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Mortgage Servicers Face Washington Hammer

Stocks in this article: OCN WFC

NEW YORK (TheStreet) -- Mortgage loan servicers are becoming the new regulatory pin cushion.

In the aftermath of the credit crisis, it became pretty clear that the largest U.S. banks were having plenty of difficulty handing various aspects of servicing distressed mortgage loan portfolios, resulting in numerous regulator actions and a landmark $25 billion foreclosure settlement with regulators, which included plenty of relief for suffering borrowers.

Loan servicing specialists began purchasing the rights to service large pools of mortgage loans, with key players such as Ocwen Financial (OCN) growing by leaps and bounds. Ocwen grew its pro forma portfolio of serviced loans to $473 billion in November from $204 billion at the end of 2012, according to the company's Jan. 28 presentation to lenders.

But that $473 billion pro forma figure has here been adjusted down from $512 billion, because Ocwen on Feb. 6 said it had it had agreed "to put an indefinite hold" on its deal to purchase the serving rights for a pool of 184,000 mortgage loans with an unpaid balance of roughly $39 billion from Wells Fargo Bank, NA, the main subsidiary of Wells Fargo (WFC).

Ocwen put a hold on the Wells Fargo deal at the request of the New York Department of Financial Services Superintenden Benjamin Lawsky, who expressed concern over Ocwen's ability to handle its rapid growth, according to media reports.

In comments at the New York Bankers Association annual meeting in New York on Feb. 12, Lawsky didn't mention Ocwen by name, but he called the growth of non-bank mortgage servicers "a troubling trend." Of the top 10 U.S. mortgage loan servicers, four are non-banks, according to Lawsky, servicing "more than a trillion dollars of loans -- 10 percent of the residential mortgage market, and climbing."

Lawsky also pointed out that "the loans that those non-bank companies service are disproportionately distressed. And behind each distressed loan is a homeowner or family struggling to make ends meet."

It seems reasonable at this stage of the economic recovery, with banks trying to cut their loan servicing costs, for the loans being sold to non-banks to be "disproportionately distressed," since those are the serving burdens the banks want to get rid of.

One of the reasons the big banks want to focus less on servicing loans is their increased regulatory burden and capital requirements. Non-bank servicers for the most part don't hold the loans being serviced, which is one of the reasons they have a lower regulatory burden.

"Non-bank servicers see a tremendous business opportunity in this regulatory arbitrage, and are moving quickly to gobble up distressed MSRs," or mortgage servicing rights, Lawsky said.

In comments that must have been aimed at Ocwen, Lawsky said a recent SEC filing by "one of these non-bank servicers" made for "startling" reading. "In the space of about a single year, that company had nearly quadrupled in size, and now services more than $400 billion in loans... In the next 2-3 years alone, that company said it sees opportunities for as much as a trillion dollars in additional servicing growth," he said.

Lawsky went on to say the New York DFS "closer look" at non-bank loan servicers has identified "corners being cut."

Shares of Ocwen have dropped 53% this year through Wednesday's close at $36.28, nearly following a gain of 60% during 2012.

In addition to Lawsky's action against Ocwen, there has been plenty of recent coverage of consumer complaints against non-bank mortgage loan servicers, and the industry is facing much greater pressure in Washington.

Consumer Financial Protection Bureau deputy director Steven Antonakes during a Mortgage Bankers Association (MBA) conference in Orlando, Fla., on Wednesday described his agency's new rules for mortgage servicers, which include a monthly statement to show the borrower how their payments are applied, along with balances for principal and escrow accounts.

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