Fast Growth of Mortgage-Service Companies Stirs Concern for Consumers

headquarters of Fannie Mae
headquarters of Fannie Mae

When Nationstar Mortgage Holdings Inc. tried to buy the rights to collect payments on $122 billion of mortgage loans earlier this year, housing finance giants Fannie Mae and Freddie Mac were not happy. Nationstar had just won the rights to collect payments on a separate $215 billion mortgage portfolio, and Fannie and Freddie worried it would have trouble digesting another big deal, sources familiar with the matter said.

The two finance companies, which guaranteed many of the loans against default and have to approve their transfer, feared there could be unnecessary foreclosures on loans if Nationstar's systems couldn't cope. Fannie and Freddie shared their concerns with Nationstar and the seller of the mortgages, lender Ally Financial, the sources said. Ally ended up selling the majority of the portfolio to a Nationstar rival, Atlanta-basedOcwen Financial Corp.

It is unclear whether Fannie and Freddie threatened explicitly to stop Nationstar from acquiring the business, and whether Ally had other reasons to pick Ocwen's bid, such as a better price. But the intervention shows how uneasy some mortgage industry players are with the rapid growth of servicing companies such as Nationstar, Ocwen, and Walter Investment Management Corp. It also reflects the much more cautious atmosphere in the home mortgage business after the dramatic housing bust in 2007-2009.

"We are very concerned about how these servicers are dealing with customers," said Leslie Peeler, head of Fannie's national servicing organization.

Fannie and Freddie say they have not been able to identify major issues at these servicers but in at least one case its concerns about the pace of expansion were great enough for Fannie to delay the transfer of a portfolio of mortgage servicing rights. Fannie receives daily reports on the performance of the servicing companies, including such things as how quickly customers' calls are answered, but declined to discuss the details or comment on individual cases.

State regulators and the Consumer Financial Protection Bureau, a relatively new federal agency that monitors mortgage servicing among many other aspects of consumer banking, have also expressed concerns. The seven largest non-bank mortgage servicers accounted for $1.40 trillion in mortgage servicing at the end of the first quarter, an increase of 69 percent in just three months, according to Inside Mortgage Finance. The total market is worth about $10 trillion.

The firms say they can handle the new business they are taking on, and have added the systems and staff to cope. And many of the banks that are selling these operations have struggled with mortgage servicing -- they have lost paperwork and have improperly signed documents, and have agreed to pay out billions of dollars in settlements and homeowner relief linked to misconduct in the foreclosure process.

"The banks have done such a terrible job that I don't think anyone is crying tears," as they scale down in the servicing business, said Ira Rheingold, executive director and general counsel of the National Association of Consumer Advocates, a Washington D.C.-based organization.

Servicers get paid by loan owners, typically banks or investors, to collect mortgage payments and handle delinquencies and foreclosures. For a $100,000 loan in good standing and guaranteed by Fannie Mae or Freddie Mac, the servicer might get paid about $250 a year.

Many banks, still suffering from the aftermath of the housing bust and financial crisis, are deciding that fee is not enough given the reams of paperwork and the costs involved. New rules will also force them to use more capital to support their servicing businesses, which has been a big spur for recent deals. Independent mortgage servicers do not have to follow bank capital rules, and are more willing to take on staff and build systems because servicing is their main business.

The independent companies say they have large cost advantages over banks -- for example, when a consumer falls behind on a $100,000 loan, the average servicer can end up spending more than $875 a year to collect payments on it, while Ocwen will spend closer to $260, its Chief Financial Officer John Britti said in a recent presentation.

Ocwen's cost advantages have helped it to grow fast -- its portfolio more than doubled from the fourth quarter of 2012 to the end of the first quarter of 2013, and the company is now servicing more mortgages, as measured in dollars, than banks like Citigroup Inc and U.S. Bancorp.

Nationstar, which is majority-owned by hedge fund Fortress Investment Group, has increased its servicing book nine-fold since 2009, yet reduced 60-day delinquencies by more than 30 percent, it said. The company's systems can handle 6 million loans, far more than the 2.5 million it will have after it completes a deal to acquire loans from Bank of America, said John Hoffman, a spokesman for Nationstar in Lewisville, Texas.

"We have both the capacity and the processes in place to handle those kinds of transfers," Hoffman said.

For its part, Ocwen believes its technology helps to make servicing rights transfers "operationally seamless, although some borrowers naturally will have questions about the change in servicers," said Paul Koches, a spokesman at Ocwen, in an e-mailed statement to Reuters. Ocwen serviced $439.25 billion in the first quarter of this year, more than double the $193 billion in the fourth quarter of last year, according to Inside Mortgage Finance.

Walter, which traces its roots back to 1958, when it was the financing arm of a U.S. homebuilder and natural resources company, did not respond to requests for comment. The firm's vice chairman Denmar Dixon told investors in January that transfers come with risk but that the company had the proper people, systems and processes to minimize those concerns.

Stock investors are more than happy with these companies -- Nationstar's shares have almost tripled since its initial public offering in March 2012. Shares in Ocwen and Walter have more than doubled over the same period. Even Steve Eisman, an investor who profited handsomely from shorting the housing market before it crashed, said in a presentation last month that he thought Ocwen was an attractive investment.

State regulators have been paying close attention to cases where the transfer of home loans to the mortgage servicers were problematic to compensate for the comparatively light federal oversight of these companies, said John Prendergast, vice president for supervision at the Conference of State Bank Supervisors.

"It's a considerable issue because the regulators have seen instances where it didn't go so well," Prendergast said.

In December, New York regulators ordered Ocwen to accept an independent monitor to oversee its servicing practices, in exchange for allowing the company to acquire two more portfolios.

The CFPB said in February it was concerned about home loan servicing transfers, and issued a bulletin advising home lenders about their obligations to protect consumers during the process. Officials from the CFPB declined to comment, other than to say they have "a handful" of mortgage "experts" and are still staffing up to administer new mortgage servicing rules that will apply to the industry starting in 2014.

Consumer advocates can point to cases where individuals had major issues after loans were transferred. When the mortgage of Ester Villalpando, a 54-year-old homeowner in San Antonio, Texas, was transferred to Ocwen in the fall of 2010, for example, she said she did not get a booklet of coupons that she needed to send with her monthly mortgage check.

Ocwen would not accept her checks, and initiated foreclosure proceedings for non-payment, she said. When she tried to get a loan modification later, she kept getting conflicting information from the servicer. "It has just been a nightmare," she said. Ocwen declined to comment on the case.

What is not clear yet, given the recent rapid changes in the industry, is whether banks or independent payment collectors generate more complaints per borrower.

(Reporting by Jessica Toonkel in New York, additional reporting by Rick Rothacker in Charlotte, North Carolina; editing by Dan Wilchins, Martin Howell.)

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