Bank of America Corp is in talks to sell collection rights on $300 billion of mortgages, two sources familiar with the situation said, in an effort to offload problem exposure after huge losses from its Countrywide Financial acquisition.
Ocwen Financial Corp, Nationstar Mortgage Holdings and Walter Investment Management Corp are among the firms that are in talks to purchase a portion of the assets, said the sources, who declined to be identified because they are not permitted to speak to the press.
The assets that Bank of America is looking to sell -- known as residential mortgage servicing rights -- have become increasingly onerous for banks to hold onto.
The rights allow banks to earn fees from mortgage investors in exchange for collecting home loan payments from borrowers. The housing bust has made collecting mortgage payments an expensive business, as borrowers go delinquent and into foreclosure.
New capital rules will also make mortgage servicing rights more expensive for banks to hang onto, so at least some of the assets are migrating toward non-bank companies like Ocwen, Nationstar, and Walter Investment Management.
It could not be determined how much each of the three would buy from Bank of America or what they would pay for the MSRs. Sources said they expect a deal to be announced within the next few weeks.
Bank of America spokesman Dan Frahm said the company does not comment on what he characterized as "market rumor or speculation." Representatives of Nationstar, Ocwen and Walter did not immediately respond.
Nationstar is looking to take the biggest position in the mortgage servicing rights, said one of the sources. Bank of America's mortgage servicing costs -- $3.4 billion in the third quarter -- have ballooned as it has added employees to work with customers who are behind on payments. The bank said those costs should fall to $500 million per quarter over time. The unit now has nearly 42,000 employees in the unit, about 15 percent of the bank's total workforce.
In November, Bank of America Chief Executive Officer Brian Moynihan said the bank plans to reduce its mortgage servicing portfolio to about 6 million loans from 8 million. At its peak, the firm had 12 million loans.
The No. 2 U.S. bank by assets serviced $1.1 trillion in loans at the end of the third quarter, compared to $1.5 trillion a year earlier.
"We continue to look at transactions," Moynihan said at an investor conference in New York. "We have been selling servicing in relatively sizable chunks to the market."
In June, Bank of America agreed to sell $10.4 billion in residential mortgage servicing rights, as measured by unpaid principal balance, to Nationstar.
INDUSTRY SHIFT
Non-bank mortgage servicers such as Nationstar, Ocwen and Walter bought up servicing rights from banks including Morgan Stanley and Goldman Sachs Group Inc that were burned during the U.S. housing meltdown. These non-bank firms specialize in working with borrowers who are behind on their payments and need extra attention from servicers.
Last year, Nationstar, majority owned by private equity firm Fortress Investment Group, vied with Ocwen and Walter to buy the mortgage lending and servicing business of Residential Capital, an Ally Financial Inc subsidiary that filed for bankruptcy in May. Ocwen and Walter prevailed in the bankruptcy auction.
In a research report last month, FBR Capital Markets analyst Paul Miller said there could still be $600 billion to $700 billion in assets that will eventually shift to specialty servicers such as Nationstar, Walter and Ocwen.
"We believe that special servicers will continue to benefit from changing regulatory and capital requirements that make it more difficult for bank-based, traditional servicers to service troubled mortgages," Miller wrote.
Before the housing crisis, banks viewed their mortgage servicing businesses as a good way to balance their mortgage lending businesses. When rates are rising, banks tend to make fewer home loans, so revenue from lending declines. But the right to service mortgages becomes more valuable, because fewer borrowers refinance, so banks can collect payments on loans for a longer period of time.
But the business brought banks pain during the financial crisis when they had to hire thousands of employees to handle delinquent loans. Five large banks, including Bank of America, last year also agreed to a $25 billion settlement to resolve allegations that they mishandled foreclosures.
Even banks that fared relatively well in the financial crisis have said they are looking to shed mortgage servicing rights. In May, Wells Fargo & Co top mortgage executive said the bank was looking at creating a market for selling these rights, while retaining the ability to collect payments.
Inside Mortgage Finance, an industry publication, reported earlier on Friday that Bank of America may be looking to offload $300 billion in mortgage servicing rights to unidentified buyers.