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Banks added mortgage servicing rights assets in Q4'17

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Banks added mortgage servicing rights assets in Q4'17

Banks increased their holdings of mortgage servicing rights by 2.3% during the fourth quarter of 2017, as rising interest rates began to push up prices for the assets.

Just two of the top 20 bank holders of mortgage servicing rights, or MSRs, saw their holdings decline during the period, according to an S&P Global Market Intelligence analysis.

Contracts for servicing mortgages have increased in value as banks have become bigger players in the marketplace, said Dean DeMeritte, executive vice president of Phoenix Capital and an adviser on MSR deals.

"We're starting to see more financial institution interest in servicing rights, especially on the conventional side," said DeMeritte in an interview, referring to loans that are not backed by government-sponsored entities like Freddie Mac.

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Continuing a development that began in the fourth quarter of 2017, asset values ramped up in the first quarter when interest rates trended upward, DeMeritte said. As interest rates rise, lenders tend to produce fewer mortgages, and the profit margin for loan production narrows, he said.

When that happens, buyers' appetites for MSRs increase, DeMeritte explained.

"They're less concerned about prepayment speeds," he said. DeMeritte also suspects that federal tax reform, which reduced the corporate rate to 21% from 35%, is partly behind aggressive pricing for MSRs.

As of the end of the fourth quarter of 2017, Wells Fargo & Co. remained the top bank holder of MSRs, with assets of $15.05 billion, followed by JPMorgan Chase & Co. in a distant second with $6.03 billion in assets. The two banks increased their holdings during the quarter, by 2.1% and 5.1%, respectively. Of the top 20 bank MSR portfolios, only those of Bank of America Corp. and PNC Financial Services Group Inc. declined during the period. Bank of America's MSR assets fell 4.4% to $2.30 billion, and PNC Financial's MSR holdings declined 1.2% to $1.83 billion.

Flagstar Bancorp Inc.'s MSR assets jumped 18% in the quarter to $290.5 million. The bank typically sells MSR contracts it creates when it originates loans then remains as a subservicer, collecting payments and interacting with borrowers on behalf of the new contract holders, COO Lee Smith said during a Jan. 23 conference call, according to a transcript.

The company keeps some MSRs on its portfolio, and expects a 5% to 7% return on them in the first quarter. Flagstar usually beats its guidance on MSR returns, CFO James Ciroli said during the call.

"That asset, especially how we hedge it, provides a good return without a significant downside," Ciroli said.

At the start of the fourth quarter, CIT Bank NA agreed to sell its reverse mortgaging business, Financial Freedom, in a deal whose buyer and terms were undisclosed. The move was part of the business simplification strategy for CIT Group Inc.

In the latter part of the quarter, Wintrust Financial Corp. reached a deal to buy the servicing rights for 9,000 loans from iFreedom Direct Corp. Wintrust President and CEO Edward Wehmer believes the assets will be a valuable financial lever as rates rise, he said during a Jan. 23 conference call, according to a transcript.

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