Benjamin Lawsky, superintendent of New York's Department of Financial Services, who last week halted Wells Fargo's planned sale of mortgage servicing rights (MSRs) on $39 billion in debt to Ocwen Financial, told a group of bankers on Wednesday 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.
‘We – both state regulators and the regulated servicers – need to make sure that these MSR transfers do not put homeowners at undue risk,’ Lawsky said. ‘We have a vital responsibility to protect consumers. There are real people at the other ends of these loans, and the ability to work with those homeowners is not something that these non-bank firms can build up overnight.’
Last week, Lawsky halted Wells Fargo's planned sale on the rights to about 184,000 loans to Ocwen, reportedly due to concerns that Ocwen wouldn't be able to handle the load.
According to a Bloomberg News report, the department has a monitor at Ocwen who apparently feels the company doesn't have the resources in place in order to properly service the loans.
Ocwen, which is licensed in New York State, agreed to put an indefinite hold on the deal until the monitor's concerns are allayed, according to the report.
Ocwen is one of many non-bank servicers that have been growing rapidly in recent years as they snap up business from larger banks, which are divesting themselves of their MSRs in reaction to the new Basel III rules, which require regulated institutions to hold around 5% of the value of the loans they service in reserves. What's more, many large banks are getting rid of their servicing portfolios because servicing has been a shrinking part of their business and thus is no longer as profitable.
Lawsky said the rapid growth of non-bank mortgage servicers, which have been buying up the MSRs in bulk, is a ‘troubling trend." He pointed out that in "2011, all of the 10 largest mortgage servicers were traditional banks. Today, four of the top 10 are non-banks."
Those four, he said, service more than a trillion dollars in loans.
‘We have serious concerns that some of these non-bank mortgage servicers are getting too big, too fast,’ Lawsky said. ‘We are seeing far too many struggling homeowners getting caught in a vortex of lost paperwork, unexplained fees and avoidable foreclosures.’
Lawsky referenced one particular servicer – which he did not identify by name – that had recently quadrupled in size and now services more than $400 billion in loans. That firm, he said, is promising that it can service distressed loans at a cost that is 70% less than the industry average. He said regulators should play a role in determining whether such claims were ‘too good to be true’ and furthermore, should assess whether servicers have the capacity – both in terms of technology and labor – to properly service all the loans they take on.
Depending on how his remarks are interpreted, Lawsky seems more concerned with non-bank servicers' capacity in terms of labor than technology:
‘People lead complicated lives, and helping them work through their issues often requires creative solutions,’ he said. ‘It is human capital – people – that helps families keep their homes. And human beings are not as readily scalable as the technology that supposedly supports them.’
In his prepared speech, Lawsky makes no mention of the Consumer Financial Protection Bureau's new mortgage servicing rules, which are designed to ensure that servicers – both bank and non-bank – properly handle each and every loan. Servicers that violate these rules not only risk fines but also face the specter of civil lawsuits that can result in large settlements.
Lawsky, however, pointed out that regulatory enforcement typically comes after a servicer has already committed misdeeds.
‘Rather than solely treating the symptoms of these problems through after-the-fact fines and enforcement actions, we also need to ask ourselves some deeper questions as regulators. Among them, how do we address the underlying problem itself?’
To read Lawsky's prepared remarks, click here.