Citigroup's plan to sell a $97 billion mortgage servicing portfolio and subservice its remaining accounts highlights the growing prevalence of nondepository servicers and raises questions about how much capacity exists for these institutions to absorb more large deals.

The deal, announced Monday, is the latest in a series of large servicing acquisitions by the publicly traded New Residential Investment Corp. The New York-based nonbank will pay approximately $950 million and $32 million for Citi's mortgage servicing rights and related advances, respectively, which are tied to Fannie Mae and Freddie Mac loans originated by CitiMortgage.

In addition to the Citi deal, New Residential has acquired the servicing rights on more than $150 billion in unpaid principal balance from companies including Walter Investment Management Corp., PHH Corp. and FirstKey Mortgage since October 2016. Deals of these sizes suggest a growing risk for the nonbank servicing business, said Chris Whalen, senior managing director and head of research at Kroll Bond Rating Agency.

"It points to a lack of capacity in the market," he said, adding that given its size, the parties involved in the Citi deal probably didn't have much competition.

Regulators have been wary of nonbank concentration in both the servicing and subservicing space, and Citi's MSR sale is pending a review process by the Federal Housing Finance Agency. The expected timeframe for that process is within the first half of this year.

"They will say yes," Whalen said of the FHFA approval. "Who else would take it?"

Citi has long been a top mortgage player, but its participation and revenue from its servicing business have wavered over time. The company has been scaling back its servicing for years in line with its efforts to operate more efficiently and focus on more profitable business lines.

While there are disincentives, such as recent changes in capital requirements that have generally limited banks' appetites for holding mortgage servicing, it's unclear if the Citi deal is a harbinger of greater bulk selling of the same order. The limited capacity for large deals may portend future agency servicing transactions decreasing in size, on the order of $2 billion to $5 billion, to make them accessible to smaller servicing shops and increase competition among buyers.

"There is more opportunity for nonbanks to step in where the banks are stepping back," said Gagan Sharma, the chief executive of BSI Financial Services in Irving, Texas, a company that provides subservicing for more moderate-sized portfolios.

Citibank also plans to transfer the subservicing on the balance of its loans to Cenlar by the end of 2018. It will continue to hold the MSRs on retail loans it owns.

Citi does plan to remain active in originating loans for its portfolio and for sale to Fannie and Freddie, but generally it is true that nonbanks' stake in both sides of the home loan business is growing and a year-to-year rise in rates is making servicing look more attractive.

"Everything is shifting to the independents in such a big way: servicing and originations," said David Lykken, president and founder of Transformational Mortgage Solutions, a consulting firm in Austin, Texas.

But not every nonbank has the capacity to handle the scale.

"The biggest challenge the nonbanks have is they are restrained by [availability] of capital, banks less so," he said. However, banks do have regulatory capital requirements linked to MSRs that nonbanks don't have.

This opens up opportunity for nonbank servicing investors like New Residential that can tap capital through the public markets, as it will in the case of the Citi deal, so long as they have enough capacity. Both New Residential and Nationstar are publicly traded and have ties to private equity firm Fortress Investment Group.

Capacity rather than competition is the main challenge for companies servicing bulk portfolios because of the high barriers to entry.

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