By Shayndi Raice
New York state's top financial regulator said Wednesday he is
troubled by the rapid growth of nonbank mortgage servicers and said
regulators should act to halt that expansion.
Benjamin Lawsky, superintendent of New York's Department of
Financial Services, said he has "serious concerns that some of
these nonbank mortgage servicers are getting too big, too
fast."
Mr. Lawsky's comments, which were made at a New York Bankers
Association meeting, came after he "halted indefinitely" last week
a deal between mortgage servicer Ocwen Financial Corp. and Wells
Fargo & Co. to purchase servicing rights on $39 billion of
loans. The deal was stopped because Mr. Lawsky has concerns over
Ocwen's ability to handle more loans in light of his previous
concerns, a person familiar with the matter said.
Mr. Lawksy in his speech didn't name Ocwen, which is the largest
U.S. nonbank servicer.
A spokeswoman for Ocwen didn't have an immediate comment on Mr.
Lawsky's remarks.
Mortgage servicers collect payments from homeowners and
distribute the payments to investors who own the loans through
mortgage securities. Nonbank mortgage servicers, which aren't as
heavily regulated as banks, often focus on delinquent loans and
those made to buyers with poor credit histories.
"The problems associated with these distressed loans --
including homeowners behind on their payments or facing foreclosure
-- do not just disappear when the big bank sells the servicing
rights," Mr. Lawsky said in his remarks. "Those issues remain when
they arrive on the doorstep of the nonbank firm."
Mr. Lawsky added that non-banks have been turning loan servicing
into a profitable enterprise by using technology, rather than
people, to service loans. He referred to an unnamed nonbank
servicer who bragged about servicing loans for 70% less than the
rest of the industry.
"When we see such rapid growth, and when we see regulated
institutions boasting that they can perform services at a fraction
of their prior cost, it raises red flags," he said.
Before the financial crisis, large banks dominated the mortgage
servicing market. But the market shifted after the U.S. housing
market collapsed as the number of home foreclosures rose and legal
costs associated with servicing loans grew. Some banks also had to
pay penalties for abusive practices, increasing costs even
more.
At the same time, regulators have put in place new rules forcing
big financial firms to set aside more capital for the assets they
hold. They imposed some of the highest capital charges on
mortgage-servicing rights.
As a result, big banks have been selling off their
mortgage-servicing rights. In all, servicing rights on more than $1
trillion in mortgages have changed hands in the past two years.
The main buyers have been a small group of specialty, nonbank
servicing shops like Ocwen, Walter Investment Management Corp. and
National Mortgage Holdings Inc.
Mr. Lawsky said that since 2011, the number of mortgage
servicers who are also traditional banks has fallen to four from
10.
"We -- both state regulators and the regulated servicers -- need
to make sure that these MSR (mortgage servicing rights) transfers
do not put homeowners at undue risk," he said.
Ocwen in December reached a $2.1 billion settlement with the
Consumer Financial Protection Bureau and 49 states over abuses
against homeowners, including charging unauthorized fees, failing
to credit borrowers' mortgage payments in a timely fashion,
improperly imposing expensive insurance policies and filing
foreclosure documents in court without verifying the information in
them.
Ocwen shares rose 1.4% Wednesday in early afternoon trading, but
are down 30% so far this year.
Write to Shayndi Raice at shayndi.raice@wsj.com
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