Whether through legislation or regulation, mortgage servicers in New York — especially non-bank servicers — are increasingly facing a hostile environment.
At the Mortgage Bankers Association 2014 National Secondary Market Conference in New York City, New York Superintendent of Financial Services Benjamin M. Lawsky talked Tuesday about his plans to rein in servicers.
In prepared text released to the media, Lawsky highlighted how banks are unloading mortgage servicing rights as they face greater capital requirements in the wake of the financial crisis.
On the other side of the MSR sales are less-regulated non-bank servicers.
“There are, of course, likely other factors at play beyond capital requirements,” Lawsky stated. “But the recent trend toward explosive growth in non-bank mortgage servicing itself is undeniable — regardless of its cause.”
He explained that because servicing fees are fixed in the pooling and servicing agreements, servicers are motivated to cut costs and increase earnings.
Greater profits mean that servicers can bid more for MSRs. The regulator cited one non-bank servicer that is touting how it can service distressed loans at a more than 70 percent discount thanks, in part, to expanded use of information technology.
But in this “race to the bottom,” borrowers are being put at risk, Lawsky warned. He explained that it takes creative solutions, not just technology, to help distressed borrowers stay in their homes.
Also in harms way are investors.
Adding to the problem is the explosive growth of non-bank servicers that makes it more difficult to keep up with newly boarded loans.
Among the nation’s fastest-growing servicers are Ocwen Financial Corp. and Nationstar Mortgage LLC, which have grown their servicing portfolios from less than $100 billion in 2010 to nearly $400 billion as of March 31, 2014.
Walter Investment Management Corp. has expanded its servicing portfolio from less than $80 billion in 2012 to nearly $200 billion as of March 31, while Quicken Loans Inc.’s portfolio has ballooned to more than $140 billion from just $80 billion during the same period.
“Regulators have a responsibility to ask whether the purported ‘efficiencies’ at non-bank mortgage servicers are too good to be true,” he said.
Lawsky claims that his department has found that some non-bank servicers are cutting corners.
“Borrowers and investors both suffer when a servicer does not know how to pull together its loan files strewn around the globe,” he said. “Or when a servicer is unable to extract information from its many incompatible computer systems at the right time and for the right purpose. Or when a borrower cannot get a straight answer from a servicer on a loan modification that could both save a family’s home and reduce an investor’s losses.”
Lawsky also criticized servicers for the ancillary service fees they’re earning at each step in the lending and servicing process. He suggested that this could create a conflict of interest because the affiliated businesses have an incentive to provide low-quality services for high fees — which some appear to be doing.
Lawsky noted that while he has publicly highlighted concerns about ancillary services with just one particular non-bank servicer — last month he sent a letter to Ocwen questioning fees earned by affiliate Altisource Portfolio Solutions S.A. — his department is expected to expand its investigations to other industry players.
But Lawsky isn’t the only Empire State official to set his sights on mortgage servicing practices.
On Thursday, New York Attorney General Eric T. Schneiderman said he is launching a statewide effort to encourage the state’s legislature to pass the Abandoned Property Neighborhood Relief Act he proposed earlier this year.
The proposed legislation would make servicers responsible for properties securing distressed loans soon after they are abandoned instead of after a lengthy foreclosure process. This would require them to pay for the upkeep.
The legislation also would require the creation of a statewide registry for abandoned properties. It would subject lenders to civil penalties and court actions if they fail to register a vacant property.
Resolutions to encourage the bill’s passage have been passed in three cities already, while several more are expected to pass such resolutions. In addition, a resolution is expected to be introduced in New York City.
Schneiderman explained the “zombie properties” become magnets for crime, drag down property values and cost cities money.
“Too often, when a homeowner falls behind on mortgage payments and receives a notice of arrears or a foreclosure notice, the homeowner abandons the property. Many families are not aware that they have the right to remain in their home until a judge declares the foreclosure complete, which can take years,” a written statement said. “At the same time, there is evidence that lenders are actually slowing down the foreclosure process, and in some cases, seeking court orders to cancel foreclosure actions in the middle of the process.”