JPMorgan Chase & Co. JPM is set to re-enter the mortgage servicing business in a big way. The banking giant has been revealed as the buyer of Ocwen Financial Corp.’s OCN $45 billion of mortgage servicing rights (“MSRs”). This was disclosed by the newsletter Inside Mortgage Finance citing industry advisers.
Earlier this month, Ocwen announced signing of a letter of intent with a buyer (name not disclosed at that time) for sale of the above-mentioned MSRs. These MSRs formed part of a portfolio which consisted of roughly 277,000 performing agency loans owned by Fannie Mae FNMA.
Further, Ocwen expects the deal to close by June-end, while loan servicing transfer will take place over the latter part of 2015. Notably, the transaction still requires approval from Fannie Mae and the Federal Housing Finance Agency as well as fulfillment of other customary conditions.
For JPMorgan, this deal comes as a reversal from its prior stance of doing away with MSRs. The company had sold $15 billion worth of MSRs to Ocwen in 2011, when the major U.S. banks were shedding this business owing to heightened regulatory scrutiny and increasing costs. Further, Basel 3 rules necessitated the presence of additional capital for MSRs held. All these led the banks to shed MSRs.
However, as the overall mortgage originations continue to decline, banks are trying to recoup revenues through other channels, and servicing loans is one of them. JPMorgan’s mortgage originations fell 53% year over year to $78 billion in 2014.
Further as of Dec 31, 2014, JPMorgan’s third-party mortgage loans serviced totaled $751.5 billion, while the company earned $3.61 billion as servicing-related revenues. Hence, we believe that after the completion of the afore-mentioned deal, JPMorgan will be better positioned to earn more revenues from servicing loan portfolios.
For Ocwen, the deal is in sync with its strategy to downsize the agency servicing portfolio. Previously, the company had announced the sale of $9.8 billion of MSRs backed by Freddie Mac FMCC to Nationstar Mortgage Holdings Inc. Both these deals, amounting to around $55 billion worth of agency loans, are projected to produce around $550 million over the next six months.
Currently, JPMorgan carries a Zacks Rank #3 (Hold), while Ocwen holds a Zacks Rank #2 (Buy).
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