Moody's has issued a report citing concern that non-bank mortgage servicers might start originating risky or ‘non-prime’ loans if regulators start limiting their growth by preventing them from buying up more mortgage servicing rights (MSRs).
Recently, the New York Department of Financial Services (DFS) indefinitely postponed Ocwen Financial Corp.'s $2.7 billion deal to purchase MSRs on approximately $39 billion of unpaid principal balance from Wells Fargo.
Benjamin Lawsky, superintendent of the New York DFS, halted the deal over concerns that Ocwen wouldn't be able to handle the load of about 184,000 loans.
Several days later, Lawsky told a group of bankers during a conference that both state and federal regulators should play a more active role in deciding whether non-bank servicers have the capacity to handle such deals.
‘I think it is appropriate for regulators – where warranted – to halt the explosive growth in the non-bank mortgage servicing industry before more homeowners get hurt,’ Lawsky said in prepared remarks for the New York Bankers Association Meeting and Economic Forum.
Moody's says the DFS action "may signal a broader regulatory push to moderate the growth of the large special servicers, which, in addition to Ocwen, include Walter Investment Management Corp. and Nationstar Mortgage."
While Moody's analysts say limiting the growth of non-bank servicers would help keep them credit positive, and would also help protect investors by ensuring loan performance, the increased scrutiny they face when entering such deals could result in fines and penalties, should regulators discover violations when assessing a servicer's capacity.
In other words, should a servicer consider a large MSR acquisition, it could be opening itself up to additional risk, in terms of regulatory action. Should a regulator such as the Consumer Financial Protection Bureau (CFPB) discover violations, those violations, in turn, will result in fines and penalties that will drive up servicer operating costs. Those additional costs, in turn, will be passed on to consumers.
Should regulators continue to block such MSR deals, it could cause servicers to look at other ways to boost revenue – including venturing into risky or ‘non-prime’ lending.
‘[A] concern we have is whether the companies will attempt to offset the credit-positive decrease in growth by shifting business models and originating non-prime mortgages, a net credit negative,’ Moody's says in its report. "We have said that Ocwen and the special servicers could become the next generation of non-prime originators, given their wealth of non-prime servicing experience along with the cyclical, low-margin nature of prime mortgage originations. But originating non-prime loans increases legal risks and performance volatility. Although industry non-prime loan volume is currently very low and we do not expect it to grow rapidly anytime soon, we expect the market to redevelop with active participation by special servicers.’
In addition to Lawsky, numerous other state and federal regulators have recently expressed concerns regarding the rapid growth of non-bank servicers – the main one being that customer service could erode again, should servicers be allowed to scale unchecked.
Last week, during a keynote he delivered at the Mortgage Bankers Association's National Mortgage Servicing Conference & Expo 2014 in Orlando, Fla., Steven Antonakes, deputy director of the CFPB, said although some servicers made great strides in terms of complying with the CFPB's new mortgage servicing rules, which went into effect Jan. 10, he is nonetheless ‘deeply disappointed by the lack of progress the mortgage servicing industry has made’ in terms of improving customer service since the financial crisis began nearly eight years ago.
