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Why the crisis affected mortgage servicers like Nationstar

Brent Nyitray, CFA, MBA

An investor's guide to non-bank mortgage servicers like Ocwen (Part 3 of 5)

(Continued from Part 2)

Servicers have been under scrutiny from politicians

Once the financial crisis began, servicers came under the microscope in Washington. People were angry with the burst housing bubble and a lousy economy, and “Wall Street” ended up taking the brunt of the blowback. Servicers like Nationstar (NSM) and Ocwen (OCN) weren’t immune either, and they came under scrutiny almost immediately for some questionable behavior. There were reports in the press of people being wrongly foreclosed upon, and there were stories discussing how hard it was to get in touch with the servicer and discuss payment problems.

The government pushes servicers to modify loans

One of the first orders of business once the bubble burst was for the government to prod servicers to avoid foreclosures. Of course the government referred to them as “avoidable foreclosures,” but what it really wanted was to stop foreclosures in their tracks for a while in the hope that taking foreclosed inventory off the market would somehow stop the real estate market from falling. So the government basically pushed and prodded the servicers to make loan modifications wherever possible. Since servicers get paid regardless of what happens to the loan, they weren’t really in a position to resist what the government was doing. Of course, given the recidivism of loan modifications, the ones who ultimately bore the cost were the security holders—the people servicers owe a fiduciary duty to. These investors are often mortgage REITs like Annaly (NLY), American Capital Agency (AGNC), or MFA Financial (MFA).

Enter the Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau is part of Dodd-Frank and is in charge of enforcing the laws regarding servicing. Dodd-Frank ended some practices, such as dual-tracking, which occurred when a servicer was simultaneously pursing a modification and foreclosure. The idea was that if the mod didn’t work out, the servicer would be in a better position to foreclose. The CFPB ended that practice.

Continue to Part 4

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