Mortgage Market Gets Reshuffled
By Stephanie Armour, Andrew R. Johnson and Rob Copeland
Washington’s effort to push banks out of the mortgage-servicing business is propelling the handling of customers’ loans into companies such as hedge funds and nonbank financial firms. The shift is fueling concern among federal and state regulators about the level of oversight. Banks such as Morgan Stanley, Bank of America Corp., Goldman Sachs Group Inc. and Ally Financial Inc., have been selling mortgage-servicing rights to nonbank companies, including Ocwen Financial Corp.OCN in Your Value Your Change Short position
and Nationstar Mortgage Holdings NSM in Your Value Your Change Short position which have doubled their servicing portfolios in the past year. The business can be lucrative. Servicers typically make money by collecting a fee from the mortgage’s owner—usually a bank or investor—for handling billing and payment collection. Ten of the largest U.S. mortgage lenders took in $8.23 billion in servicing income in 2013, according to an analysis by Inside Mortgage Finance. But it has become a liability for lenders, which face new restrictions as Washington tries to siphon risk out of the banking system. Regulators, concerned about banks’ exposure to mortgage-related assets and their alleged ham-handedness in handling crisis-era loans of troubled borrowers, have introduced new rules dictating how mortgage servicers interact with borrowers and raising capital costs for servicing loans. The CFPB, a consumer regulator, has established rules for all servicers—including those owned by nonbank companies—that prevent servicers from initiating foreclosure in the first 120 days a borrower is delinquent. But nonbank firms generally aren’t subject to the types of federal capital requirements and other restrictions that regulators place on banks. “This is the first clear case of rules restructuring a banking business into a shadow one,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc.