NY Regulator Troubled by Growth of Nonbank Mortgage Servicers -- Update

By Dow Jones Business News, 
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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'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. 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

Order free Annual Report for Ocwen Financial Corp.

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