When William Erbey, the executive chairman of mortgage servicer Ocwen Financial (OCN), said last week that trades of servicing rights had ground to a halt, he may have been using a bit of hyperbole.
The overall market remains robust, though trading of seriously delinquent portfolios has slowed, brokers of mortgage servicing rights say. Buyers and sellers of such assets cannot agree on pricing because probes by regulators could result in increased liability, demands for more settlements or even more class-action lawsuits from borrowers.
Analysts and servicing experts have been parsing Erbey's comment on a conference call that "the whole market" has been frozen since February, when Ocwen put an indefinite hold on a $2.7 billion purchase of servicing rights from Wells Fargo (WFC).
When asked about Ocwen's future servicing acquisitions, Erbey laid the blame squarely on New York's banking regulator Benjamin Lawsky, who is investigating Ocwen's business relationships, fee structure and rapid growth.
"Until we resolve" the situation "in New York State we are not acquiring any new portfolios at all," Erbey said Thursday on the conference call for investors in Home Loan Servicing Solutions, a Cayman Islands company that he founded in 2010 to finance Ocwen's purchases of mortgage assets and servicing rights.
"As a matter of fact... nothing is really being put out for bid right now," he added. "So it's the whole market that's basically stopped until that gets resolved."
Servicing experts say that description of the market is overstated.
"The MSR market is strong. We continue to see a lot of activity, a lot of trades," says Steve Harris, a managing director at Mortgage Industry Advisory Corp., a New York firm that brokers servicing and other asset sales and provides software. "While the market may be difficult for Ocwen, it has nothing to do with the broader MSR market."
"I think we've all misinterpreted what he said and the comments were germane only to his company," Harris adds.
Ocwen did not return calls seeking elaboration on Erbey's comments.
Lawsky's investigation of Ocwen has made it particularly difficult for buyers and sellers of servicing rights on nonperforming loans to quantify if they face additional regulatory scrutiny and liability.
"There's this huge liability for servicers," says Dan Thomas, another managing director at MIAC. "It's just on the non-GSE side that the market is at a standstill."
On the conference call, Erbey said increased regulatory scrutiny had changed the nature of competition for servicing portfolios.
"The paradigm has shifted... away from price, more towards who is compliant under national mortgage settlement, because that matters who you transfer to now in terms of their quality, having some more capital," he said. "That's a very important dialogue which has been raised both, by New York State as well as the national dialogue."
Nonbank servicers have estimated that as much as $1 trillion in mortgage servicing rights, nearly all of it non-performing delinquent loan portfolios, would change hands in the next three years as banks leave the mortgage servicing business.
But Erbey's comments raise fresh questions about the projections for future growth of nonbank servicers, and whether there will be more liability attached to such trades going forward.
"The market for non-performing loans is really thin because there are only a handful of players," says David C. Stephens, the chief operations officer at United Capital Markets, an advisory firm in Greenwood Village, Colo. "So where does its pipeline of [nonperforming loans] come from?"
Though Bank of America (BAC) and Citigroup (NYSE: C) have sold MSRs in the past year or so, other large banks have not. They may prefer to sit on the sidelines and work through their own portfolios rather than sell at steep discounts, Stephens says.
The mortgage servicing market is divided into two main segments: portfolios of loans backed by the government-sponsored enterprises Fannie Mae and Freddie Mac, and loans that were packaged into private label mortgage-backed securities that were sold to bondholders. Both segments have performing and non-performing, delinquent loans.
Ocwen specializes in the latter, and typically buys distressed non-agency loans that require "high touch" servicing (though regulators seem to be calling into question whether nonbank servicers' operations are truly "high touch" for homeowners.)
The sliver of the market for distressed, private-label loan portfolios typically is negotiated directly between banks, including many regional and community bank sellers, and the small group of nonbank servicers that are buyers.
"We're doing trades every day on GSE product, which is very liquid and there's tons of new money coming into that business looking for the cleaner paper," says Thomas. "It's just on the non-GSE side that the market is at a standstill."