Ocwen, Dubbed "Next Generation Subprime Lender" By Moodys, Is Focus Of NY State Regulator

Tyler Durden's picture

Ocwen Financial, dubbed by Moody's as poised to become the "next generation" of subprime lenders, has come under considerably pressure this morning amid news that NY State regulators are investigating the firm for "conflicts of interest"...

  • *NY DEPT FINL SERVICES FINDS POTENTIAL CONFLICTS OF INTEREST
  • *NY CITES REVIEW OF OCWEN'S MORTGAGE SERVICING PRACTICES
  • *NY SEEKS INFO ON FINL INTEREST OF OCWEN EXECS IN AFFILIATED COS

It is the Mortgage Servicing Rights (MSRs) that has Moody's the most-concerned as the volumes required may force Ocwen (and others) to shift their business model to ever lower quality loans.

 

 

As The FT reports,

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.

And then they get hit with today's news...

  • *NY DEPT FINL SERVICES SEEKS ADDED INFORMATION FROM OCWEN
  • *NY SAYS POTENTIAL CONFLICTS WITH COMPANIES CHAIRED BY ERBEY
  • *NY SAYS OCWEN MGMT OWNS STOCK OR OPTIONS IN AFFILIATED COS.
  • *NY SEEKS INFO ON FINL INTEREST OF OCWEN EXECS IN AFFILIATED COS

As Bloomberg reports,

“Presently, Ocwen’s management owns stock or stock options in the affiliated companies,” Lawsky said in the letter.

 

This raises the possibility that management has the opportunity and incentive to make decisions concerning Ocwen that are intended to benefit the share price of affiliated companies, resulting in harm to borrowers, mortgage investors, or Ocwen shareholders as a result.