to $2.13 and core earnings per share to be in the range of $2.12 to $2.16.

In addition, New Residential’s board declared a first-quarter dividend of 48 cents per common share, up from the 46 cents per common share in the fourth quarter of 2016. The dividend is payable April 28 to shareholders of record as of March 27.