Wells Again King of the Hill
In a deal for the record books, Washington Mutual agreed last month to sell its entire government servicing portfolio and part of its conforming portfolio- $140 billion in receivables - to competitor Wells Fargo.
The portfolio was not sent out for bid, and was negotiated one-on-one between the two mortgage banking giants. Lehman Brothers advised WaMu.
The sale also makes Wells Fargo Home Mortgage the nation's largest residential servicer again with $1.273 trillion in receivables to $1.196 trillion for Countrywide Home Loans, Calabasas, Calif. (The ranking is based on June 30 figures with WaMu's portfolio added to WFHM's.) One executive of a large mortgage banking franchise, requesting anonymity, said the deal surprised him. "I don't get it," he said. "WaMu seems to be changing strategies constantly."
A few years back, WaMu was an aggressive buyer of residential servicing rights and mortgage franchises, gobbling up some of the biggest names in the business. It recently closed it traditional correspondent division.
According to analysts, the sale of Wells is part of a continuing process of diversifying away from mortgages while reducing its hedging risks.
WaMu values the $140 billion in servicing rights at $2.6 billion, but when all is said and done, the thrift will book a $157 million pretax loss on the sale.
WaMu chairman Kerry Killinger said in a conference call that he expects to more than offset the loss through the planned sale of its mutual fund business, which the company is currently shopping around.
The sale of the $140 billion servicing portfolio is the largest bulk servicing transaction in U.S. history, according to figures compiled by this newspaper.
The portfolio includes $89 billion in Fannie Mae/Freddie Mac servicing, $43 billion of FHA/VA and $8 billion of private-investor product.
Mr. Killinger said that after the sale, the value of the MSR asset will fall by about 30% and would be equal to about 25% of WaMu's capital, a target the company has previously outlined. Today, the MSR asset equals about 35% of WaMu's capital.
"This sale significantly reduces our risk profile and accelerates the winding down of certain non-strategic home loan products," Mr. Killinger said during a company conference call.
Mr. Killinger said WaMu wants to gradually shift to a "bank-like balance sheet," with fewer fixed-rate loans on its portfolio and more multifamily, home-equity, subprime and "high margin" home loans.
He acknowledged that this increases credit risk, but said the added credit risk can be managed with loan loss reserves and provisioning to reduce earnings volatility in the long run. The sale and shutdown of the Milwaukee servicing facility will entail another $50 million in costs, with most of it to be incurred in the third quarter, he said.
Steve Rotella, WaMu's president and chief operating officer, said most of the $157 million loss on the MSR value related to FHA and VA loans.
WaMu executives defended the decision to sell the MSRs through a negotiated transaction rather than an auction, noting that the thrift wanted to complete the deal expeditiously and sell the portfolio as a whole.
"When your looking to move something of this size, there are limited buyers on the other side," Mr. Rotella said. In the context of valuing servicing rights, he said the $157 million downward adjustment "is rather small" on an MSR portfolio valued at $2.6 billion. After the sale, 40% of WaMu's remaining servicing portfolio will consist of fixed-rate, agency home loans.
On the cost-cutting front, Mr. Killinger said WaMu reduced its workforce by 4,000, or 7% of its employee base, in the second quarter. The mortgage workforce declined by 14% on a linked quarter basis.
He said WaMu continues to migrate more of its operations to low-cost domestic sites in San Antonio and Jacksonville, Fla. In addition, WaMu plans to offshore as many as 7,500 jobs overseas by the end of next year.
In an interview with MSN's sister publication, National Mortgage News, WaMu home loans chief David Schneider said that WaMu has no plans to sell any more residential servicing rights. He also said that WaMu is likely done with the restructuring of its home mortgage business.
"This is the last leg of the stool. We feel good about where we stand," he said.
MAKE A DEAL: What Wells Gets From WaMu
(Dollars in Billions)
Product $ Amount of
Type of Receivables
Fannie Mae/Freddie Mac $89
FHA/VA (GNMA) $43
Private investor $8
SOURCES: Company reports/MSN (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com