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Moody's sends warning to Ocwen, Nationstar and Walter

There is one thing nonbanks shouldn't do

mortgage lemons
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Moody's Investors Service is citing concerns that nonbank mortgage servicing companies, such as Ocwen Financial (OCW), Nationstar (NSM) and Walter Investments (WAC), will begin originating nonprime mortgages.

This move could happen, the credit ratings agencies say, as regulators try to limit the amount of growth at those firms.

And if it does, it could negatively impact the credit ratings of the firm, Moody's said in it's latest ResiLandscape 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," states the report.

"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," the report adds.

On Feb. 6 the New York Department of Financial Services indefinitely halted Ocwen's $2.7 billion deal to purchase mortgage servicing rights on approximately $39 billion of unpaid principal balance from Wells Fargo (WFC).

Many consider this a signal for regulators to limit the rapid growth of these kinds of companies. These limits are good, in Moody's opinion.

Over the medium term the regulatory attention could accelerate a shift in servicers’ business models to areas with even greater operating risk," Moody's said.

For now, the origination of non-prime mortgages is not a huge operation at any of the three mentioned firms. Nationstar, for example, is currently limiting its mortgage originations and plans to keep shrinking its market share.

However, Moody's is right to note there is an opportunity in the space. Traditonal lenders are exiting the mortgage business as it becomes more unprofitable. Other players, such as real estate investment trust Redwood, is getting into the conforming mortgage market.

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