The banking regulator many in the housing industry fear more than the Consumer Financial Protection Bureau says that he is not taking his eye off nonbank mortgage servicers, and in fact he plans to go a lot deeper.
New York State Department of Financial Services superintendent Benjamin Lawsky opened the second day of the Mortgage Bankers Association’s Secondary Markets Conference & Expo (#secondary14) on Tuesday, telling attendees he has grave concerns about the rise and growth of nonbanks who are snapping up mortgage servicing rights even as traditional banks are leaving the space in droves.
(Sidenote: The day started badly for Lawsky, as he was initially turned away by a guard from entering the MBA convention because he didn’t have convention credentials.)
“Recently…there has been an evolution in the mortgage servicing industry. Regulators are – appropriately, in the wake of the financial crisis – putting in place stronger capital requirements for big banks. In particular, they are giving those banks less credit for the – often distressed – mortgage-servicing rights on their balance sheets,” Lawsky said in prepared remarks. “Rather than building up stronger capital buffers in response, many large banks are instead offloading those MSRs to nonbank mortgage servicers – which are often more lightly regulated.”
Ocwen’s CEO said Lawsky’s freeze has chilled almost all MSR deals in the pipeline.
“Until we resolve New York State we’re not acquiring any new (MSR) portfolios at all. As a matter of fact the entire market – nothing is being put out for bid right now,” William Erbey, CEO of Ocwen, said. “The whole market has stopped until that gets resolved.”
“Now, one of the things we’re concerned about as a regulator is whether these MSR sales trigger a race to the bottom that puts homeowners at risk. Remember, in most cases, the compensation to be paid for servicing is fixed by the PSA; it cannot be diminished,” Lawsky said. “So the cheaper a servicer can service those mortgages, the more profit it expects to earn from the fixed servicing fees, and the more it can offer the banks to buy these MSRs.
“The result is high prices paid for MSRs, together with incentives for cut-rate servicing by nonbanks. Indeed, one large nonbank servicer touted that it can service distressed loans at a more than 70% discount – in part due to expanded use of information technology,” he said.
Lawsky said that he believes regulators have a responsibility to ask whether the efficiencies at nonbank mortgage servicers are too good to be true.
“So, what are the consequences of this potential race to the bottom? Well, it should be no surprise that borrowers tend to be the losers here. When we at DFS take a closer look at some of these nonbank servicers, we find corners being cut, to the disadvantage of homeowners,” he said. “Mortgage investors also lose out. After all, they are the ones paying rack rates for bargain-basement services.”
Lawsky argues that borrowers and investors both suffer when a servicer does not know how to pull together its loan files, or when a servicer is unable to extract information from its many incompatible computer systems at the right time and for the right purpose.
“Moreover, while some defend the nonbank mortgage servicing industry as providing better service than the large banks – that’s cold comfort for most borrowers and investors given the bank’s track record in this area (even if it were true). It also wouldn’t justify regulators turning a blind eye to a rapidly growing nonbank sector in which the homes of millions of families are at stake,” Lawsky said.
Lawsky says that part of the DFS’s focus on Ocwen is because his office’s review of nonbank servicers has also turned up another enormous profit center associated with these MSRs that could put homeowners and mortgage investors at risk: the provision of what they call ancillary services.
“Now, in most circumstances, there’s nothing inherently wrong with companies and their affiliates providing a range of ancillary services,” Lawsky said. “This is the extraordinary circumstance where there effectively is no customer to select its vendor for ancillary services. Nonbank servicers have a captive and often confused consumer in the homeowner.
“So who makes the decision about where to procure these ancillary services, and how much of the investor’s or the borrower’s money to pay for them? It’s usually the servicer, seemingly with no oversight whatsoever. The very same servicer that benefits – either directly or indirectly – from the profitability of the affiliated companies that provide these services,” Lawsky said.
Specifically, Lawsky is referring to the latest move DFS made against Ocwen, when it sent a letter to Ocwen’s general counsel demanding answers to questions about Ocwen and how it operates in relation to its subsidiaries, Hubzu and Altisource.
“The potential for conflicts of interest and self-dealing here are perfectly clear. Servicers have every incentive to use these affiliated companies exclusively for their ancillary services, and they often do. The affiliated companies have every incentive to provide low-quality services for high fees, and they appear in some cases to be doing so,” Lawsky said. “In the context of the nonbank mortgage servicing market, homeowners and investors are at risk of becoming fee factories.”
Lawsky concluded saying that the role of regulators is to monitor these fees in the mortgage industry imposed through potentially conflicted arrangements. And when these ancillary services are being provided either at a sub-standard quality or at inflated prices – or both – that deserves strong scrutiny, he said.
“We’ve publicly highlighted our concerns about ancillary services with one particular nonbank servicer, but they are not the only industry player doing this. So you should expect us to expand our investigation into ancillary services in the coming weeks and months,” he said.
The full text of Lawsky's remarks can be read here.