Toxic: US Private Banks to Seek Exit From Mortgage Segment Led by Citi

© REUTERS / Mike BlakeThe Bank of America building is shown in Los Angeles, California October 29, 2014.
The Bank of America building is shown in Los Angeles, California October 29, 2014. - Sputnik International
Citigroup is exiting its mortgage business, a precedent which could be potentially followed by other banks as both Wells Fargo and Bank of America earlier reported declines in mortgage applications, whilst Wells Fargo’s mortgage servicing rights (MSR) declined in value after the Fed interest rate hikes.

Kristian Rouz – Amidst the crash in mortgage applications in the US, fuelled by the Federal Reserve’s tightening credit policies and the central bank's predicted withdrawal from mortgage reinvestment, Citigroup announced it would exit the mortgage servicing business by late 2018. This might set a precedent for other lenders, big and small, as both Wells Fargo and Bank of America are expecting lower mortgage revenues.

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As the wall of 10-year commercial mortgage-backed securities (CMBS) expiries is approaching this year, home loans are becoming a less appealing business as consumption patterns suggest less demand and greater private indebtedness concerns.

Citigroup Inc. announced they have concluded a sale agreement of mortgage servicing rights on Fannie Mae and Freddie Mac-originated loans with New Residential Mortgage LLC on Monday. The total value of the deal is $97 bln. Citi’s remaining home loans will be serviced by Cenlar FSB, and the rights will be handed over sometime in early 2018.

New Residential Mortgage LLC was incorporated in 2014 and is a subsidiary of New Residential Investment Corp., a real estate investment trust and a mortgage operator, which is also a subsidiary of Newcastle Investment Corp. Newcastle, in turn, is externally managed by Fortress Investment Group LLC. Fortress Investment is a hedge fund with $70.2 bln worth of assets in private equity, liquid hedge funds and debt.

Meanwhile, Cenlar is the US leading loan-servicing provider, focusing of cost and risk mitigation and ensuring best performance of the debt.

All that said, Citi, one of the world’s largest lenders, is exiting the mortgage business, relegating its home loans to the enterprises focusing on the ownership and management of more volatile assets. During the 2008-2009 crisis, for example, Fortress was one of the worst hit US companies due to their risk exposure.

“The strategic action is intended to simplify CitiMortgage’s operations, reduce expenses and improve returns on capital,” Citi said.

The fact that a major lender is selling part of its business to debt management companies might stem from concerns over consumer debt servicing and the rising debt delinquency in the US. Mortgage servicing companies focus on collecting debt payments on home loans, and handling mortgage foreclosures.

Another concern for Citi is that the US government has recently discovered the bank misled mortgage borrowers on several occasions. Citi had to pay $28.8 mln in court to settle claims. Besides, managing mortgage debt is becoming increasingly costly as more borrowers are unable to service their obligations, while the regulatory interference makes the process of debt management more complicated.

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In late 2016, Citi ha some $1.6 bln worth of mortgage-servicing rights compared to that of $6.5 bln in late 2009, meaning mortgage business has hardly become more popular among lenders since the mortgage bust of the past decade. Citi extracted only $371 mln in mortgage servicing revenues in 2016 in the first three quarters of 2016 compared to that of $416 mln during the same period of 2015.

Meanwhile, another prominent player in the mortgage business, Walter Investment Management Corp., announced they would exit the reverse mortgage origination segment. The reasons are similar: the business is no longer profitable. In 2016, Walter reported greater net losses from reverse mortgages.

Another sign of mortgage deterioration is that Wells Fargo, the US' largest mortgage originator, posted worse-than-expected 4Q16 results due to weak mortgage activity. In Q4, Wells Fargo’s mortgage servicing unit posted earnings below $200 mln the second time since 2008, mainly because the Fed rate hike decimated the bank’s mortgage servicing rights. In 4Q15, Wells Fargo’s mortgage revenues were $730 mln.

In addition, the Fed is planning two more rate hikes in 2017, and is poised to stop mortgage reinvestment sometime in 2018, mortgage servicing rights (MSR) will further drop in value, maybe dramatically, and the yields on MSR hedge instruments could skyrocket.

That is how you spot a toxic asset in the market.

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