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Mixed Bag for Large Special Servicers

A state regulator’s recent decision to indefinitely halt the sale of mortgage servicing rights to a rapidly growing special servicer could signal a broader regulatory push to moderate the growth of such servicers.

A deal reached in January for Ocwen Financial Corp. to acquire MSRs on $39 billion in loans from Wells Fargo Bank, N.A., was held up this month by the New York Department of Financial Services.

Ocwen noted in an announcement that the Department of Financial Services is concerned about the Atlanta-based servicer’s stellar growth.

A report released Wednesday from Moody’s Investors Service indicated that the New York regulator’s action could signal a broader regulatory push to moderate the growth of large special servicers like Ocwen, Nationstar Mortgage LLC and Walter Investment Management Corp.

“Regulatory action that moderates the growth of special servicers or otherwise strengthens their operating and financial profiles would be credit positive,” the New York-based ratings agency said. “However, increased regulatory attention could also lead to financial penalties if the firms’ operational capacity has not kept pace with their growth rates, resulting in servicing quality issues.”

Moody’s warned that the regulatory attention could accelerate a shift in the servicers’ business models to areas that have even greater operating risk.

Operating risks associated with the complex integration of acquired MSRs is considered by Moody’s to be a key credit constraint at special servicers with extraordinary growth. The servicers face potential worsening loan performance as well as deterioration in call center statistics, account reconciliation and investor reporting.

A higher profile among regulators could lead to higher operating costs for the servicers. This could come from fines due to operating deficiencies or from process changes.

In the case of Ocwen, New York Department of Financial Services Superintendent Benjamin Lawsky reportedly questioned whether corners were being cut by servicers.

Lawsky also questioned the purported cost savings and efficiencies of non-bank mortgage servicers.

“He cited off-shoring as an area that bears special scrutiny,” the report said. “Any changes that result would affect Ocwen most, since approximately 65 percent of its employees are offshore, primarily in India.”

Although Nationstar has also been rapidly increasing its offshore activity, the majority of its operations are still in the United States.

Moody’s previously expressed concern that it sees Nationstar, Ocwen and Walter as likely prospects to becoming the next generation of nonprime loan originators — a move that could increase legal risks and performance volatility.

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