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BofA correspondent lending exit to slow down MSRs

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Bank of America (BAC) mortgage servicing rights are already dropping as a result of lower interest rates, and exiting the correspondent lending channel will cost the bank even more. Mortgage servicing rights, or MSRs, are contractual agreements between a bank and a lender to service a mortgage for a fee. Buying and selling MSRs is a multibillion dollar market. The fee on an MSR is taken as basis points from the interest rate on the loan, and as rates have dropped to historic lows, MSR values have declined. Bank of America, the nation's largest mortgage servicer, reported $7.9 billion in MSR value for the third quarter, down 36% from the previous quarter. Bank of America Chief Financial Officer Bruce Thompson explained during a conference call with investors Tuesday lower interest rates pushed the cap rate on MSR to 78 basis points from 52 bps in the previous period. When the bank announced an exit from its correspondent lending practice during the third quarter, one of the side effects would be fewer MSR being added to the bank's balance sheet. "The correspondent came with an MSR that doesn't count from a Basel III perspective, so you will see a slow down of MSRs on the balance sheet as a result of exiting this segment," Thompson said. The cost of servicing is going up as new regulations from consent orders and the multistate attorneys general settlement with mortgage lenders begin to take shape. The legacy asset servicing department formed earlier in the year to sort out the back log of troubled and discontinued mortgages staffs more than 42,000 employees and costs BofA $2 billion in pure operating expense every quarter, Thompson said. Some progress is being made, however slowly. Nonperforming loans, leases and foreclosed properties dropped below $30 billion at BofA during the third quarter, down from more than $34 billion last year. Write to Jon Prior. Follow him on Twitter @JonAPrior.

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