DEC 19, 2013 1:21pm ET

Flagstar to Sell MSRs, Keep Subservicing

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Flagstar Bancorp has entered into a definitive agreement to sell “a substantial portion” of its mortgage servicing rights portfolio but plans to keep subservicing income coming as it shifts business priorities.

Under the agreement Flagstar will sell $41 billion in aggregate unpaid principal balance of residential mortgage servicing rights to Matrix Financial Services Corp., a wholly owned subsidiary of Two Harbors Investment Corp.

These MSRs represent 55% of its mortgage loans serviced-for-others portfolio as of Sept. 30, according to a press release.

The bank’s president and CEO Alessandro DiNello described the transaction as an important step in Flagstar's “continued effort to augment” its mortgage origination business.”

Flagstar’s primary business focus has traditionally been in originating one-to-four family residential first-mortgage loans. Its total assets at Sept. 30 amounted to $11.8 billion. The MSR portfolio consists of “certain mortgage loans” originated primarily after 2010 that Flagstar serviced for Fannie Mae and Ginnie Mae.

The acquisition is expected to close before the end of the year.

“A central component” of the transaction, however, is the decision to continue to act as the subservicer of these loans.

Flagstar will receive subservicing income “and retain a portion of the ancillary fees to be paid,” if the service is not terminated earlier. The subservicing agreement will remain in effect “so long as mortgage loans underlying the MSRs remain outstanding.”

"We periodically evaluate the sale of MSRs as a way to reduce the concentration of the asset,” while also retaining the underlying subservicing revenue, DiNello explained.

Flagstar is diversifying operations, says Lee Smith, Flagstar's COO, rebranding the servicing platform to generate ongoing servicing revenue and offer an additional incentive to those interested in purchasing MSRs.

Potential buyers may find an MSR deal even more attractive knowing Flagstar will sub-service the loans underlying the MSR portfolio on sale.

“There is a growing market for such services," he says.

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