The country’s biggest residential mortgage servicer is reaping the rewards from economies of scale.
Wells Fargo’s mortgage servicing fee income grew during the past year by one-fourth more than did the size of its servicing portfolio, validating CEO Richard Kovacevich’s insistence last September that the financial giant would weather the housing downturn with its mortgage servicing business.
Servicing fee income increased 53% to $947 million at the end of its third quarter from $619 million a year earlier, according to a report by CFO Howard Atkins. And its servicing portfolio increased 42% to $1.33 trillion from $925 billion a year earlier. That growth means that Wells Fargo is now the country’s largest servicer of mortgage loans.
At a conference sponsored by Bank of America last September, Kovacevich noted that Wells Fargo has a natural offset to the housing downturn with its mortgage servicing, with the market decline providing opportunities to purchase mortgage servicing rights, as it did with its acquisition of a $140 billion servicing portfolio in July from Washington Mutual. That purchase, said Atkins in his report, accounted for one-fourth of Wells Fargo’s year-over-year growth rate of its servicing fee income.
The increase in servicing fee income more than offset the $14 million in additional expenses related to its servicing the WaMu purchase and its $86 million net loss on market-related changes to mortgage servicing rights that resulted from the decline in MSR value due to lower rates net of the gain on financial hedging instruments, according to Atkins.
Wells Fargo’s total home mortgage expenses, including that $14 million cost of servicing the WaMu portfolio purchase, were reduced 5% from a year ago, despite the 42% growth in its total servicing portfolio, he pointed out.
“The 5% reduction in expenses is in line with the relative changes in originations and servicing,” he said, noting that this reduction occurred as origination volume fell and servicing volume increased, underlining the value of being a giant in the servicing business.
“We will continue to tailor origination expense to origination volume and seek economies of scale in servicing,” Atkins vowed.
“Our economies of skill ands scale in servicing,” added Mark Oman, senior executive vice president of Wells Fargo’s Home and Consumer Finance Group, in comments on the company’s performance, “and our ability to cross sell and retain our servicing customers has made us a leader in a consolidating industry. Our servicing business benefits from a slower housing market as lower prepayments result in a lower rate of MSR amortization.”