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Following the announcement of laying off 2,300 employees in its mortgage servicing segment in August, Wells Fargo & Company (WFC - Analyst Report) decided to proceed with the sell off of mortgage-servicing rights (MSRs) on $41 billion of government-backed home loans, according to Bloomberg. Wells Fargo is taking this step to scale down its non-core operations and further strengthen its balance sheet.

Additionally, given the new capital regulations, servicing of loans has become a costly affair for the banks. Therefore, Wells Fargo’s move is based on reduction in the mortgage business for adapting new Basel III rules, thereby reducing risks. Notably, Wells Fargo with contracts on $1.9 trillion of loans recorded just about $393 million in the second quarter of 2013 from the mortgage business.

At the same time, specialized mortgage-servicing companies, such as Walter Investment Management Corp. (WAC - Snapshot Report), Ocwen Financial Corp. (OCN - Analyst Report) and Nationstar Mortgage Holdings Inc., are capitalizing on such sales and building their business. Over the last couple of years, these companies have been purchasing MSRs from major banks including Wells Fargo, Morgan Stanley, Bank of America Corporation (BAC - Analyst Report) and Goldman Sachs Group Inc, enhancing their organic growth prospects.

We believe that Wells Fargo’s plan to vend off MSRs will be a positive for the company and enable it to act toward its goal of focusing on core and profitable operations. In the current market scenario, many banks are finding it difficult to cope with the volatile conditions, in which the scope for revenue growth is limited. Hence, these banks are resorting to extreme cost-cutting measures comprising layoffs and closures of business units worldwide. Currently, Wells Fargo carries a Zacks Rank #3 (Hold).

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