For years, many in the mortgage industry viewed nonbank servicers as white knights, swooping in to rescue troubled loans from large banks and saving borrowers from foreclosure while protecting Fannie Mae and Freddie Mac from further losses.
But concern is mounting among investors and analysts that Nationstar (NSM), Ocwen Financial (OCN) and Walter Investment (WAC) are getting so big so quickly that they are becoming too difficult to manage.
Shares of Ocwen and Nationstar have plunged in recent days following earnings announcements in which the companies disclosed a range of operational problems, including delays in integrating acquisitions of servicing portfolios. Meanwhile, Walter recently disclosed that it is under investigation by the Consumer Financial Protection Bureau and facing scrutiny from the Department of Housing and Urban Development over management of its reverse mortgage program and other issues.
The three firms have bought roughly $1 trillion of servicing rights from the likes of Bank of America (BAC) and Ally Financial's Residential Capital unit and have made no secret of their intention to continue acquiring more assets.
But the transfer of servicing rights must be approved by investors, or in the case of loans backed by Fannie and Freddie, the Federal Housing Finance Agency, and the recent spate of problems has prompted some analysts to question whether Ocwen, Nationstar and Walter are equipped to handle any more acquisitions.
In a conference call discussing Nationstar's third-quarter earnings Thursday, Henry J. Coffey, an analyst at Sterne Agee & Leach, asked Nationstar Chief Executive Jay Bray if Fannie, Freddie and the FHFA are "suddenly losing the stomach for the role that independent servicers are playing."
Bray, though, said that nonbank servicers have played a vital role in reducing losses for government-sponsored enterprises and keeping delinquent borrowers in their homes.
"It comes down to math, right?" Bray said on the call. "When you look at the amount of the impact that Nationstar's had on reducing losses for the GSEs in the portfolios that have been transferred, it's big numbers, right? At the end of the day, we're one of the few guys that actually can really deliver the value, the infrastructure, the governance that these entities are looking for."
Still, in an interview Friday, Bray said it may be "prudent" of the FHFA to slow down and let the nonbank servicers digest past acquisitions. He acknowledged that, after a string of deals last year, even Nationstar needed to take a breather in 2013.
"If somebody had called us in the first or second quarter and said they have $200 billion [in mortgage servicing rights] to move in the next 90 days, we would have said no," Bray said. "You can't underestimate this process. You have to be very prudent, very careful because we're dealing with borrowers' lives."
Nonbank servicers have been aggressive in acquiring servicing rights because large banks have deliberately reduced their exposure due to changing capital rules, increased regulatory scrutiny and the desire to shed noncore customers. Because the nonbanks have purchased the rights to service troubled loans at a discount, they have been able to rework delinquent mortgages with far more success than many of the banks have.
In the past year, Ocwen and Walter have catapulted themselves into the ranks of the top 10 mortgage servicers while Nationstar has jumped from No. 7 to No. 5. The three combined have a 12% share of the servicing market. Only Wells Fargo (WFC), JPMorgan Chase (JPM) and Bank of America are larger than Ocwen, ranked fourth, and Nationstar, according to Moody's Investors Service. Walter ranks ninth.
To date, regulators have largely supported an expanded role for nonbank servicers given banks' servicing lapses in recent years; just recently Fannie gave Walter Investment's Green Tree Servicing its highest servicer rating.
Still, while the FHFA has supported the expanded role of nonbank servicers, primarily to reduce losses at Fannie and Freddie, the Consumer Financial Protection Bureau has repeatedly warned about the risks of such transfers to nonbanks. Servicers say they have kept millions of borrowers out of foreclosure, but the CFPB says it has received thousands of complaints about servicing interruptions and a failure to honor past loan modifications.
The CFPB has received more than 13,000 complaints since early 2012 against the three nonbank servicers. Ocwen had the most complaints at 7,524 followed by Nationstar with 3,462 and Green Tree with 2,432. However, the vast majority of complaints have been resolved.
Recent filings suggest that servicers could have more run-ins with regulators.
On Nov. 6, Walter disclosed that the CFPB notified Green Tree on Oct. 7 that it was considering taking action for alleged violations of federal consumer protection laws. Walter, based in Tampa, Fla., also received a subpoena on Oct. 2 from HUD's Office of Inspector General requesting information on its reverse mortgage program and third-party management of real estate-owned properties.
Walter disclosed that it has set aside $52.9 million to cover liabilities to HUD from its acquisition last year of Reverse Mortgage Solutions. The company said it has an additional $142.2 million in "potential financial statement exposure," but believes the liabilities are the responsibility or prior servicers or investors.
Walter said it has not been given specific information about the alleged violations and therefore "does not have sufficient information to make an assessment of the existence, nature, outcome or impact of any such violations."
Ocwen, based in Atlanta, also disclosed that it is in discussions with state and federal regulators about an upcoming settlement, and has set aside reserves but would not provide further information.
Ocwen's shares have fallen more than 15% since Oct. 31, when it reported third-quarter earnings that fell far short of consensus analysts' estimates. It missed earnings targets because of delays in integrating servicing rights it bought from OneWest (the former IndyMac) in June, and it was unable to book the full servicing revenue from that acquisition.
Nationstar's stock, meanwhile, has plunged 35% since Thursday morning, when it reported lower-than-expected profits and lowered its earnings guidance for this year and next. Though servicing income more than doubled from the year-earlier quarter, total profits suffered from a decline in loan originations.
Nationstar, of Lewisville, Texas, has also experienced a delay in integrating some of the $200 billion of servicing rights it bought from Bank of America, but Bray, its CEO, said that hiccups are to be expected.
"I don't think it's a deficiency but complexity around these transfers," he said. "You have to communicate around the data, the documents and the customer's status."
Steven Horne, the president and chief executive of Wingspan Portfolio Advisors, a Dallas mortgage service provider, suggests that servicers could be having integration issues because they don't have the infrastructure to support their rapid growth.
"They've bulked up very quickly and that creates systems issues, technology issues," he says. "Part of the problem is they have servicing systems that are locked in the past."
Warren Kornfeld, a senior vice president at Moody's, says it would not be the worst thing for servicers to slow their growth until they get a better handle on integration issues. In a recent report, he wrote that the history of mortgage servicing is rife with tales of firms that struggled or even failed because they expanded too quickly. He says the industry needs firms like Walter, Nationstar and Ocwen to be healthy because few firms out there could pick up the slack if they run into problems.
"If one of these companies goes out, who is going to service these loans?" Kornfeld says. "In an odd way, because of their size, they might be 'too big to fail.' "