How Ocwen's Regulatory Woes Could Help Rival Nationstar

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Ocwen Financial's recent regulatory troubles may open the door for New Residential Investment Corp. to transfer its massive subservicing portfolio away from the beleaguered servicer to an affiliate, Nationstar Mortgage Holdings.

New Residential's relationship with Ocwen dates back to its 2015 acquisition of the assets of former Ocwen affiliate Home Loan Servicing Solutions, including rights to servicing fees on mortgage-servicing rights owned by Ocwen.

In April, New Residential acquired outright ownership of those MSRs, which have an unpaid principal balance of nearly $120 billion and account for more than half of the loans Ocwen services.

Until New Residential acquired full ownership of the MSRs, its ability to transfer the servicing away from Ocwen was severely limited. Even now, it can only transfer the servicing under certain circumstances, such as a downgrade of Ocwen's servicer rating.

"Servicing is a scale business and should servicing be moved, that could be financially negative to the organization and that can impact the servicing performance over the longer run," said Roelof Slump, a managing director at Fitch Ratings.

Credit rating agencies have warned of a servicer rating downgrade in light of a Consumer Financial Protection Bureau lawsuit and separate cease-and-desist orders filed by more than 20 state attorneys general alleging widespread servicing errors. Ocwen responded this week by challenging the CFPB's constitutionality and requested injunctions and restraining orders in Illinois and Massachusetts.

Should Ocwen lose New Residential's subservicing, Nationstar is a logical candidate to pick up the business. The nonbank lender and servicer is already set to begin subservicing a $97 billion portfolio of MSRs that New Residential is acquiring from CitiMortgage and both Nationstar and New Residential have ties to the private equity firm Fortress Investment Group.

Fortress, Nationstar, New Residential and Ocwen did not respond to requests for comment.

Nationstar would likely welcome the opportunity to add more loans to its servicing platform, even as it prepares to onboard a significant portfolio in the Citi deal, as leveraging economies of scale is key in the notoriously low-margin servicing business. The same could be said for subservicing specialists like Cenlar or the Credit Suisse affiliate Select Portfolio Servicing.

"I'd be surprised if anybody would say no," Slump said. "It is a scale business."

While New Residential transferring its servicing could sound Ocwen's death knell, it's not a foregone conclusion. New Residential only holds the MSRs, not the loans themselves. Mortgage-backed securities contracts can also dictate servicing transfer terms, so other parties, including MBS trustees, would have to agree to any change in subservicer.

"Investor consent can be difficult to obtain," Slump said.

There may also be reputational and compliance concerns for any servicer taking over mortgage accounts previously managed by Ocwen. The CFPB's lawsuit alleges Ocwen botched basic servicing functions by sending inaccurate monthly statements to borrowers, improperly crediting payments, and mishandling taxes and insurance in escrow accounts. If true, an incoming servicer would face challenges transferring loans to its platform and open itself up to regulatory scrutiny of its own operations.

Another question for any servicer taking over accounts is how to handle repayment of funds that Ocwen has advanced to mortgage bondholders. Ocwen has securitized these receivables in several transactions, most recently in August 2016, so this is a concern to investors in these bonds.

These receivables stay in the securitization trust, regardless of who owns the servicing rights. However, it’s up to the new servicer to forward funds to be paid to noteholders. So it's possible that repayment of these bonds could either slow down or speed up, according to Jeremy Schneider, a senior director in Standard & Poor's RMBS team.

Schneider said the new servicer will either step in and pay back all outstanding receivables at once, which is something we has happened in the past, or it will wait for the receivables to come in to repay them for benefit of the trust. 

Repaying all of the outstanding receivables upon acquiring the servicing rights “is a cleaner option,” compared with earmarking how much in receivables is owed to the prior owner over time, he said.

This may be less likely to happen in a stressed economic environment, however. In its ratings, S&P assumes that in certain scenarios a new servicer might not repay securitized advances at time of servicing transfer, and that reimbursements to noteholders, instead of speeding up, could actually slow.

“We do build reimbursement curves at higher rating stress levels based on servicing moving to a slow servicer,” who is not only unable to repay advances right away, but takes longer to recover assets, the analyst said.

Even if the advances aren’t paid off early, noteholders might get their principal back faster, in certain circumstances. That’s because there are some deals with triggers that would cause these notes to deleverage, if servicing is transferred on a certain percentage of mortgages for which funds may have been advanced.

There have also been servicer advance receivable securitizations previously that may also have had triggers linked to the rankings of the servicer.

Austin Kilgore and Allison Bisbey contributed to this report.

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