Lawsky's Move Raises Tough Questions for Ocwen, Servicing Market

By halting Ocwen Financial's (OCN) deal to buy a mortgage servicing portfolio from Wells Fargo (WFC), New York regulator Benjamin Lawsky has called into question the servicer's ambitious growth plans.

Lawsky's move also raises a broader question of whether there are enough other servicers to take on the nearly $1 trillion in servicing of delinquent loans that banks are expected to sell in the next few years.

Ocwen has been telling analysts that it expected to acquire about $400 billion in additional servicing rights in the next 12 to 18 months. The Atlanta-based mortgage servicer has said it expects to win its "fair share" of delinquent servicing portfolios.

But Ocwen's strategy is now being upended by Lawsky, the superintendent of New York's Department of Financial Services. Ocwen said last week that at the request of Lawsky's agency it put an indefinite hold on the $2.7 billion purchase from Wells. The regulator is specifically concerned about Ocwen's servicing portfolio growth, the company said. He has jurisdiction because of Ocwen's New York mortgage banking charter.

"It's clear the government is putting itself squarely in front of the ability of Ocwen to grow its business," says Dick Bove, the longtime banking analyst and vice president of equity research at Rafferty Capital Markets.

Ocwen did not return calls or emails seeking comment for this story.

Broadly, regulators are driving big banks out of the servicing business with stringent capital rules, says Jeff Lewis, a senior portfolio manager at the hedge fund TIG Advisors. The Basel III rules will require banks to increase the amount of capital they hold against mortgage servicing rights, motivating banks to sell their portfolios.

But at the same time, there are few large servicers with the ability to handle such a large number of delinquent loans.

"The banks are sent the message that they should not have servicing as an asset, so if they have to put so much capital against it, it's a poor return on their money," says Lewis. "So the nonbanks have taken a huge amount of market share and they don't have a lot of capital. I'm not sure what the solution is once you have that dynamic in place."

He adds, "This is the problem you get when you have this patchwork of regulation and everybody is doing their own thing and there's no comprehensive approach."

Ocwen has grown quickly. Since 2012, it has acquired the servicing rights on more than $325 billion of loans, including the acquisition of Litton Loan Servicing from Goldman Sachs, Homeward Residential Holdings from Wilbur L. Ross, and the home loan servicing rights of Ally Financial.

The company has long maintained it has the capacity to handle more servicing and analysts have never questioned its ability to take on more delinquent loans, says Dave Stephens, the chief operating officer at United Capital Markets, a Greenwood Village, Colo., mortgage servicing consultant.

"They've been aggressively making plans for a lot more acquisitions, so how is this suddenly a problem?" Stephens says. "Analysts have asked only if there is enough servicing for Ocwen to buy and keep the growth going for years. It has always been implied that they had tons of capacity."

However, on a conference call in October, analysts did bombard Ocwen CEO and President Ronald Faris with questions about delays in integrating two separate servicing acquisitions from Ally Financial and OneWest.

Faris replied that the approval process for the sale of servicing rights to loans backed by Fannie Mae and Freddie Mac was much faster than for nonagency servicing.

"I think that the process that the various consenting parties in Ocwen and the seller went through bodes well for future transactions," Faris said. "It's difficult to predict what a future transaction will look like. But I think the process that we went through here, although it took time, was productive and will actually be helpful in the future."

Lawsky may not believe that Ocwen has lived up to its $2.1 billion settlement in December with the Consumer Financial Protection Bureau, 49 state attorneys general and the District of Columbia, says Bove. That deal requires that Ocwen provide $2 billion in principal forgiveness to modify loans to underwriting borrowers and $125 million in refunds to up to 185,000 customers who lost their homes to foreclosure from 2009 to 2012.

The CFPB and state authorities had charged that Ocwen provided false and misleading information to borrowers about their accounts, denied loan modifications to eligible borrowers, robo-signed court documents through the foreclosure process, and miscalculated interest rates and other fees.