By Dow Jones Business News,
February 12, 2014, 01:44:00 PM EDT
By Shayndi Raice
New York state's top financial regulator said Wednesday he is troubled by the rapid growth of nonbank mortgage
servicers and regulators should act to halt that expansion.
Benjamin Lawsky, superintendent of New York'sDepartment 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. Lawsky in his speech didn't name Ocwen, which is the largest U.S. nonbank servicer.
"Ocwen's success and growth have been driven by our conviction that keeping distressed homeowners in their homes
and, whenever possible, helping people avoid foreclosure via sustainable modifications are good for our business, the
investors who own the mortgages, homeowners and communities," the company said in a statement.
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 nonbanks 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 such as 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
"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.
Write to Shayndi Raice at email@example.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
Copyright (c) 2014 Dow Jones & Company, Inc.