It really smarts to give up thousands of customers your bank would rather keep.
But Mark Mason, the CEO of HomeStreet (HMST) in Seattle, takes some consolation in the fact that SunTrust Banks (STI), based more than 2,000 miles away, bought the servicing rights on $3 billion of mortgages from his bank. As opposed to, say, a nonbank that might treat the borrowers poorly.
"SunTrust being a bank was one of the factors we considered because we had a much higher level of confidence in their ability to complete a transaction and provide good service to our customers," Mason says. Still, "this is not a transaction we wanted to do. [Regulators] are making us sever our relationship with our customers."
Basel III capital rules are prodding many banks to sell mortgage servicing rights to avoid having to hold more equity against these assets. Banks with large concentrations of home equity loans and troubled residential mortgages have the biggest impetus to unload the associated rights because the capital charge is especially high.
That's why, in the past few years, banks have typically been sellers, not buyers, of servicing rights. So it is notable that HomeStreet's portfolio went to another bank.
"This does represent a change in the MSR market in terms of who the buyers have been," says Terry McEvoy, an analyst at Sterne Agee.
Mason agrees with that assessment. "In the population of potential buyers today, other banks are in the minority," he says.
However, as interest rates rise and loans become more likely to stay on the books, more banks may show up on the buy side of the market for servicing rights.
The sale of the HomeStreet portfolio to SunTrust comes as the Atlanta bank just struck a $968 million deal last month with federal and state regulators over mortgage servicing violations. SunTrust allegedly robo-signed mortgage documents and illegally foreclosed on some customers. It has agreed to allocate $500 million to borrowers over the next three years by reducing principal or lowering mortgage rates.
The timing of the sale, just weeks after the settlement, was purely "coincidental," Mason says.
SunTrust did not respond to requests for comment.
The company has been selectively buying servicing rights after whittling down its holdings of nonperforming loans in the past few years.
Servicing is more lucrative in a rising-rate environment because refinancing activity subsides, making the customer relationships stickier, notes Chris Marinac, an analyst at FIG Partners.
SunTrust may have decided to begin bulking up its servicing portfolio as it plans for a rising-rate environment, Marinac says, adding that he thinks other banks could do similar deals in the future.
"I think it is a hedge on higher interest rates and it made sense to me," Marinac says. "When rates go up, the value of servicing goes up."
McEvoy, however, says that until rates go up SunTrust could look to for refinance opportunities in the $3 billion portfolio of loans that HomeStreet originated in 2012 and 2013 and that are being serviced for Fannie Mae.
"SunTrust has proactively managed the expenses down in its mortgage operations and this deal would generate a marginal amount of revenue for it, while leveraging the platform and potentially allowing it to capture some of the refi business," says McEvoy.
Indeed, in an investor presentation in May, Chairman and CEO Bill Rogers expressed interest in wringing more revenue out of its home loan operations.
"While becoming a more efficient operator is an important goal of the mortgage business, we are also maintaining an eye on revenue opportunities," Rogers said. "The purchase market should grow over time, affording us organic production portfolio opportunities. We are also focused on improving our cross-sell rates, both of mortgage products into the bank and private wealth customers, and of bank products into the mortgage customer."
SunTrust's current Basel III capital ratio of 9.7% would put it in compliance with the Federal Reserve's final capital rules, the bank said in a March regulatory filing. The rules are phased in for banks through 2018 but they go into effect for HomeStreet and SunTrust in 2015.
Bankers have been complaining for several years that the Basel III rules, which were geared more toward European banks, are forcing them to sell valuable assets and customers. Customers already are bearing the brunt of the regulations as servicing moves from banks to nonbank servicers that have come under attack from regulators for lousy customer service.
"We should not be driving servicing out of banks," says Mason, who wants the Basel III rules modified. "Responsible institutions have gone through all of the pain and steps necessary to improve the quality of their originations or servicing."
The Basel capital rules limit mortgage servicing assets to 10% of a bank's Tier 1 common equity. Assets under the 10% cap would also eventually be risk-weighted at 250%. Under the rules, banks' combined holdings of mortgage servicing and several other assets are limited to 15%.
Before Basel III, there were no limitations on how much MSRs could count toward Tier 1 capital and the asset carried a risk weighting of 100%. Regulators finalized the U.S. Basel rule last year, and it has already taken effect for banks with more than $250 billion of assets. It will not be effective for smaller institutions until Jan. 1.
Industry trade groups have called the risk-weightings draconian because they do not take into account banks' ability to hedge. Servicing experts say the capital requirements are so conservative that hedged MSRs will be the safest assets on bank balance sheets.
HomeStreet's portfolio fetched a bigger price than the company expected, and the sale will result in a $5.4 million increase in mortgage servicing income for the second quarter.
"We're fortunate the market is good and the price is good, but it doesn't make me feel better having to sell my customers," says Mason.
The transfer of servicing is expected to be completed in October.