Most big mortgage lenders seem to have gotten the same memo:
Your bedside manner stinks.
For that and other reasons, the biggest banks continue to sell
off the portions of their portfolios requiring them to service
mortgage loans, especially loans for which the borrowers are
On the receiving end are independent mortgage servicers,
specialists in dealing with mortgage customers -- and with
problem loans in particular.
Bank of America (
) early this month agreed to sell servicerNationstar Mortgage
) some $215 billion in residential mortgage servicing rights.
More than half are private-label securitizations that tend to be
the most troubled and toughest to service.
Nationstar will shell out $1.3 billion for the portfolio. That
will bring the total servicing rights it has taken over from
banks in the last two years to nearly $400 billion, measured in
unpaid principal balances of the loans.
Nationstar shares surged 14% the week the deal was
In October, the bankrupt Residential Capital auctioned off
$374 billion in mortgage servicing assets. The winning
bidders:Ocwen Financial (
) andWalter Investment Management (
Ocwen and Walter barely registered on stock screens before
last year. Nationstar went public in March, backed by
co-investorsNewcastle Investment (
) and majority owner Fortress Investments.
The three have since glowed on heat maps as they've scooped up
hundreds of billions in loans shed by restructuring banks and
become the top-three nonbank mortgage servicers in the
"These companies are some of the best servicers of distressed
loans," said analyst Kevin Barker of Compass Point. "Banks are
not very good at servicing distressed and credit-sensitive loans.
The special servicers have been doing this for decades."
The trio have been the driving force behind IBD's mortgage and
real estate services industry group, which has held a top five
ranking among 197 industries tracked by IBD since June.
Another driver,CoreLogic (CLGX), is a real estate and mortgage
data and analytics firm that separated from title insurerFirst
American Financial (FAF) in 2010. Its shares rose 86% in the 12
months through Thursday.
In the ResCap deal, Ocwen will gobble up all but the $50.4
billionFannie Mae (FNMA) portion of ResCap's portfolio. That
smaller portion was awarded to Walter, which also landed
origination and capital markets platforms in the deal.
Nationstar lost out on ResCap, but prevailed in the Bank of
America deal. Banks aren't done downsizing portfolios yet,
analysts say. In addition, the federal regulator overseeing
government service agencies such as Fannie Mae andFreddie Mac
(FMCC) is encouraging them to transfer mortgage servicing from
banks to special servicers, Barker says.
"(Banks) are looking for partners like us to help them," said
Nationstar Chief Executive Jay Bray. He says Nationstar, Ocwen
and Walter will be prime beneficiaries since they've been at it
longer than most.
"The size and level of servicing that has been moving in the
last 12 months has been the largest it's been historically," Bray
Mortgage servicers get paid a fee for the loans they service.
A standard servicing fee is 25 cents per $100 of unpaid loan
balance, or $250 a year on a $100,000 outstanding loan. Fees are
higher on loans that require more work, such as adjustable rate
mortgages. Distressed loans can bring added servicing fees, and
incentive and modification fees can add another 5 cents per
The key is to balance yield and risk across the portfolio.
"Servicing is a business that works better if you have a
substantially large number of loans to spread costs over," said
Fitch Ratings managing director Diane Pendley.
This is where efficiencies of scale kick into effect. By
applying account technology, systems and experience, servicers
can work "just as cheaply on 1 million loans as they can on 1,000
loans," Pendley said.
Ocwen, Nationstar and Walter are growing in giant steps. Not
only are they snapping up servicing rights offloaded by banks,
they are acquiring smaller servicers.
The cost and hassle of complying with increased regulations
has hit smaller servicers hard.
"We're seeing a lot of consolidation of servicers because
their prior owners wanted to get out of the business," Pendley
In September 2011, Ocwen acquired Litton Loan Servicing from
Goldman Sachs, which came with a $38.6 billion portfolio. It
later bought Saxon Mortgage Services from Morgan Stanley.
Added Borrower Protection
"Robo" signings on foreclosure papers and other sloppy
mortgage-servicing practices used by banks during the housing
crisis led to two multibillion-dollar bank settlements over
abusive servicing and foreclosure practices.
First came a $25 billion Department of Justice settlement in
February. This month, an $8.5 billion deal replaced a criticized
earlier version. A foreclosure review was cut in favor of a
program that distributes aid more quickly to eligible
Major banks involved in both settlements -- Bank of
America,Citigroup (C),JPMorgan Chase (JPM) andWells Fargo (WFC)
-- were required to make extensive fixes to mortgage servicing
and foreclosure processes.
Banks continue to face rising protections for borrowers. The
most recent rules from the Consumer Financial Protection Bureau
apply to nonbank servicers as well.
The new CFPB rules requires mortgage servicers of all kinds to
work harder to prevent foreclosures, and to offer more
information on insurance and loan-modification options. They
can't, for example, push borrowers through the foreclosure
process while they are seeking loan modifications.
"The CFPB rules are positive for specialized servicers in that
they may result in banks offloading more products to them,"
It also increases pressure on smaller servicers, driving the
industry toward further consolidation.
"Smaller servicers are being challenged to make the economics
work with the regulatory burden," said Bray.
Margins And Rules
Major banks also are gearing up for higher capital
requirements effective in 2014 under Basel III regulatory
Nonbank servicers aren't affected by the new liquidity rules,
but more rules could spring from government service enterprises
such as Fannie and Freddie, who have set base lines for a lot of
the practices in the industry, Pendley says.
"And there are always individual state laws," she added, not
to mention states' attorneys general clamoring for tighter
regulations and cities setting their own requirements.
"Servicing is a constantly evolving business," she said. "It
takes large companies years to retool all their procedures,
retrain employees and get the technology down. And changes keep
If priced correctly, however, mortgage servicing can still be
a profitable business despite all the regulations, Pendley says.
But it's "becoming less profitable because of the costs to meet
all the requirements."
"Most of the servicers taking on additional product have seen
the writing on the wall and they've had some time to prepare for
these new changes and regulations," she said.
Bray expects servicing rights on $300 billion to $400 billion
in unpaid principal balances to transfer to specialty nonbank
servicers over the next 12 months.
Bank of America is likely to sell more of its portfolio,
analysts say. Even giant mortgage origination and servicer Wells
Fargo is said to be considering selling more of its servicing
Nationstar estimates the mortgage servicing flow from banks to
nonbanks over the next few years could run as high as $2
trillion. The total servicing market currently is around $10
Servicing platforms could become more valuable if interest
rates go up because borrowers won't be as inclined to refinance
out of a loan, Bray says. "So the servicing will stay with us
longer, which makes it a more valuable asset," he said.
Servicing costs are rising, although higher volumes help
leverage those costs. Ocwen's earnings are expected to soar more
than 250% from 2012 to 2014, according to Thomson Reuters.
Nationstar's and Walter's are each seen rising more than 140%
over that time.