Nonbank Mortgage Servicers' Rapid Growth Alarms Investors
December 4, 2013
But concern is mounting among investors and analysts that Nationstar (NSM), Ocwen Financial (OCN) and Walter Investment (WAC) are getting so big so quickly that they are becoming too difficult to manage.
Shares of Ocwen and Nationstar have plunged in recent days following earnings announcements in which the companies disclosed a range of operational problems, including delays in integrating acquisitions of servicing portfolios. Meanwhile, Walter recently disclosed that it is under investigation by the Consumer Financial Protection Bureau and facing scrutiny from the Department of Housing and Urban Development over management of its reverse mortgage program and other issues.
The three firms have bought roughly $1 trillion of servicing rights from the likes of Bank of America (BAC) and Ally Financial's Residential Capital unit and have made no secret of their intention to continue acquiring more assets.
But the transfer of servicing rights must be approved by investors, or in the case of loans backed by Fannie and Freddie, the Federal Housing Finance Agency, and the recent spate of problems has prompted some analysts to question whether Ocwen, Nationstar and Walter are equipped to handle any more acquisitions.
In a conference call discussing Nationstar's third-quarter earnings Thursday, Henry J. Coffey, an analyst at Sterne Agee & Leach, asked Nationstar Chief Executive Jay Bray if Fannie, Freddie and the FHFA are "suddenly losing the stomach for the role that independent servicers are playing."
Bray, though, said that nonbank servicers have played a vital role in reducing losses for government-sponsored enterprises and keeping delinquent borrowers in their homes.
"It comes down to math, right?" Bray said on the call. "When you look at the amount of the impact that Nationstar's had on reducing losses for the GSEs in the portfolios that have been transferred, it's big numbers, right? At the end of the day, we're one of the few guys that actually can really deliver the value, the infrastructure, the governance … that these entities are looking for."
Still, in an interview Friday, Bray said it may be "prudent" of the FHFA to slow down and let the nonbank servicers digest past acquisitions. He acknowledged that, after a string of deals last year, even Nationstar needed to take a breather in 2013.
"If somebody had called us in the first or second quarter and said they have $200 billion [in mortgage servicing rights] to move in the next 90 days, we would have said no," Bray said. "You can't underestimate this process. You have to be very prudent, very careful because we're dealing with borrowers' lives."
Nonbank servicers have been aggressive in acquiring servicing rights because large banks have deliberately reduced their exposure due to changing capital rules, increased regulatory scrutiny and the desire to shed noncore customers. Because the nonbanks have purchased the rights to service troubled loans at a discount, they have been able to rework delinquent mortgages with far more success than many of the banks have.
In the past year, Ocwen and Walter have catapulted themselves into the ranks of the top 10 mortgage servicers while Nationstar has jumped from No. 7 to No. 5. The three combined have a 12% share of the servicing market. Only Wells Fargo (WFC), JPMorgan Chase (JPM) and Bank of America are larger than Ocwen, ranked fourth, and Nationstar, according to Moody's Investors Service. Walter ranks ninth.
To date, regulators have largely supported an expanded role for nonbank servicers given banks' servicing lapses in recent years; just recently Fannie gave Walter Investment's Green Tree Servicing its highest servicer rating.
Still, while the FHFA has supported the expanded role of nonbank servicers, primarily to reduce losses at Fannie and Freddie, the Consumer Financial Protection Bureau has repeatedly warned about the risks of such transfers to nonbanks. Servicers say they have kept millions of borrowers out of foreclosure, but the CFPB says it has received thousands of complaints about servicing interruptions and a failure to honor past loan modifications.
The CFPB has received more than 13,000 complaints since early 2012 against the three nonbank servicers. Ocwen had the most complaints at 7,524 followed by Nationstar with 3,462 and Green Tree with 2,432. However, the vast majority of complaints have been resolved.
Recent filings suggest that servicers could have more run-ins with regulators.
On Nov. 6, Walter disclosed that the CFPB notified Green Tree on Oct. 7 that it was considering taking action for alleged violations of federal consumer protection laws. Walter, based in Tampa, Fla., also received a subpoena on Oct. 2 from HUD's Office of Inspector General requesting information on its reverse mortgage program and third-party management of real estate-owned properties.