Citi to Exit Mortgage Servicing, Sell $97 Billion Portfolio

(Bloomberg) -

Citigroup plans to exit the mortgage servicing business by the end of 2018 to focus on making new loans.

New Residential Investment Corp. agreed to pay Citigroup $950 million for servicing rights on Fannie Mae- and Freddie Mac-backed loans with $97 billion of outstanding balances, the New York-based buyer said Monday in a statement. Citigroup also reached a deal with Cenlar FSB to service its remaining mortgages, and plans to transfer the rights for those loans beginning in 2018, the bank said in a separate statement.

The sale to New Residential, which is subject to regulatory approval, is expected to be completed in the first half of 2017. Citigroup said the agreements will reduce pretax results by about $400 million in the current quarter. Expense benefits will start to accrue in 2018, according to the bank.

“The strategic action is intended to simplify CitiMortgage’s operations, reduce expenses and improve returns on capital,” the New York-based company said in the statement.

Mortgage servicers handle the billing and collections on home loan payments and oversee foreclosures. Many banks have pulled back on their servicing units as costs for the business rose and regulatory pressure intensified. This month, Citigroup agreed to pay $28.8 million to settle allegations by U.S. regulators that two of the bank’s mortgage-servicing units misled borrowers.

Citigroup’s mortgage-servicing rights were worth $1.6 billion at the end of last year, down from $6.5 billion at the end of 2009, according to the company’s fourth-quarter earnings statement. The bank produced $371 million in fees from servicing securitized mortgages in the first nine months of last year, down from $416 million in the same period of 2015.

As lenders have pared their servicing businesses, non-banks have stepped in. The share of home mortgages serviced by non-banks increased to 24 percent in 2015 from 6.8 percent in 2012, according to an April report by the U.S. Government Accountability Office.

New Residential, run by Chief Executive Officer Michael Nierenberg, said its servicing business benefited from higher interest rates in the quarter. Higher rates typically dissuade borrowers from paying mortgages early, which increases the value of servicing rights, the company said in a filing.

Nierenberg, 54, got his start at Lehman Brothers Holdings Inc., where, within three years, he was the firm’s top mortgage trader. In 1994, he was poached by Bear Stearns Cos., where he went on to lead the adjustable-rate mortgage desk. Following JPMorgan Chase & Co.’s acquisition of Bear Stearns during the financial crisis, Nierenberg was tapped to be co-head of securitized products.

Merrill Lynch hired Nierenberg in 2008 to run its global mortgage and securitized products businesses. In 2013, Fortress Investment Group LLC hired him as a senior executive in its private-equity business to focus on residential mortgages, real estate investment trusts and property-related holdings. He was appointed CEO of New Residential, a Fortress affiliate, later that year.

Under Nierenberg, New Residential has been scooping up mortgage servicing rights. The firm completed four deals in the fourth quarter, paying about $572.5 million to acquire the right to service loans with about $82.1 billion in outstanding balances. The firm also announced in December it would pay PHH Mortgage Corp. $612 million for the rights on loans with $72 billion in unpaid balances.

New Residential said in a separate statement Monday that it will issue 49 million shares of its common stock to help pay for the Citigroup acquisition. Citigroup, Barclays Bank Plc, Bank of America Corp. and Credit Suisse Group AG are acting as joint book runners for the offering.