Wells Fargo sets stage for MSR selloff

Basel III requirements, operational relief drive offering

One of the largest U.S. lenders is offloading mortgage-servicing rights, announcing a new sale involving $41 billion in loans.

Wells Fargo (WFC) is reportedly making this move as the mega bank focuses on shrinking its mortgage business, while adapting to new Basel III rules governing banks' treatment of MSRs when calculating a firm's Tier-1 capital ratio. 

The implementation of Basel III has shifted the landscape for banks holding MSRs. For many, the fear of Basel III driving MSRs to non-banks seems ideal, but many servicers are witnessing their business volumes increase as a result.

Wells Fargo spokesperson Tom Goyda declined to comment on the sale, but said the large bank is "always interested in ways to execute our business strategy."

The increase in MSR market activity is driven by a couple of items, including strong demand for the asset from private equity firms and real estate investment trusts looking for high single-digit returns in the current low-rate environment, explained Matt Maurer, managing director at MountainView Servicing Group.

The sales are happening to offer firms Tier-1 capital relief, operational relief and to move away from borrowers tied to the serviced loans who are not the bank's core customers, Maurer said.

"And let’s not forget that MSR pricing levels are now trading at levels where Wells may not have to take a loss upon sale," Maurer said.

While $41 billion of MSR sales seems like a significant amount, the institution has roughly $1.3 trillion in servicing — a small drop in the bucket.

"The potential sale could be the loans the company doesn’t really care to service anymore, helping them to reduce the size of their portfolio, which will help them with their Tier 1 capital ratio requirements," Maurer said.

Basically under Basel III, the maximum amount of MSR value that institutions can count toward their Tier-1 capital ratio is 10%. As a result, holding higher MSR value is becoming more expensive for servicers.

Overall, MSRs remain an attractive acquisition for many, especially when factoring in how much stake big players such as Ocwen Financial Corp. (OCN) and Nationstar Mortgage Holdings (NSM) are willing to take on.

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