Five Signs of the Trouble in Servicing Transfers

The nature of servicing transfers changed dramatically last year, but not as much as regulators and buyers may have hoped.

It's no longer acceptable to rely on trailing documents to fill in missing gaps in servicing data because they can jeopardize an MSR sale and potentially hurt borrowers. But with the responsibility for ensuring data is complete and accurate after a transfer resting largely on the shoulders of buyers, sellers don't have a natural incentive to provide as much data as buyers would like to have.

Regulators are concerned about the potential harm that MSR transfers can have on consumers, particularly distressed borrowers in the process of seeking loss mitigation workouts.

Increased efforts to ensure the veracity of documents and data in a servicing transfer reached a tipping point in August, when the Consumer Financial Protection Bureau issued a bulletin warning servicers that its examiners would be on the lookout for cases where borrowers got the "runaround" after MSR transfer.

"Prior to Aug. 14, 2014 there was little guidance," said Brad Johnson, chief operating officer at RoundPoint Mortgage Servicing Corp.

But signs that transfers were less than optimal, even after earlier reforms, were present well before then. Here are five recent servicing transactions pointing to this.

Ginnie Mae Puts Deal with Missing Docs on Hold

A foreshadowing of the major push to clean up servicing transfers came in April 2014, when Ginnie Mae halted a proposed Bank of America transfer to a nonbank because of missing documents. The stalled sale was a real warning to the market that data and documents submitted after a transfer were becoming a thing off the past.

"A lot of work goes into putting these bids out, and that means there is a lot of risk if that deal doesn't go through," said Brian Fitzpatrick, president and CEO of due diligence and quality control technology vendor LoanLogics.

Identifying whether there is a problem doesn't have to be difficult if the right technologies are in place to track and share information, he said.

"A quick document review can be done to identify whether you've got all the key documents in place," said Fitzpatrick. Alternatively, some companies chose to hire due diligence firms to handle the work, he added.

Regulatory Concerns Block Massive Sale to Nonbank

The swell of regulatory scrutiny on Ocwen stopped a $39 billion sale of Wells Fargo servicing rights to the nonbank servicing giant.

Wells had agreed to sell the servicing early in 2014, but Benjamin Lawsky, the superintendent of New York's Department of Financial Services, blocked the sale soon after.

There has been talk about the development chilling the market for supersize deals. But while trades of such transactions have slowed to a degree, large servicing rights trades haven't disappeared altogether.

Huge Nonbank Sheds Servicing

Amid regulatory concerns over its size, Ocwen's decision to sell off its agency loans and retain its legacy nonagency portfolio highlights a schism in the servicing market.

Activity has been brisk for agency mortgage servicing rights transfers. But legacy nonagency servicing that may have data or documentation deficiencies and problem loans with sensitive workouts are generally tougher to transfer, said Roelof Slump, a managing director at Fitch Ratings.

"Usually we hear from servicers that if key information is missing, they simply won't bid on the transaction at all," he said.

But that's not to say the servicer can't change on a nonagency portfolio, like in recent actions taken at the master servicing level where poor-performing servicers have been replaced.

SunTrust's MSR Buy Shows Banks Are Still Buyers

While the growing prominence of nonbank servicers has garnered a lot of attention, depositories haven't completely lost interest in acquiring MSRs, as a SunTrust mortgage transaction last year showed.

New Basel III capital ratios have certainly weakened banks' appetite for new servicing and pressured some to sell of their MSRs, the asset class still holds cross-selling appeal for those that have room on their balance sheets.

What's more is that depositories are better positioned for the increased regulation in servicing because they historically have operated under tighter controls, Fitch said in a report last month. Many large bank players made notable changes under the 2012 National Mortgage Settlement, and broader regulations implemented by the CFPB last year are largely in line with the settlement requirements.

Transfer Spotlights Mod Reporting Discrepancies

A 2013 transfer from Aurora Bank's servicing affiliate to nonbank Nationstar exemplified accounting differences in how servicers report loan modifications with forbearances. Some servicers chose to recognize a loss at the time of the forbearance, while others don't recognize a loss unless a loan's subject property is liquidated. In this case, Nationstar took the more conservative path and recognized the loss upfront.

While the forbearance transparency issue continues to be a concern, according to a Fitch report issued late last year, other differences in servicing practices that can affect borrower and investor outcomes are also ongoing, such as business strategies for borrower outreach and loss mitigation, Slump said.

"CFPB guidelines have greatly standardized what servicers need to do," he said. "It's much more homogenized, but there are still unique business practices."