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Embattled mortgage servicer Ocwen Financial faces up to $26 billion in damage claims by bondholders and a greater risk of being fired as a mortgage servicer on thousands of small, private-label trusts.
February 27 -
Foreclosures and delinquencies may seem like problems from the past, but servicers are still struggling with a massive backlog of distressed loans and a return to normalcy is at least two years away, if not longer.
February 18 -
California's Department of Business Oversight said Friday that it will drop its effort to suspend Ocwen Loan Servicing's mortgage license in California. The Atlanta servicer had failed for more than a year to provide its California regulator with requested information
January 23 -
After slogging through several quarters of high expenses and shrinking profits, some lenders are now selling mortgage servicing rights to raise cash to cover payroll and expenses, industry sources say.
April 7
Mortgage servicers are getting hit hard by dips in interest rates, as millions of borrowers become more likely to refinance and disappear from portfolios, taking with them a lucrative income stream.
The volatility in rates in the past four months has upended the business models of some new entrants into mortgage servicing. Some companies backed by private equity firms and hedge funds began buying up servicing rights in mid-2013 on the belief that borrowers with 30-year fixed mortgage rates at 4% or so would never refinance again.
Instead, mortgage rates fell 37.5 basis points from September to December, and dropped by the same amount in January, before reversing course by half in February. Now servicers are taking writedowns and attempting to sell servicing assets at a time when the industry is
"A lot of folks really in their hearts believed that interest rates were going up," said Mark Garland, the president of MountainView Servicing Group in Denver. "To say people can't refinance is like saying the Titanic can't sink."
The upshot of rate volatility will mean fewer bidders and an expected drop in prices for mortgage servicing rights. Servicing transfers will increase at a time when the
But it is unclear whether banks, which have been major sellers of MSRs in the past few years
In the past week, two large nonbank servicers, Nationstar Mortgage in Lewisville, Texas, and Walter Investment in Tampa, Fla., have taken writedowns because more borrowers refinanced and prepaid their mortgages than expected. Servicers also try to recapture borrowers who may refinance, so losses on a given portfolio vary by many metrics including recapture rates. Some analysts have estimated that as much as 35% of newly bought MSRs are prepaying.
"We have a growing component of our portfolio that is interest rate sensitive," Nationstar's chief financial officer, Robert D. Stiles, told analysts on Feb. 26, after the company wrote down the value of MSRs by $50 million.
Paul Miller, an analyst at FBR Capital Markets, said every company that owns MSRs "is taking a beating right now."
"People thought these loans would never repay, but they forget that for every pool of MSRs there are a bunch of families making life decisions about moving, retiring, downsizing or sending their kids to college," Miller said.
The rate squeeze underscores the volatile nature of mortgage servicing rights, an esoteric niche asset that offsets the hit to earnings when mortgage rates rise and lending volumes fall. Banks typically hedge against servicing, but many new entrants do not hedge and may not have large enough mortgage origination platforms to offset servicing losses.
"Buying servicing as an investment is a flawed model if you don't have the origination business to defend the portfolio, and even more so if you don't hedge the MSR appropriately," said Andrew Chang, chief business development officer for PennyMac Mortgage Investment Trust. "Many of these newer entrants and their investors are learning this the hard way."
The reason some of the newer entrants did not hedge is it adds to costs and reduces yields. Had rates moved up, the strategy would have paid off handsomely, experts said. Instead, it worked against them.
"Today, we are not hedging the MSR portfolio, but it's something that we constantly monitor and we may choose to do so in the future," Gary Tillett, Walter's chief financial officer, said on a conference call last week.
Some of the more recent entrants include Seneca Mortgage Servicing in Elma, N.Y.; RoundPoint Mortgage Servicing, which is a unit of Tavistock Group, a private investment firm; and Pingora Asset Management in Denver. Some large mortgage banks like Stearns Lending have also raised private capital to invest in MSRs.
The about-face in servicing values has renewed concerns about whether there are enough servicers to pick up the slack given the industry's massive problems.
Ocwen Financial, a nonbank servicer, which for years has been one of the largest purchasers of MSRs, is now a seller and has been
"Prices will soften and I think there will be a new consolidation over the course of this year as it relates to nonbanks," said Michael Lau, the CEO of Pingora, which raised private capital to investment in MSRs. "It remains to be seen how this will shake out. But there are going to have to be others that are going to absorb that market."
Lau said he thinks it's unlikely that the largest banks Bank of America, Citigroup or JPMorgan Chase will buy up servicing rights though others like U.S. Bancorp, SunTrust and PNC may come in selectively.
"I don't envision that the banks will be back as they were before, because they were pummeled by [regulatory] settlements and they don't want to take on additional risks from third parties," Lau said. "They will originate from their own retail banks."
But Garland at MountainView takes the opposite view.
"2015 will be the year that banks come back," said Garland. "For a long time there were almost no banks bidding for MSRs. Now we're seeing 20% to 30% of bidders are banks, and I expect it could go to 40% to 50% in the next year."
Margins are getting squeezed and according to Garland, banks "live for the yield curve," so if they can draw fee income from MSRs, they'll be judicious buyers.
After the subprime market imploded in 2007, mortgage servicing rights were practically being given away.
But private investors searching for yield jumped in and began bidding up prices in mid-2013. The thinking was that new mortgage originations were pristine because of tight underwriting standards, and borrowers with low rates would stick around for five years, or even longer, in a rising rate environment.
Servicers are paid a sliver of interest, usually 25 basis points of the loan balance annually, to collect principal and interest payments from borrowers and remit those funds monthly to investors. Servicers also collect and remit taxes and insurance for some borrowers, and deal with delinquencies and foreclosures. The cost to service varies but typically runs between 4 and 8 basis points, leaving the rest in profit.
Matthew Ostrander, the CEO of Parkside Lending, a San Francisco lender that generates $3 billion a year in servicing rights, said he sees the growth of small mortgage banks as a positive, particularly for consumers.
"Any time you have people who are originating the loan, and servicing and keeping the loan, ultimately they can drive the costs down and it's better for the customer," Ostrander said. "It's better for the industry to have disaggregation of servicing from the hands of the few to the many."
