Benjamin Lawsky, superintendent of the New York Department of Financial Services (NY DFS) – who in April launched an investigation into why an auction services company that non-bank mortgage servicer Ocwen Financial Corp. works with was charging Ocwen customers nearly three times as much as it does non-Ocwen customers – said during the Mortgage Bankers Associations' (MBA) annual Secondary Conference & Expo in New York City on Tuesday that his department will continue to investigate the business relationships between mortgage servicers and their partners delivering ancillary services.
Lawsky is the state regulator who in February put an indefinite hold on Ocwen Financial's plan to purchase mortgage servicing rights (MSRs) on portfolios with unpaid principal balance of nearly $39 billion from Wells Fargo. Lawsky said his firm took this action out of concern that Ocwen was growing too quickly and wouldn't be able to handle the extra load, which in turn could negatively affect service to borrowers.
Lawsky said the recent trend of big banks selling off their MSRs – which is the result of stronger capital requirements put in place through regulations including Basel III – has created a bit of a feeding frenzy among non-bank servicers, many of which are more lightly regulated than traditional servicers. This has resulted in competition among non-bank servicers, many of which are advertising that they can service loans better, faster and for lower cost than traditional banks. In fact, one particular non-bank servicer recently advertised that it could service loans for 70% less than its competitors.
This, in turn, has raised concerns that non-bank servicers might be cutting corners and thus skimping on the level of service they should be giving borrowers.
‘One of the things we're concerned about as a regulator is whether these MSR sales trigger a race to the bottom that puts homeowners at risk,’ Lawsky said. ‘Remember, in most cases, the compensation to be paid for servicing is fixed by the pooling and servicing agreement (PSA); it cannot be diminished. So the cheaper a servicer can service those mortgages, the more profit it expects to earn from the fixed servicing fees, and the more it can offer the banks to buy these MSRs.’
This structure creates a situation where non-bank servicers are, in effect, offering ‘cut-rate’ servicing that may or may not be in line with new servicing regulations put in place by the states and the Consumer Financial Protection Bureau (CFPB).
While he conceded that much of this cost cutting is being achieved through the use of technology, technology alone "cannot keep a family in their home," Lawsky said. He added that it takes an investment in human capital in order to properly service distressed loans and work with borrowers to keep them out of foreclosure.
‘People lead complicated lives, and helping them work through their issues often requires creative solutions,’ Lawsky said. ‘It is human capital – people – that help families keep their homes. Human beings are not as readily scalable as the technology that supposedly supports them.â�¨And the explosive growth of non-bank servicers only compounds these problems as the companies try – often unsuccessfully – to keep up with a rapidly increasing portfolio of loans.
‘So, what are the consequences of this potential race to the bottom?’ he continued. ‘Well, it should be no surprise that borrowers tend to be the losers here. When we at DFS take a closer look at some of these non-bank servicers, we find corners being cut, to the disadvantage of homeowners. Mortgage investors also lose out.Â After all, they are the ones paying rack rates for bargain basement services.
‘Borrowers and investors both suffer when a servicer does not know how to pull together its loan files strewn around the globe,’ Lawsky added. ‘Or when a servicer is unable to extract information from its many incompatible computer systems at the right time and for the right purpose. Or when a borrower cannot get a straight answer from a servicer on a loan modification that could both save a family's home and reduce an investor's losses.’
Lawsky said under the current structure, the banks receiving top dollar for their MSRs are the only real beneficiaries of ‘light touch’ regulation of non-bank servicers. The non-bank servicers, meanwhile, will continue to snap MSRs, so long as they feel "they can still profit through cut-rate service.’
‘What's more, our review of non-bank servicers has also turned up another enormous profit center associated with these MSRs that could put homeowners and mortgage investors at risk: the provision of what we call ancillary services,’ Lawsky said. â�¨’Under a business model employed by several large non-bank mortgage servicers, the servicer or an affiliate provides fee-based services for every single step in the real estate process.
‘Need to inspect a property to determine whether it's vacant?Â We have an affiliate that can do it.Â Need to market your short-sale property to a wider audience? We have an online auction site that can do it.Â Need to sell a property in a foreclosure sale? We can handle it.Â Need to sell your real-estate-owned property following foreclosure?Â We have an affiliated real estate brokerage.Â Need to collect on a debt that's no longer secured by the property? Use our affiliated debt collector.Â Need to get a non-performing loan off your books? We even have an affiliate that will buy loans from investors, pursue foreclosure, and turn those idle properties into profitable rentals.Â The list of services available goes on and on and on."
Lawsky said while there is ‘nothing inherently wrong with companies and their affiliates providing a range of ancillary services, in the case of mortgage servicing, the problem is that the customer – the borrower – has no choice as to which providers of acillary services are used – and further how much they charge.
‘Non-bank servicers have a captive – and often confused – consumer in the homeowner,’ he said. ‘Yes, the borrower interacts most with the servicer, but has little or no power in this relationship and is typically at the mercy of the servicer.’
This situation, Lawsky says, opens up the potential for conflicts of interest and self-dealing – after all, the affiliates have an incentive to provide low quality services for the lowes cost possible. What's more, they can basically charge whatever fees they wish, with little to no regulatory oversight.
‘Indeed, so long as the volume of MSRs remains high, servicers and their affiliates make a profit,’ Lawsky said. ‘A performing loan keeps churning servicing fees. A delinquent loan merits monitoring of the property, for a fee.Â An underwater mortgage is solicited for a short sale, for auction fees, technology fees, broker fees, referral fees, and servicing fees.Â A foreclosed property involves a foreclosure sale, for a fee.Â A property that doesn't sell in foreclosure becomes real estate owned and then sold, for many more fees.
‘In the context of the non-bank mortgage servicing market, homeowners and investors are at risk of becoming fee factories,’ he said, adding that it is ‘the regulator's role to monitor these fees in the mortgage industry imposed through potentially conflicted arrangements.’
To that end, all players in the mortgage industry can expect the NY DFS to expand its investigation into ancillary services in the coming weeks and months, Lawsky said.