Wells Fargo Co. (WFC) is reportedly close to selling mortgage servicing rights, according to Compass Point Research & Trading Group.

The research firm quoted Inside Mortgage Finance, which suggests Wells Fargo would still maintain customer contact through a sub-servicing arrangement.

Compass Point wrote the following:


Special servicers provide the operational expertise to physically service mortgages. Wells Fargo wants to maintain the sub-servicing of the mortgage in order to preserve the relationship with the borrower. However, the MSR asset would be sold to another party (similar to the relationship between (HLSS-Buy, $25, Stewart and OCN - Buy, $44, Barker) in order to provide capital relief to WFC under Basel III.

Private equity firms have been rumored to be looking at the space, but outside of Fortress few investments have been made. In this case, we believe private equity return hurdles are likely too high for WFC to part with the asset. Based on our conversation with industry brokers, we believe a clearing rate for high quality banks such as WFC to sell MSRs is in the 10-12% IRR range (or potentially even lower).

If transacted in this range, this sale has the potential to lower the cost to finance MSRs by setting a new benchmark return requirement. Recall, Cerberus Mortgage filed an IPO on Friday to discusses making this type of investment.