After running afoul of the New York Department of Financial Services, the Securities and Exchange Commission, the monitor of the National Mortgage Settlement, the Federal Housing Finance Agency Office of the Inspector General, and the Consumer Financial Protection Bureau in the past few months, nonbank mortgage servicers may have a new nemesis on their hands, Elizabeth Warren.
Warren, the Democratic Senator from Massachusetts, has long been at the forefront of Washington’s fight for financial reform. She was instrumental in the formation of the CFPB and now she has her sights set on nonbank mortgage servicers.
Warren, along with Congressman Elijah Cummings, D-Md., sent a letter this week to the U.S. Government Accountability Office, requesting a study of the risks posed to consumers by the “unprecedented” growth in nonbank mortgage servicing.
In the letter, Warren cites a FHFA-OIG report that showed the dramatic rise of nonbank servicers in the last few years. The report said that nonbank special servicers now hold approximately $1.4 trillion in mortgage servicing rights out of a nearly $10 trillion market.
In that report, the FHFA-OIG said that nonbanks use of short-term financing to buy servicing rights for troubled mortgage loans will likely not pay off until difficulties resolve in the long-term.
“This practice can jeopardize the companies’ operations and also the Enterprises’ timely payment guarantees and reputation for loans they back,” the report said.
“Specifically, the nonbank special servicers do not have the same capital requirements as a bank, which means they are more susceptible to economic downturns. Such downturns could substantially increase nonperforming loans that require servicer loss mitigation while at the same time impact the ability of the servicer to perform.”
In the letter to the GAO, Warren and Cummings question the financial structures of nonbanks and what the impact of another economic crisis would be on nonbank servicers and the homeowners they service.
“We are writing to request a study of the vulnerability of nonbank mortgage servicers to economic downturns given the lack of capital requirements applicable to these servicers and of the risks posed to consumers by continued growth in nonbank specialty mortgage servicing,” Warren and Cummings state in the letter.
A recent report from Fitch Ratings also suggested that the rise of nonbank servicers threatens private-label residential mortgage-backed securitizations. According to Fitch’s report, nonbanks now service approximately 74% of all private-label securities by loan count, up from 48% in 2004. And nearly all of that 74% is being serviced by the top five nonbank servicers.
According to Fitch’s data, Ocwen Loan Servicing (OCN), Nationstar (NSM), Select Portfolio Servicing, Green Tree Servicing, and PHH Mortgage Corp. (PHH) currently account for 64% of all non-agency servicing. That concentration is a concern, Fitch said.
“Nonbank servicers have grown significantly through the sale and transfer of difficult-to-service loans from large banking institutions," said Fitch Managing Director Roelof Slump said in the report. “However, while nonbank servicers typically offer specialization which is important for this critical function, they are generally not as well-capitalized as the banks and this could increase servicer disruption/continuity risk among lower-rated companies with unique business strategies.”
In the letter to the GAO, Warren and Cummings ask the GAO to study several areas that could potentially be impacted by the rise of nonbank servicers, specifically:
- The risks posed to consumers by the growth in nonbank specialty servicers generally
- The vulnerability of nonbank specialty servicers to volatility in the MSR market given the lack of requirements compelling these servicers to maintain capital cushions
- The likely effect on consumers should a major nonbank specialty servicers fail as a result of this vulnerability
- The effect of the nonbank specialty servicing industry generally should a major nonbank servicer fail
A full copy of Warren and Cummings’ letter can be read here.
Warren and Cummings’ letter comes on the heels of what is already a bad week for Ocwen, which was targeted in another letter from a financial regulator earlier this week.
On Tuesday, the NYDFS sent an open letter to Ocwen alleging that Ocwen has serious issues with its servicing practices, including backdating letters it sent to borrowers.
“In the course of the Department’s review of Ocwen’s mortgage servicing practices, we have uncovered serious issues with Ocwen’s systems and processes, including Ocwen’s backdating of potentially hundreds of thousands of letters to borrowers, likely causing them significant harm,” Lawsky says in the open letter to Ocwen general counsel Timothy Hayes, a copy of which was sent to HousingWire.
“In many cases, borrowers received a letter denying a mortgage loan modification, and the letter was dated more than 30 days prior to the date that Ocwen mailed the letter,” Lawsky writes. “These borrowers were given 30 days from the date of the denial letter to appeal that denial, but those 30 days had already elapsed by the time they received the backdated letter.”
A full copy of the Lawsky letter can be read here.
Ocwen responded to Lawsksy’s charges in a statement issued to HousingWire.
“We deeply regret the inconvenience to borrowers who received improperly dated letters as a result of errors in our correspondence systems,” a spokesperson for Ocwen said. “As always, our goal is to avoid foreclosure. In the case of the 283 borrowers in New York who received letters with incorrect dates, 281 are currently borrowers with us. We are continuing to review the rest of the cases.”
But that didn’t stop Ocwen’s stock from plummeting after HousingWire broke the news on Tuesday. The volatility was so high that trading was temporarily suspended twice during the course of the day. The stock opened in the mid-$26 range and immediately plunged about 20%, ending the day at $21.48.
The stock opened Wednesday down again, at $20.12, and was down about 8.5% as of 11:30 a.m. ET.
In the aftermath, Moody's Investors Service downgraded Ocwen’s ratings, saying in a note to its clients: “These allegations raise the risk of actions that restrict Ocwen's activities, the levying of monetary fines against Ocwen, or additional actions that negatively affect Ocwen's credit strength. In addition, the continued regulatory scrutiny further damages Ocwen's franchise position.”
And with Warren and Cummings now shining a magnifying glass on the nonbanks, downgrades from ratings agencies could be the least of Ocwen’s and other nonbanks’ concerns.