Increased regulatory scrutiny of the servicing industry — driven by the Consumer Financial Protection Bureau and Benjamin Lawsky, superintendent of financial services for the state of New York — is putting a stranglehold on the transfer of remaining MSRs from regional banks to special servicers, said Michael Lau, CEO of Pingora Asset Management, who runs a fund dedicated to residential MSRs.
“We’re at a standstill until we can get Mr Lawsky out of the way in New York,” said Lau. “To me it’s a problem because it’s stopping the remainder that needs to move.”
“There are smaller regional banks that still have pockets of this stuff that is better off at these special where they do a much better job. It’s problematic that we’re…treading water right now.”
Non-bank special servicers have hoovered up mortgage servicing rights over the past few years, buying them from banks eager to get them off their books because of punitive regulations.
By and large, big banks have managed to transfer most of their unwanted servicing agreements to third-parties, but some smaller banks still have MSRs to shift, said panellists at the conference.
Rampant growth
Of the servicers rated by Fitch, non-bank special servicers like Ocwen Financial now service around 74% of private-label RMBS securities by loan count compared to 48% a decade ago, the ratings agency said.
Lawsky’s office halted the transfer of $2.7bn in MSRs from Wells Fargo to Ocwen in February this year. The sale is still on hold. Moody’s Investor Service downgraded Ocwen’s special servicer quality assessments last month because of regulatory actions against the company.
The biggest risk for RMBS investors when servicing rights are transferred is at the cash flow level, said Roelof Slump, RMBS analyst at Fitch.
“If the servicer is not there for a short period of time, that can, as we’ve seen, disrupt the cash flows and cause disruptions at the trust level,” Slump told GlobalCapital last week.