MSR sale could improve NYCB capital ratio by up to 15bps: KBW

Key Takeaways:

– NYCB is struggling and could benefit from selling mortgage servicing rights to improve its capital ratio
– NYCB acquired Flagstar Bank in December 2022, becoming a large mortgage servicer
– The bank’s servicing portfolio includes Fannie Mae, Freddie Mac, and Ginnie Mae loans
– Selling GSE MSR assets could benefit CET1 ratio by 10-15 bp
– NYCB’s capitalization fell to 9.1% as of Dec. 31, 2023, targeting a 10% CET1 ratio
– The bank cut its dividend to assist with capital generation
– NYCB is reportedly in talks to transfer mortgage risks amid market pressure
– Potential buyers for GSE servicing rights include Mr. Cooper, Rithm Capital, and Annaly Capital Management
– NYCB reported a $193 million net loss in the fourth quarter of 2023
– The company’s leadership is being shaken up, with the CEO stepping down and a new executive chairman appointed

HousingWire:

Struggling New York Community Bancorp (NYCB), which triggered fears of new bank collapses, could benefit from selling mortgage servicing rights (MSR) to improve its capital ratio, according to analysts at Keefe, Bruyette and Woods (KBW). 

NYCB became a large mortgage servicer after the acquisition of Flagstar Bank in December 2022. Its owned servicing portfolio reached $78 billion in unpaid principal value (UPB) at the end of 2023, with a carrying value of $1.1 billion, analysts wrote in a report on Monday.

In addition, NYCB is also responsible for a subservicing portfolio close to $300 billion in UPB, comprehending about 1 million loans, per KBW analysts’ estimate. 

The bank’s servicing portfolio increases as the company originates mortgages, thus reflecting the market’s condition. It results in 80% of the MSRs being Fannie Mae and Freddie Mac loans and 19% Ginnie Mae loans. 

“We believe that GSE MSR is the easiest asset to sell given the broad array of buyers, especially financial buyers,” the analysts wrote, adding that high quality GSE MSRs should transact around carrying value. “We estimate that an MSR sale could benefit CET 1 by 10-15 bp.” 

Measured by its common equity tier 1 (CET1) ratio, the bank’s capitalization fell to 9.1% as of Dec. 31, 2023, down from 9.59% in the third quarter. Targeting a 10% CET1 ratio, the bank cut its quarterly dividend from $0.17 to $0.05 to assist with capital generation.

The bank is also reportedly in talks to transfer mortgage risks amid market pressure. 

KBW analysts, however, wrote that the scenario that the bank sells the whole servicing business, including subservicing, is less likely because there are “significant deposits attached to the business, and it could be difficult to retain those deposits without a servicing operation.” 

On a call on Feb. 7, management noted that there were $6 billion to $8 billion in mortgage escrow deposits. NYCB had $83 billion in total deposits, with 72% of the total insured and collateralized. Total liquidity was $37.3 billion, with a coverage ratio of 163%, management said during the call.

Regarding the potential buyers of GSE servicing rights, KBW analysts included Mr. Cooper, Rithm Capital, Annaly Capital Management, Two Harbors and MSR funds. There are fewer buyers for the Ginnie Mae assets, including Freedom Mortgage and Lakeview/Bayview

“As long as the company keeps the subservicing on any MSR sold, they should be able to maintain the deposits, especially since most buyers are non-banks,” analysts wrote. “However, if they sell the whole servicing operation, it will likely be harder to hold on to the escrow deposits.”

NYCB’s struggles started at the end of January when it reported a $193 million net loss available to common stockholders during the fourth quarter of 2023, including a provision for loan losses of $552 million, up from $62 million in the previous quarter.  

This week, the company’s disclosure of internal control deficiencies and a goodwill impairment of $2.4 billion put even more pressure. Rating agencies Fitch and Moody’s both on March 1 downgraded its debt ratings. 

It resulted in the company shaking up its leadership. Thomas Cangemi is stepping down as president and CEO. Alessandro DiNello, appointed executive chairman of the board on Feb. 6, will replace Cangemi. 

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Property Chomp’s Take:

So, have you heard about the recent struggles of New York Community Bancorp (NYCB)? It seems like they’re facing some challenges, but there might be a way out for them. Analysts at Keefe, Bruyette and Woods (KBW) are suggesting that NYCB could benefit from selling mortgage servicing rights (MSR) to improve its capital ratio.

NYCB became a major mortgage servicer after acquiring Flagstar Bank in December 2022. With a servicing portfolio of $78 billion in unpaid principal value (UPB) and a carrying value of $1.1 billion, NYCB is also responsible for a subservicing portfolio close to $300 billion in UPB. The majority of their MSRs consist of Fannie Mae and Freddie Mac loans, with a smaller portion being Ginnie Mae loans.

Selling off some of these MSRs could potentially boost NYCB’s capitalization by around 10-15 basis points, which could help them reach their target common equity tier 1 (CET1) ratio of 10%. Currently, their CET1 ratio stands at 9.1%, down from 9.59% in the previous quarter.

While there are talks of NYCB transferring mortgage risks to alleviate market pressure, selling off the entire servicing business, including subservicing, seems less likely. This is because there are significant deposits attached to the business, and retaining those deposits without a servicing operation could be challenging.

Potential buyers for the GSE servicing rights include companies like Mr. Cooper, Rithm Capital, Annaly Capital Management, Two Harbors, and MSR funds. However, there are fewer buyers for the Ginnie Mae assets, such as Freedom Mortgage and Lakeview/Bayview.

NYCB’s struggles began when they reported a net loss in the fourth quarter of 2023, followed by internal control deficiencies and a goodwill impairment of $2.4 billion. This led to credit rating agencies like Fitch and Moody’s downgrading their debt ratings and ultimately resulted in a leadership shake-up, with Thomas Cangemi stepping down as president and CEO.

It will be interesting to see how NYCB navigates through these challenges and whether selling off some of their MSR could be the key to improving their financial health. Stay tuned for more updates on this evolving situation!

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