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

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.