Three fast-growing mortgage servicers are the focus of a ratings agency report that raises concerns about the operational risk that accompanies such rapid growth.
Ocwen Financial Corp. has grown its mortgage servicing portfolio from $102 billion as of Dec. 31, 2011, to $436 billion as of June 30 of this year.
At Nationstar Mortgage Holdings Inc., the servicing portfolio has surged from $107 billion to $318 billion during the same period.
Walter Investment Management Corp., which serviced just $77 billion as of the end of last year, reported that it serviced $223 billion as of mid-year 2013.
While profitability at the trio will increase as the housing market continues to heal, the rapid growth creates credit-negative operating risks, according to a report from Moody’s Investors Service.
Moody’s Senior Vice President Warren Kornfeld said in the report explained that significant operational risks resulting from high growth and rapid transformation will constrain their ratings.
“Over the last year, the companies have expanded their prime residential mortgage origination capacity, a much-needed source of organic growth and a credit positive,” the report stated. “It is uncertain how well the companies will be able to compete with banks in prime mortgage banking over the long term. Given the companies’ wealth of non-prime servicing experience, along with the cyclical, low-margin nature of prime mortgage originations, the companies could look to become the next generation of non-prime loan originations — adding risk to their credit profile.”
But the ratings agency noted growth at Ocwen, Nationstar and Walter is expected to slow significantly as they transition from acquisition-based growth to organic growth from the newly expanded full-service mortgage banking operations.
The slowdown is expected to free up cash flow as they begin to see the benefits of their investments.
Moody’s said that sustained success will depend on how they choose to deploy excess cash flow.
“The improving housing market and economy will increase the profitability of the company’s servicing businesses, a credit positive,” the report said. “Since the delinquency rates of special servicers’ servicing portfolios are far higher than those of prime servicers, special servicers have the most to gain from the declining delinquency and default rates that accompany a rising housing market.”
