Increasingly, the $10 trillion mortgage servicing industry is shifting from banks to nonbank firms such as hedge funds, as federal and state regulators increase their scrutiny — and fines — on the banking industry.
For years, banks such as Bank of America, JPMorgan Chase, Wells Fargo & Co. and Ally Financial have been selling mortgage servicing rights to nonbank companies like Carrington Mortgage Services, Nationstar Mortgage Holding and Ocwen Financial Corp.
Last year, over $1 trillion of home loan servicing rights were transferred from traditional banks to nonbank companies, reports The Wall Street Journal.
The home loan servicing business is lucrative. Nonbank mortgage servicers make money by collecting a fee for handling billing and payment collections from borrowers. Banks and loan investors pay the nonbank mortgage servicers a percentage of the billions collected each month.
Some critics of mortgage servicing firms fear that they are growing too quickly. Already some nonbank firms have run into trouble with federal regulators. In December, Ocwen reached a $2.1 billion settlement with the Consumer Financial Protection Bureau (CFPB) over allegations that the company charged borrowers unauthorized fees. And last month, the New York Department of Financial Services halted Ocwen’s purchase of servicing rights on a $39 billion portfolio of mortgages owned by Wells Fargo & Co., citing complaints against Ocwen’s past servicing record, according to Reuters.
With 9.3 million borrowers “deeply underwater,” others are concerned that the nonbank firms could help spark a new surge in foreclosures. In addition to the 9.3 million deeply underwater borrowers, there are over $220 billion in outstanding home equity lines of credit, or HELOC loans that will mature soon. “HELOCs, as they were known, were aggressively marketed from 2004 to 2007, and now the bills are coming due,” warns The New York Times.
The upcoming HELOC payment shock may be crushing for millions of borrowers, according to Moody’s Investor Service. A borrower with a $40,000 HELOC balance and $210,000 first mortgage at 4 percent interest will see a monthly increase of nearly $300 — from $1,103 to $1,389, assuming the equity line converts and rolls over to a 10-year amortizing loan at a 3 percent interest rate.
Are banks unloading their mortgage servicing portfolios because of the coming HELOC Hell?