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JAN 21, 2014 11:06am ET

Specialty Servicers Face Trouble

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Nationstar Mortgage is further along in developing its origination capacity than Ocwen Financial and Walter Investment Management, according to a new report by Moody's Investors Service.

But all three special servicers could have trouble competing with the banks in the prime mortgage space, the report says, and they might become the “next generation of non-prime mortgage originators.”

Moody's notes the three servicers are looking at becoming full-service mortgage bankers as a new source of revenue to partially offset declines in their servicing portfolios.

Nationstar originated $8.4 billion in loans during the second half of 2013, compared to $5.1 billion by Walter and $4.2 billion by Ocwen.

“When Nationstar's flow servicing volume and originations are combined, they almost offset the company's servicing portfolio runoff,” Moody's says.

But the credit rating agency says it is “uncertain how competitive the special servicers will be in prime mortgage banking, which has historically been the domain of the banks because of their funding advantages.”

Meanwhile, their servicing portfolios will be generating “increasing excess cash flows” as the housing markets improves, prepayments slow and default decline.

Near term, the three publicly traded servicing companies will “likely focus on prime mortgage lending,” says Moody's. However, given their histories as non-prime originators, their wealth of non-prime servicing experience and the cyclical nature of prime mortgage originations, they could look to become the next generation of non-prime originators.

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