An investor's guide to non-bank mortgage servicers like Ocwen

Part 4
An investor's guide to non-bank mortgage servicers like Ocwen (Part 4 of 5)

Wells Fargo and Ocwen’s mortgage servicing right sale is blocked

A mortgage servicing right (or MSR) sale between Wells Fargo and Ocwen is blocked

New York State Attorney General Eric Schneiderman decided in October to block the planned sale of mortgage servicing rights from Wells Fargo (WFC) to Ocwen Financial. The claim out of the AG’s office was that Wells failed to comply with some of the 304 servicing standards stipulated under a settlement between the nation’s largest banks and the states. New Yorkers will recognize what’s going on here—the quickest way to the NY governor’s mansion is to go after Wall Street, and Schneiderman is following the model.

10 year bond yield historicalEnlarge Graph

While bulk servicing sales generally require some sort of government approval, this is the first time a state attorney general has intervened. Nobody is really sure what Schneiderman wants or is after, but the suit certainly poses a risk to the non-bank servicers. If servicing transfers can be stopped at the whim of some attorney general somewhere, then the market will price in the loss of liquidity in the market.

The servicing business is becoming tougher

The regulatory requirements imposed on servicers like Nationstar (NSM) or Ocwen (OCN) pretty much make servicing an even lousier business than it was before. Remember that the value of a mortgage servicing right is the present value of the future cash flows from the servicing asset. If it costs more to service the loan, then the MSR is worth less than before. MSR valuation is still pretty low given historical standards, with newly originated MSRs trading for three to four times cash flows, when they traded at five to seven times before the crisis.

This is surprising, given that the interest rate environment is highly favorable for MSRs—rates are going up, which extends their expected life (and thus the cash flow stream increases), and short-term rates will go up, which will mean float income (the servicer is entitled to any interest earned on principal and interest accounts). The large banks like JP Morgan (JPM) and Citi (C) are probably interested in selling some of their servicing portfolios as well and will watch the proceedings with interest.

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