Recently, Wells Fargo & Co. (WFC - Free Report) announced the sale of $12.2 billion worth of unpaid principle balance (UPB) reverse mortgages servicing rights (MSR). Walter Investment Management Corp’s (WAC - Free Report) wholly owned subsidiary – Reverse Mortgage Solutions, Inc. – will be buying these MSRs that include a portfolio of roughly 76,000 loans originated by Fannie Mae .
However, Wells Fargo will continue to service the remaining reverse-mortgage loans in its portfolio. While both the companies did not reveal the terms of the deal, it is anticipated to close by the third quarter of 2013.
Reverse-mortgage loans are provided to homeowners by keeping real estate equity as security. This allows borrowers, aged more than 62 years, to remain in their homes and receive either a one-time sum payment or a stream of income. Mortgage servicers supervise billing and collections in the interest of the investors, who own the loans and supervise foreclosures.
As of Dec 31, 2012, Wells Fargo had contracts on $1.87 trillion of unpaid home loans. Earlier, in 2011, the bank stopped originating reverse mortgages. The decision to exit the reverse mortgage business was based on the probable reduction in home prices.
According to the S&P/Case-Shiller index of data from 20 U.S. cities, home prices declined 5.3% from Dec 2011 till Mar 2012. However, it rebounded 9% through January this year.
Management at Walter expects the transaction, which doubles the size of its portfolio, to be an excellent addition to its present reverse mortgage servicing portfolio. Further, the deal combined with Wells Fargo’s expertise will help strengthen Walter’s position as a leader in the reverse mortgage segment.
Wells Fargo is scheduled to announce its first quarter 2013 results on Apr 12. The Zacks Consensus Estimate for the quarter is pegged at $3.60 per share. The Zacks Earnings ESP (Read: Zacks Earnings ESP: A Better Method) for Wells Fargo is +1.15% for the first quarter. This, along with its Zacks Rank #3 (Hold), places the company for an expected earnings beat.
Among other major banks, JPMorgan Chase & Co. (JPM - Free Report) is also likely to deliver a positive earnings surprise this quarter as our model shows it has the right combination of elements – an Earnings ESP of +2.92% and a Zacks Rank #2 (Buy).