BofA to Sell MSRs to Nationstar

In an effort to scale down its non-core operations and further strengthen the balance sheet, Bank of America Corporation ( BAC - Analyst Report ) is selling certain mortgage servicing rights (MSRs) to Nationstar Mortgage Holdings Inc.’s ( NSM - Snapshot Report ) wholly owned subsidiary –Nationstar Mortgage LLC. The MSRs comprise of loans in government-sponsored enterprise (GSE) pools.

Nationstar Mortgage would be buying approximately $10.4 billion of MSRs, measured on the basis of unpaid principal of the loans. On the other hand, BofA calculates MSRs as expected future revenue to be earned, net of loan-loss reserve. As of March 31, 2012, BofA had nearly $7.6 billion MSRs on its books. The current deal signifies only a small portion of the company’s total MSRs portfolio.

Nationstar stated that a part of the deal would be funded by the $44 million of investment made by Newcastle Investment Corp. ( NCT - Snapshot Report ) . Thus Newcastle would get a right to receive 65% of cash flow that would be generated by MSRs every month. The deal is expected to be completed by July.

At the time when most of the lenders are shying away from mortgage servicing business because of various regulatory concerns and fall in mortgage rates, Nationstar is on an acquisition spree. Last month, Nationstar announced its plans to buy $374 billion in mortgage servicing assets from Residential Capital LLC. Likewise, in April, it agreed to purchase MetLife Bank's reverse mortgage servicing portfolio, which MetLife Inc. ( MET - Analyst Report ) was exiting that time.

The mortgage servicing business has been facing tremendous regulatory pressure following the disclosure of the foreclosure mess in October 2010. However, the $25 billion settlement deal signed between 49 states’ attorneys general, regulators and major mortgage services that included BofA, JPMorgan Chase & Co. ( JPM - Analyst Report ) , Citigroup Inc. ( C - Analyst Report ) , Ally Financial Inc. and Wells Fargo & Company ( WFC - Analyst Report ) , would ease the pressure to an extent.

Morgan Stanley ( MS - Analyst Report ) and The Goldman Sachs Group Inc. ( GS - Analyst Report ) also took similar actions and sold the non-core mortgage servicing units. Morgan Stanley’s Saxon Mortgage Services Inc and Goldman Sachs’Litton Loan Servicing were sold to Ocwen Financial Corp. ( OCN - Analyst Report ) .

The losses that BofA suffered from mortgage servicing operations over the past several quarters prompted the company to divest its MSRs. The sale would enable the company to move a step closer towards achieving its targeted Basel III Tier 1 common ratio of above 7.50% by the end of this year.

BofA currently retains a Zacks # 3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we maintain our long-term ‘Neutral’ recommendation on the stock.