Front Office

Lately it’s been almost impossible to comprehensively cover the mortgage servicing industry each month without at least mentioning what’s going on at Ocwen Financial. One of the largest mortgage servicers in the U.S., the company has been shrinking dramatically after being hit with a barrage of regulatory enforcement actions and lawsuits, leading to its recent decision to discontinue servicing agency-backed mortgages.

I am not alone in wondering whether Ocwen will survive - and whether its demise, should it occur, would come to emblematize the “downfall” of the mortgage servicing industry from over-regulation. But I also wonder what the impact of recent mortgage servicing rights (MSR) deals will be. For example, Ocwen’s agency-backed MSRs will now be spread out across multiple new servicers - so what does this do to market share? Will this lead to increased regulatory scrutiny for these new servicers?

Among the most recent of these deals is Ocwen’s sale of $45 billion in MSRs to JP-Morgan Chase. The massive sale, which includes 266,000 “high-quality” Fannie Mae loans, was previously announced in the Wall Street Journal in March. However, Ocwen didn’t make it official until May because the deal was still subject to a definitive agreement and required approval from Fannie Mae and the Federal Housing Finance Agency.

This deal was preceded by the sale of $25 billion in MSRs to Nationstar Mortgage in April; $9.8 billion in agency-backed MSRs to Nationstar in March; and $9.6 billion in MSRs to Green Tree Loan Servicing, a subsidiary of Walter Investment Management Corp., also in March. In combination, these deals will rebalance the mortgage servicing landscape.

What I find most interesting about Ocwen’s current situation, though, is that I’ve never known of a large servicer being in so much trouble with regulators and investors and yet having so much support from housing advocates and counseling agencies. Recently, a group of nonprofits that promote affordable housing and community development recently came to the company’s defense, when they sent a letter to top federal officials calling for an investigation into suspected pro-foreclosure campaigns run by hedge funds, mortgage bond traders and insurance companies.

In their letter, the housing groups say they are concerned that investors are “pushing servicers to foreclose on borrowers rather than offering them loan modifications and principal reductions.”

The letter specifically mentions Ocwen, which was recently sued by a group of investors for alleged “material failures … as servicer and/or master servicer, to comply with its covenants and agreements under governing pooling and servicing agreements.” Ocwen fired back with a letter of rebuttal, alleging that the investor groups were trying to “impose changes to standard servicing practices, with the goal of forcing more home foreclosures and fewer loan modifications.”

In addition, recent research by Morgan Stanley shows that Ocwen’s approach to modifications is more effective in keeping borrowers in their homes and that it has a higher success rate in keeping borrowers in their homes following transfer.

Then there’s the recent white paper from LL Funds, “In Defense of Ocwen Servicing,” which takes issue with legal claims brought by investors. Specifically, the white paper says the investors’ suit “fails to account for the fact that Ocwen services a larger percentage of subprime borrowers compared to other servicers.” It also concludes that transferring servicing away from Ocwen could harm both homeowners and bond holders.

So, Ocwen finds itself in an interesting place: Will it rise from the ashes like the phoenix, or will it serve as a reminder of an era when over-regulation and excessive oversight nearly choked an industry out of existence? Only time will tell.

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