Benjamin Lawsky
Benjamin Lawsky Bloomberg News

Mounting regulatory and political problems may prevent Ocwen Financial from completing its purchase of $39 billion in mortgage-servicing rights from Wells Fargo.

The deal has been in jeopardy for months since New York's top banking regulator, Benjamin Lawsky, froze it indefinitely and he may have just delivered the death blow, analysts and servicing experts said.

Lawsky's latest crackdown on Ocwen drove the mortgage servicer's shares down 18.2% Tuesday and another 7% in Wednesday afternoon trading. Lawsky accused Ocwen of sending thousands of financially distressed homeowners notices of imminent foreclosure well after their last chance to pay and said the company had to fix its systems immediately.

"This increases the chances the Wells Fargo servicing deal is canceled," Compass Point Research & Trading analyst Kevin Barker wrote in a research note.

Moreover, the situation could help prolong the chill in the overall market for buying and selling mortgage-servicing rights.

"It will be hard for Bank of America, Wells or JPMorgan [Chase] to not only sell to Ocwen, but to Nationstar [Mortgage Holdings], or the smaller servicers like Specialized Loan Servicing, too," said Abhishek Mistry, an analyst at J.P. Morgan Securities.

During the financial crisis, regulators encouraged nonbank servicers like Ocwen, a former subprime lender, to work out billions of nonperforming loans, on the belief they could better serve borrowers than large banks.

Nonbank servicers still expect as much as $2 trillion in mortgage servicing rights to trade hands in coming years because banks face tough new Basel III capital requirements. International policymakers expressly crafted banking accords that would force banks to move those assets off their books. U.S. banking regulators adopted those rules.

But the now year-and-a-half-long deluge of servicing rights to nonbank buyers has unnerved U.S. consumer protection regulators, so sales have slowed to a trickle.

David Hisey, an executive vice president at Nationstar, acknowledged Tuesday at a Mortgage Bankers Association conference in Las Vegas, that Lawsky's scrutiny of Ocwen had put a damper on servicing transfers.

"Clearly transfers of nonperforming loans aren't moving as quickly as we would like," Hisey said. "There are people responsible for protecting the rights of consumers."

Ocwen, the nation's largest nonbank servicer of home loans, announced in January it would buy $39 billion in servicing rights from Wells Fargo. In February, Lawsky halted the transaction citing a failure by Ocwen to live up to a December 2012 consent order.

Since then, Lawsky has used his jurisdiction over Ocwen, a licensed mortgage bank in New York, to demand proof that the company can adequately service its burgeoning loan portfolio.

In April, Lawsky accused Ocwen of conflicts of interest and self-dealing in charging fees to homebuyers through an affiliated distressed property manager Altisource and online auction site Hubzu. In August, Lawsky notified Ocwen that that he was also reviewing the company's force-placed insurance business.

He has not yet approved the transfer of mortgage servicing rights, Matthew Anderson, a spokesman for Lawsky's office, said Tuesday when asked about the status of Ocwen's deal with Wells.

Wells spokeswoman Catherine Pulley declined to comment about the odds of the deal being completed, as did Ocwen spokesperson David Millar.

But another market watcher said it looks highly unlikely.

Lawsky's demands this week tied to the backdating allegations "will add six months if not another year to Ocwen's ability to do any kind of transfer," said Dave Stephens, the chief financial officer at United Capital Markets, a mortgage-servicing advisory firm in Greenwood Village, Colo. "I've never heard of a deal going out more than six months without a firm commitment to do a transfer at a certain date in the not-too-distant future."

Mortgage servicing transfers typically are completed within 120 days, Stephens said. Often 20% of the purchase price will get paid within 90 days along with the transfer of one third of the loans. The remaining loans typically get "boarded" in 90-day increments to keep a servicer's processing centers from being overwhelmed, Stephens said.

In addition, buyers of mortgage servicing rights often have to adjust the sales price if a deal does not close within a few months. A drop in interest rates could speed up prepayments, for example, as more borrowers refinance, reducing the value of the MSRs.

Analysts had predicted for monthsthat the Wells Fargo sale would eventually move ahead.

"Initially there was a view that the deal would eventually happen," Stephens said. "But at some point, with this added problem from Lawsky, I think that hope has gone out the window."

Lawsky's latest salvo against Ocwen makes it more likely that Wells or Ocwen will walk away from the sale, Barker said.

"Given all the issues Ocwen is facing today, it may make more sense for Ocwen to just get their operations in order," Barker said. "Or, Wells may look at this and say it is not worth the counterparty risk. That is a distinct possibility."

Paul Thomas, the chief operating officer at Pingora Asset Management, a Denver investor in servicing portfolios, said he hoped the latest crackdown on Ocwen did not have a chilling effect on other servicers.

"We're still trying to figure out the right balance between the regulations and protections for consumers and bringing in private capital."

In December, Ocwen agreed to pay more than $2 billion to settle allegations by the Consumer Financial Protection Bureau that it mishandled foreclosures for thousands of borrowers. That settlement with the CFPB and state attorneys general does not restrict the CFPB's ability to supervise and examine Ocwen further for compliance with consumer financial protection laws.

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