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Continuing with its retreat from the mortgage servicing industry, Wells Fargo & Co. (WFC - Analyst Report) decided to proceed with the sell-off of residential mortgage-servicing rights (MSRs) on 1,84,000 loans with total principal balance of about $39 billion to Ocwen Financial Corp. (OCN - Analyst Report). Notably, the portfolio represents 2% of the bank's total residential-servicing portfolio as of Dec 31, 2013.

Financial terms of the deal were undisclosed. The sale is expected to reach completion in 2014. Notably, private investors mainly own the loans underlying the servicing rights sold.

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.

Moreover, revenues from mortgage fees have lessened as the boom in mortgage refinancing is gradually fizzling out. Therefore, Wells Fargo resorted to reduce its exposure to the mortgage market. Notably, last week, Wells Fargo recorded a year-over-year drop of 49% in mortgage banking revenues to $1.6 billion for the final quarter of 2013. Moreover, the company’s home-lending originations came in at $50 billion, down from $125 billion in the prior-year quarter.

Alongside, besides Ocwen, specialized mortgage-servicing companies, such as Walter Investment Management Corp. (WAC - Snapshot 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 Citigroup Inc. (C), 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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