Non-bank mortgage servicers are poised to become the “next generation” of subprime lenders as the companies seek to diversify their rapidly expanding businesses in the face of mounting regulatory scrutiny, Moody’s says.
The warning from the credit rating agency comes as specialised mortgage servicers, particularly Ocwen Financial, face increasing criticism from regulators, who argue that the companies have grown too quickly in recent years.
Mortgage servicers such as Ocwen, Nationstar and Walter Investment have been buying hundreds of billions of dollars worth of “mortgage servicing rights” from big banks including JPMorgan Chase and Bank of America.
Under these MSRs, the companies collect payments on US mortgages in exchange for a small portion of the income. Banks have sold the rights in the face of a wave of troublesome post-financial crisis foreclosures as well as regulatory pressure to offload the assets. The amount of outstanding mortgages serviced by Ocwen, the biggest non-bank mortgage servicer in the US, has risen from $43bn in 2005 to more than $500bn now.
Ocwen estimates that banks still have $1tn worth of MSRs to sell, but servicing mortgages has a finite shelf life and originations of the subprime loans in which the company has historically specialised are unlikely to recover to pre-crisis levels.
That could spur Ocwen to expand its nascent prime lending business to include making subprime loans, which have historically been the domain of banks.
Moody’s said it was concerned about the possibility that specialised servicers will attempt to offset a “decrease in growth by shifting business models and originating non-prime mortgages”, which would be a “net credit negative” for the companies.
“Ocwen and the special servicers could become the next generation of non-prime originators, given their wealth of non-prime servicing experience along with the cyclical, low-margin nature of prime mortgage originations,” Moody’s noted.
Last week, Ocwen sold $123.5m of a new type of MSR-backed bond aimed at helping the company finance future purchases of the assets and expand its lending business. Ocwen has said it could sell as much as $1bn of the bonds this year, according to people familiar with the matter.
“What they’re looking to potentially do is go from credit-impaired servicing to prime servicing plus prime originations,” said Moody’s analyst Warren Kornfeld.
“At some point the opportunity for MSR transfers is going to slow,” added Brian Harris, also at Moody’s. “There’s just limited opportunity in terms of mortgage transfers going forward. It could be even more limited if there’s strong regulatory action.”
Some of the biggest banks have said they do not intend to originate riskier loans that do not meet new rules written by the Consumer Financial Protection Bureau, creating opportunities for non-bank lenders that are not constrained by the regulation.
Jamie Dimon, chief executive of JPMorgan, on Tuesday described home lending as “the most painful business ever” as he confirmed a new round of job cuts in the bank’s mortgage division.
Ocwen is due to report fourth-quarter earnings on Thursday.
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