The truth behind the safety of nonbank servicers

Compass Point: 4 areas show strength

Nonbank mortgage servicers are stuck in the undercurrent of a heavy wave of regulator scrutiny and industry surveillance.

Benjamin Lawsky, superintendent of the New York Department of Financial Services, is coming after nonbank mortgage servicers arguing that they are growing too fast and regulators need to protect homeowners by making sure these companies can handle the volume of business they are taking on.

The Mortgage Bankers Association is working to keep a very close eye on ongoing regulatory activities aimed particularly at nonbank servicers.

Moody’s Investor services is citing concerns that nonbank mortgage servicing companies, such as Ocwen Financial (OCW), Nationstar (NSM) and Walter Investments (WAC), may begin originating nonprime mortgages, or grow existing originations platforms.

And these are only a few.

But the real question: how much of this scrutiny is justified?

Compass Point Research & Trading looked into whether or not the servicers deserve the increased oversight and compared the servicing practices between the largest bank and nonbank mortgage servicers, finding four distinct areas that outline the truth behind the safety of nonbank servicers.

“Through this process, we have found special servicers have lower servicing-related complaints at the Consumer Financial Protection Bureau per delinquent loan, higher than average marks from Fannie Mae in their STAR program and in-line to below average servicer ratings from the rating agencies,” the report explained.

1. CFPB complaint data:

Consumers who are in distress are more likely to file a complaint to the CFPB, showing that the vast majority of issues will probably occur when servicing the mortgage of a delinquent loan. However, the report looks at the amount of delinquent loans measured against the amount of complaints related to “Loan Modification, Collection and Foreclosure” to assess which servicers tended to have the most issues with distressed loans. It found, on average, the nonbank servicers screen as having the lowest amount of modification/foreclosure complaints per delinquent loan out of the largest mortgage servicers in the U.S.  

2. Fannie Mae STAR program:

The Servicer Total Achievement & Rewards program evaluates servicers across key operational and performance areas relative to their peers. It ranks the achievements on a 5-star rating system.  Both Ocwen and Nationstar produced results on the STAR scorecard at or above median level relative to their peers for the first half of the year.     

3. HAMP performance

The U.S. Treasury Department releases quarterly assessments of larger HAMP servicers through its Making Home Affordable program. According to the latest report, none of the reviewed servicers required substantial improvement. And while all data should be consider, Compass Point noted, “We view the CFPB and STAR assessments as more pertinent assessment of servicer performance given their broader applicability and entity focus.”

4. Rating agencies more critical

As noted previously, Moody’s remains cautious at the aggressive growth of the special servicers’ portfolios in the recent quarter. Nonbanks could start to originate nonprime mortgages, 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 its latest ResiLandscape report.

“Overall, we believe there is some merit to the operational concerns about portfolio growth for the special servicers, but the longer-term track record of the special servicers is strong and the near-term operational issues likely will be temporary,” Compass Point said. 

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