Wells Fargo Sells Mortgage Servicing Rights to Ocwen

On Wednesday, Wells Fargo & Co announced it will sell residential mortgage servicing rights on $39 billion in loans to Ocwen Financial Corp, a major financial services holding company. The terms of the deal have not been disclosed.

The 184,000 loans in the deal account for 2% of Wells Fargo’s residential servicing portfolio. Most of the loans were held by private investors and not owned or originated by Wells Fargo, the bank said in a statement.

Wells Fargo now joins Bank of America and Citigroup in retreating from the nearly $10 trillion mortgage servicing market as new government regulations make it more expensive to hold onto the assets. Ocwen, Walter Investment Management Corp, and Nationstar Mortgage Holdings Inc are among the most active non-bank firms purchasing the rights.

In 2013, government-owned auto lender Ally Financial made a deal to sell a portfolio of mortgage servicing rights to Ocwen for about $585 million.

As the mortgage servicer, Ocwen will handle billing and collections on behalf of investors who own the loans. The firm will also oversee foreclosures in case of default.

As of September 30, Wells Fargo was the largest United States servicer on residential mortgages.

“From a risk management standpoint, it’s good to go ahead and test the waters every once in a while, and you should expect that we’ll probably be doing that in the next few quarters,” said Chief Executive Officer John Stumpf, adding that demand for mortgage servicing rights has increased.

The company expects the sale will be finalized once servicing is transferred this year, and will not be material to the bank’s financial results.

Wells Fargo has been striving to limit its exposure to the mortgage market in the face of dropping refinancing demand, a financial category normally attributed to boosting the bank’s profits. Last week, Wells Fargo announced profits for mortgage lending fell 49% from the 4th quarter of 2012 to $1.6 billion. Home lending originations fell to $50 billion, down from $125 billion a year prior and $80 billion in the last quarter.

According to Inside Mortgage Finance, Wells Fargo currently collects payments on almost 1 out of every 5 United States home loans and is the largest mortgage servicer in the U.S.