HousingWire broke the news on Monday morning that Ocwen Financial (OCN) Executive Chairman William Erbey will resign from the Ocwen family of companies in January, and Ocwen will pay $150 million to homeowners under an agreement with the New York Department of Financial Services.
HousingWire asked Chris Whalen, senior managing director for Kroll Bond Rating Agency, what this means in the bigger picture.
HW: Can Ocwen recover from this, given the ban on purchasing new mortgage servicing rights and the overall damage to its image?
Whalen: Despite the negative headlines, Ocwen and the other servicers are continuing to make progress in terms of meeting the elevated standards that came out first with the national mortgage settlement and now with the NYDFS. Mortgage servicing is a messy, error-prone business that involves lots of people and moving parts. It will never be perfect.
The letter backdating error described by Ocwen in its public filings illustrates this operational risk of the mortgage business. Over time, we expect that Ocwen and the other servicers will repair their public reputations and modify their operations to comply with these new tough standards. It needs to be said that there is an element of politics at work here; a double standard.
Mortgage companies, whether banks or nonbanks, are very unpopular with the public. But the NYDFS has never applied this level of scrutiny to the servicing, lending or securities operations of the big commercial banks. Going after a non-bank mortgage company is easy compared to attacking JPMorgan or Bank of America, which are both big employers in New York.
HW: What does this mean for other nonbanks in the space and the mortgage industry?
Whalen: The settlement by New York with respect to Ocwen sets some very high expectations for both banks and non-banks operating in that jurisdiction. The top nonbank lender/servicers will need to comply with the same levels of service imposed upon Ocwen. Sadly, the settlement with NYDFS will serve as yet another disincentive to lend to borrowers with less than perfect credit.
Just as commercial banks now avoid lending to below-prime borrowers because of the impact of the national mortgage settlement and guidance from the major bank regulators, the actions by New York with respect to Ocwen will make it very hard to justify lending in that jurisdiction to below-prime borrowers or even at all. Prices for loans and MSRs with a high percentage of exposure to New York are also likely to suffer as a result of the actions by the NYDFS.
Between Dodd-Frank, the national mortgage settlement and now the NYDFS settlement with Ocwen, the cost of compliance for mortgage companies dealing with distressed borrowers is becoming prohibitive. Given this settlement, why would any rational investor want to acquire a pool of distressed loans to borrowers located in New York?
HW: Will this bring additional scrutiny to other nonbanks?
Whalen: It is very likely that the NYDFS is already looking at other non-bank lenders for the same types of errors and exceptions that were found with Ocwen. The settlement sets a new, much higher level of service for all servicers – banks and nonbanks alike – operating in New York.
Based upon the information in the public record, the penalties imposed seem to be disproportionate to the errors committed, but the NYDFS has essentially unlimited enforcement powers. The public antipathy towards banks and nonbank mortgage firms is so intense that these organizations must simply pay the fines and settle.
You can probably expect to see additional revelations about investigations by the NYDFS in coming months, and more fines and settlements imposed on non-bank mortgage firms. The winners here are the politicians, while the losers are the investors in nonbank companies as well as members of the public who will not be able to get a mortgage and buy a home.
As former Rep. Barney Frank noted in his congressional testimony this past summer, the objective of liberals has been to limit the availability of credit to American consumers. Sadly, this settlement is certainly helping to make that a reality.