Ocwen, Nationstar Nonagency Risk Strategies Differ

Ocwen and Nationstar, the nation’s top independent owners of mortgage servicing rights who share the same aggressive MSR purchase growth strategy, approach nonagency risk differently, according to analysts.

Large MSR transfers from large financial institutions to independent servicers, such as Ocwen and Nationstar, have affected nonagency investors “from a collateral performance and valuation perspective,” Barclay’s analysts explain in a report that focuses on implications of servicing transfers on nonagency loans that entail distinctive risks, “including the recent recognition of large forbearance-related losses on some transferred loans.”

Furthermore, both servicers have indicated they are eying the still-large “pipeline of potential MSR purchases,” which Ocwen estimates at up to $400 billion in MSRs could be sold over the next two to three years.

As of 2Q13, $19 billion of the $436 billion in unpaid principal balance loan volume serviced by Ocwen is related to nonagency loans. Nationstar’s UPB in servicing rights has now reached $312 billion of which $51 billion is related to nonagency loans. Industry data indicate by 2012 Ocwen and Nationstar dramatically increased the size of their servicing portfolios to fourth and sixth, respectively, up from 24th and 41st in 2008.

Higher Basel III capital ratio requirements motivated “many U.S. banks that have been building larger equity cushions” and selling MSRs over the past few years, analysts wrote. Under Basel III MSRs “cannot comprise more than 10% of a bank’s common equity Tier 1 capital,” or more than 15% if combined with certain other assets, and also places higher risk burdens on MSRs and a 20% capital requirement.

And since this continuing MSR sales trend is directly affecting asset performance, analysts compared performance before and after the sale in roll rates, short sales, modifications, stop advances and severities. Findings show differences in servicing strategies, including how aggressively they liquidate delinquent and foreclosed loans, or REOs, determine post-transfer changes in portfolio structure and losses.

The report found CDR rates among subprime loans transferred to Ocwen often declined after the closing of the sale and remained at low levels seven months after the transfer. For example, CDRs on subprime Litton loans transferred to Ocwen with mark-to-market CLTVs of 10% to 120% declined from roughly 14.6% to 7.6% eight months after the transfer. Short sales or delinquency to foreclosure to liquidation and REO to liquidation roll rates also followed the same pattern, but, they note, at least in part “customary procedural delays” during integration also play a part in those changes.

Later on, as the transfers are completed liquidation rates slow down, likely due to loan modifications and “an attempt by Ocwen to retain these loans in its servicing portfolio.”

Differences in strategy are especially visible when it comes to retaining and disposition, which should matter to investors. “While Ocwen appears to favor keeping loans in its servicing portfolio for as long as possible,” analysts wrote, even with less creditworthy borrowers.

Data indicate Nationstar favors faster liquidation and is less interested in keeping weaker credit worthy borrowers in the MSR portfolio, primarily “because the costs of servicing these types of loans exceed their revenue.”

At Nationstar liquidation rates show an initial drop “during the months immediately following the transfer,” before they quickly recover within six months after the transfer and CDRs return to pre transfer levels, analysts wrote.  

Again, the rationale is servicing costs.

According to the report Nationstar estimates that its costs of servicing a nonperforming loan are approximately 10 times the costs of servicing a current loan, while Ocwen “boasts some of the lowest costs in the industry in servicing nonperforming loans “claiming they are as much as 70% less than the industry average.