Moody’s: Regulatory Scrutiny Brings Credit Risk for Non-Bank Mortgage Servicers

Increasing regulatory attention could pose negative credit risks for large non-bank mortgage servicers, resulting in raised operating costs and even non-prime mortgage originations, according to a recent Moody’s report.

While regulatory action would be credit positive, that is, if it moderates the growth of special services or strengthens servicers’ operating and financial profiles, increased scrutiny could result in raised operating costs either from fines due to operating deficiencies or from process changes.

“We have regularly cited the special services’ extraordinary growth as a key credit constraint, given the operating risks associated with the complex integration of acquired mortgage servicing rights and the potential for deterioration in servicing metrics,” writes the report.

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Recent actions taken against Ocwen Financial Corporation (NYSE: OCN) may signal a broader push to moderate the growth of large servicers, which also includes Walter Investment Management Corp. (NYSE: WAC) and Nationstar Mortgage LLC (NYSE: NSM), the report also notes.

In February, the New York Department of Financial Services (DFS) indefinitely halted Ocwen’s $2.7 billion deal to purchase mortgage servicing rights on $39 billion of unpaid principal balance from Wells Fargo & Company.

Another concern Moody’s raises is whether non-bank services will “attempt to offset the credit-positive decrease in growth by shifting business models and originating non-prime mortgages.”

“We have said that 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,” writes Moody’s.

Written by Jason Oliva

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