Mortgage Servicing At U.S. Banks Declining, Top 5 Banks Service Almost 40% Of All Mortgages
The five largest U.S. banks serviced just under $3.5 trillion in outstanding mortgages in the U.S. at the end 2016.
The table above captures the break-up of total mortgages serviced by each of these banks in terms of ownership. In addition to servicing mortgages that they originate and hold on their balance sheets, these banks also service a sizable portfolio of third-party mortgages. It is a common practice for banks to assume the risk involved with a mortgage portfolio originated by a third party by buying the servicing rights from the original lender in return for all future payments from the borrowers making up that portfolio. As the big banks already have a strong workforce focused on servicing their primary loans, the mortgage servicing business allows them to generate additional revenues by using the same resources. As detailed here, third-party mortgages make up almost $2.5 trillion of the $3.5 trillion in total mortgages serviced by these 5 banks – or roughly 72% of the total mortgage servicing portfolio.
Notably, data compiled by the New York Fed indicate that there were around $8.95 trillion in outstanding mortgages in the U.S. at the end of 2016. This would imply that the 5 largest banks service around 39% of all outstanding mortgages in the U.S. As the single largest player in the industry by far, Wells Fargo services 17% of all mortgages in the country – roughly one in every six mortgages.
However, the largest banks have seen a notable reduction in their total mortgage servicing portfolio over recent years. The table below highlights the reduction in third-party mortgage servicing portfolios for these banks since 2012.
The total third-party mortgage servicing portfolio for these banks has shrunk by a sharp 11% annually over the last five years. This is primarily because stricter regulatory requirements since the economic downturn have made the mortgage servicing business less profitable – resulting in banks running off their third-party mortgage servicing portfolios. Notably, Bank of America reported the steepest decline at 26% annually followed by annual declines of 16% for Citigroup. Both these banks were plagued by mortgage-related charges after the economic downturn, and they renewed their focus on the mortgage business in late 2014. Bank of America in particular had to work its way through a huge mortgage servicing portfolio, which it acquired from Countrywide at the peak of the downturn.
The regional banking giant U.S. Bancorp stands out as the only major bank to witness an increase in its mortgage servicing portfolio over the period. The chart below captures U.S. Bancorp’s third-party mortgage servicing portfolio over the years, and also includes our forecast for it. You can see how changes to this portfolio affects our price estimate for the bank by modifying this chart.