Morgan Stanley plans to sell its mortgage-servicing business to Ocwen Financial Corp for $59.3 million, closing out a money-losing strategy that stemmed from the subprime housing bubble.
The deal, which was announced by the two companies on Monday, also signals Ocwen's strategy of expanding by buying troubled servicing assets on the cheap from big banks that have stepped back from the U.S. mortgage business in the aftermath of the financial crisis.
Morgan Stanley bought Saxon in August 2006 for $706 million as part of the bank's dive into subprime mortgages. Mortgage servicers do not lend money, but earn fees by collecting payments from mortgage borrowers for investors that own underlying bonds.
The timing of Morgan Stanley's purchase was unfortunate: problems in the subprime market were not yet widely understood, but U.S. home prices had just peaked and subprime borrowers were starting to show difficulty making payments.
Months later, Goldman Sachs Group Inc made a similar move by buying Houston-based servicer Litton Loan Servicing, which it also offloaded to Ocwen in June for over $600 million.
The two banks had hoped to profit from getting a closer look at trends in the subprime mortgage market, which produced billions of dollars for lenders, securitizers and servicers in the years leading up to the crisis of 2007-2009.
But Saxon and Litton soon created headaches for their Wall Street owners, as delinquencies rose and losses accrued. Problems with foreclosure paperwork eventually ensnared Goldman and Morgan Stanley into investigations by federal and state regulators last year.
Loans at Litton are still not doing well. The deal pushed Ocwen's delinquency rate up to 28.7 percent at Sept. 30 from 24.2 percent three months earlier, Ocwen President and Chief Executive Ron Faris said in a statement announcing third-quarter results on Monday.
Ocwen's total servicing portfolio grew to an unpaid principal balance of $106.1 billion at Sept. 30, up from $70.8 billion it serviced three months earlier.
The Atlanta-based mortgage servicer will add $26.6 billion to that balance with the Saxon deal, some of which it already subservices.
Ocwen had earlier purchased a $6.9 billion servicing portfolio from Saxon last May, and also bought Barclays PLC's U.S. mortgage servicing business HomEq for $1.3 billion last year.
The latest Saxon deal will also include a payment of about $1.4 billion to Morgan Stanley for receivables on mortgages that are doing well and expected to continue performing.
The deal is expected to close in the first quarter of 2012, Morgan Stanley said. It is not expected to have a material impact on financial results, though it will marginally reduce risk-weighted assets and boost its capital ratio.
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