Far From Wonderful: The Role Of Mortgage Servicers, Part 2

In the first part of this post, we began discussing the role of mortgage servicers in handling loan transactions. As we noted, the structure of the mortgage industry now bears little resemblance to the small-town world of the famous film "It's a Wonderful Life."

In that world, financing was local and problems at a local bank rippled through a local community. Today, however, the mortgage servicing business involves many large nonbank companies that are national in scope.

In this part of the post, let's look more closely at this phenomenon and the concerns that government regulators have about it.

The loan-servicing industry increasingly consists of a relatively small number of companies that have bought loan-serving rights from banks and other mortgage lenders. These nonbank companies include Ocwen Financial Corp. and Nationstar Mortgage Holdings, Inc., among others.

This month, government regulators in New York state moved to block a huge sale of mortgages by the giant bank Wells Fargo to Ocwen. The price tag on the proposed sale was $39 billion. But New York's superintendent of financial services expressed concerns about Ocwen's capacity to service such a large influx of new loans.

Why are some banks so interested in selling their mortgage portfolios to mortgage servicers? This may be due, at least in part, to fallout from the real-estate crisis of a few years ago.

In the so-called "robo-signing" scandal, many banks were caught cutting corners on the legal documentation requirements for foreclosure. As a result, they are under stricter scrutiny from government regulators that may make servicing a less lucrative business to be in.

Source: The Wall Street Journal, "Moody's Sees Pros and Cons in Mortgage Servicer Scrutiny," Andrew R. Johnson, Feb. 26, 2014

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