Here’s how and why CitiMortgage is leaving mortgage servicing

A deeper dive into a complex deal

CitiMortgage surprised few in the housing business on Monday when it announced that it agreed to a massive mortgage servicing rights deal with New Residential Investment and Nationstar Mortgage that will transfer the servicing rights for approximately 780,000 mortgages away from CitiMortgage.

As it often is with deals of this type, the devil is in the details.

And one of the details of this deal is the MSR sale is a precursor to CitiMortgage completely exiting the mortgage servicing business.

In addition to selling the mortgage servicing rights on approximately $97 billion in unpaid principal balance to New Residential, Citi said that it also entered into a separate subservicing agreement with Cenlar that will effectively end Citi’s mortgage servicing business.

Here’s a break down of how the deal works, and why Citi plans to leave mortgage servicing behind.

According to Citi, the deals with New Residential and Cenlar will end Citi’s mortgage servicing operations “by the end of 2018.”

Breakdown of Citi deal with New Residential

The deal with New Residential will see Citi sell all of the mortgage servicing rights to its portfolio of loans that are owned by either Fannie Mae or Freddie Mac and did not come from Citibank retail bank customers.

According to a separate announcement from New Residential, it will pay $950 million to Citi for the MSRs. The deal also includes “related servicer advances” from CitiMortgage, for which New Residential will pay an additional $32 million.

Before the deal is completed, it needs to be approved by Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency. New Residential said that it expects the deal to close in the first quarter of 2017, while Citi said it anticipates the deal closing in the first half of 2017.

While the deal is awaiting approval, Citi will continue to service the mortgages, before transfer the servicing to Nationstar, which will subservice the loans for New Residential.

Nationstar said that expects the MSRs to board beginning in the second quarter of this year and continue boarding throughout 2017.

How is New Residential paying for the deal

As stated above, New Residential plans to pay approximately $982 million to Citi for the MSRs. New Residential separately announced Monday that it plans to pay for the Citi MSR acquisitions with a stock offering of nearly 50 million shares.

According to New Residential, it plans to use the proceeds of the stock offering to “fund a portion” of the Citi MSR deal, although New Residential does not state at this time how much of the deal it hopes to fund with the stock offering.

Breakdown of Citi deal with Cenlar

For all of Citi’s remaining mortgage servicing rights, meaning the MSRs for the mortgages originated and owned by Citi for Citi’s retail bank clients, the servicing will now go to Cenlar.

According to Citi, the subservicing agreement with Cenlar covers the remaining Citi-owned loans and “certain other mortgage servicing rights” that are not being sold to New Residential.

Citi said that the servicing on these loans is expected to be transferred to Cenlar beginning in 2018.

As part of its assumption of the servicing obligations, Cenlar will provide core operations, customer service and default operations, Citi said in its announcement.

Going forward, the servicing for Citi’s retail banking clients will be retained by Citi but will be included in the subservicing contract with Cenlar, meaning that all loans for Citi retail bank clients will be subserviced by Cenlar. 

According to a spokesperson for Citi, existing and new loans for Citi retail clients will begin transferring to Cenlar beginning in 2018.  In the interim, various stages of the transaction will take place over the next two years. 

“The actions will be conducted in waves to help ensure a smooth transition,” the Citi spokesperson said.

Why is Citi exiting mortgage servicing?

Citi did not provide much of an explanation as why to it plans to exit mortgage servicing, but perhaps the regulatory overhang became more than the bank could bear.

Case in point, one week ago, the Consumer Financial Protection Bureau fined CitiFinancial Servicing and CitiMortgage a total of $29 million for foreclosure-related issues.

“Citi’s subsidiaries gave the runaround to borrowers who were already struggling with their mortgage payments and trying to save their homes,” CFPB Director Richard Cordray said last week. “Consumers were kept in the dark about their options or burdened with excessive paperwork. This action will put money back in consumers’ pockets and make sure borrowers can get help they need.”

Now, Citi is laying out its plans to leave mortgage servicing altogether.

The bank said that going forward it plans to “intensify focus” on mortgage originations, and that mortgage servicing deals will “simplify CitiMortgage’s operations, reduce expenses, and improve returns on capital.”

The bank said that the New Residential and Cenlar deals are expected to negatively impact the bank’s pre-tax results by approximately $400 million, including a loss on sale and certain related transaction costs, in the first quarter of 2017.

Overall, excluding these items, the deals are expected to have a minimal impact on operating revenues in 2017, with expense benefits beginning to accrue in 2018 as servicing is transferred to Cenlar and fully realized in 2019, Citi said.

“Over the past several years, we have made significant progress transforming our business to deliver a sustainable annuity of growth,” said CD Davies, president and CEO of CitiMortgage.

“CitiMortgage remains a critical part of serving our customers, deepening relationships with existing and prospective retail bank clients and driving growth in our core markets,” Davies continued. “We will continue to originate loans for current and new clients.”

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