On Thursday, Benjamin Lawsky, superintendent of New York's
Department of Financial Services (DFS) restricted the proceedings
of the cash-deal worth $2.7 billion entered into by
Wells Fargo & Co.
Ocwen Financial Corp.
) last month. As per the terms of agreement, Ocwen was to buy
residential mortgage-servicing rights (MSRs) on 1,84,000 loans
with total principal balance of about $39 billion from Wells
Fargo. Notably, the portfolio represents 2% of the bank's total
residential-servicing portfolio as of Dec 31, 2013.
Mortgage servicers' role is to accumulate payments from
homeowners and allocate those to investors who own the loans
through mortgage securities. Collectively, over the past two
years, servicing rights over $1 trillion in mortgages have
changed hands. Therefore, some specialty mortgage servicers have
been thriving, which has raised doubt by regulators in the
servicers' capabilities to service such loans.
Of late, Ocwen has been growing inorganically. The company has
acquired MSRs from several large banks including
The Goldman Sachs Group, Inc.
) and JPMorgan Chase & Co. Once the company closes all its
announced deals, the total servicing portfolio will likely be
approximately worth $500 billion. At present, the company is the
fourth largest mortgage servicer in the country with a market
share of roughly 5%.
Driven by concerns over the mortgage servicer's ability to handle
the increase in servicing volume, Lawsky has halted the recent
deal of Ocwen indefinitely. Therefore, Ocwen has put the deal on
hold at regulator's request and is cooperating to resolve his
concerns regarding its ability to service portfolios.
After the U.S. housing market collapsed in 2008, home
foreclosures increased, which led to a rise in legal costs
related to the servicing of mortgage loans. Moreover, some banks
had to pay penalties for malpractices related to such loans.
Additionally, given the new capital regulations, servicing of
loans has become a costly affair for the banks.
Therefore, banks started selling their rights to shrink their
mortgage business, thereby reducing risks. Moreover, revenues
from mortgage fees have lessened as the boom in mortgage
refinancing is gradually fizzling out, which led banks to resort
to reducing exposure to the mortgage market.
In Dec 2013, Ocwen announced a settlement with the Consumer
Financial Protection Bureau (CFPB) and other regulators, along
with 49 states and the District of Columbia. The settlement
pertained to the resolution of the alleged charges against the
company's handling of mortgages. However, Oklahoma was not part
of the settlement. Ocwen was bound to pay nearly $2.1 billion in
relief to distressed homeowners.
Going by the allegations, Ocwen used deceptive and unfair means
while working with borrowers who were delinquent and underwater.
The company was accused of misrepresenting facts while filing
foreclosure documents, charging unjustified fees for
default-related services and forcing borrowers to buy unnecessary
insurance policies, among others.
Continuation of such settlements will dent Ocwen's financials in
the near term. Moreover, the holding back of the deal by
regulators will affect the company's strategy of increasing
revenue through the acquisition of servicing rights from big
banks in the coming period.
Currently, both Ocwen and Wells Fargo carry a Zacks Rank #3
GOLDMAN SACHS (GS): Free Stock Analysis
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