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The mortgage servicing business has significantly more issues to be concerned about than was what originally perceived, according to a report from Sterne Agee.

“The noise and winds surrounding the maturation of the special servicing business are significantly greater than anything we have anticipated,” the report stated.

“We hope everyone does not think the legacy banks have the capacity to manage at risk and credit impaired mortgages and expect things to be resolved over time in favor of the special servicers,” it continued.  

The report outlines 4 distinct areas that should bring cause for alarm.

1. Currently, the industry does not know if Benjamin Lawsky, superintendent of the New York Department of Financial Services, has issues with Ocwen Financial Corporation (OCN), Wells Fargo (WFC), the servicing industry in general or with all three.

2. Furthering the noise, Gibbs & Bruns, the Texas-based law firm that reached a settlement with Bank of America (BAC) and non-agency bond investors several years back, noted through a leak to the press that it was soliciting BlackRock, PIMCO, and others for a lawsuit against Ocwen Financial. “If the DFS's primary complaint is that OCN is not spending enough and modifying too many loans, G&B is likely to argue that OCN is spending too much and modifying too many mortgages. Interesting crosswinds,” the report stated.

3. On Feb. 11, Representative Blaine Luetkemeyer, R-Mo., referred a bill to the House Financial Services Committee titled, "To Require a study of appropriate capital requirements for mortgage servicing assets for non systematic banking institutions and for other purposes." While there is no copy of the bill currently posted, Sterne Agee said it assumes the primary focus will be on smaller banks with assets of less than $50 billion. Additionally, it is likely that any review of this issue would also focus on the capital needs/requirements of nonbank servicers.

4. The Federal Housing Finance Agency and other important companies should ultimately get more comfortable with the contributions of the special servicer, understanding that they are already interviewing independent servicers.

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