In another sign of the banking industry’s retreat from the mortgage market, Wells Fargo is selling servicing rights on $39 billion of home loans to a nonbanking firm.
Wells said on Wednesday that it sold the rights to service 184,000 mortgages to Ocwen Financial Corporation, a rapidly expanding company known for its expertise in dealing with subprime borrowers.
The deal represents about 2 percent of all the mortgages that Wells services, and comes as other banks have been selling this business to specialty servicers like Ocwen, which is based in Atlanta.
Last week, Citigroup announced that it had transferring servicing rights for 64,000 mortgages to Fannie Mae, which, in turn, plans to pay an outside firm to service the loans.
The deals represent a significant shift for homeowners, whose mortgages are increasingly being serviced by firms outside the traditional banking system.
Industry officials estimate as much as $1 trillion of mortgages could be transferred to specialty servicers over the next two to three years.
Large banks are looking to trim their servicing activities, particularly of subprime loans, because the costs and regulatory headaches are too high. New banking rules will require banks to set aside more capital against the loans they service, further weighing on profits. The value of the servicing rights can also fluctuate based on shifting interest rates, causing unwanted volatility for the banks’ balance sheets.
That’s where Ocwen and other large nonbank mortgage servicers come in. Banks and investors in mortgage-backed securities pay Ocwen fees for servicing the loans they own. In exchange, the firms communicate with borrowers who fall behind on their mortgage payments and try to get them back on track. Servicers are also typically paid extra for getting delinquent homeowners caught up on their payments. Specialty servicers usually don’t hold the loans.
Analysts say Ocwen has been able to keep its costs low by operating call centers in places like India. The company also boasts about using “artificial intelligence, designed and tested by Ph.D.’s in psychology and statistics to develop dialogues with the homeowner,’’ according to a recent investor presentation.
“They have two decades of experience and are second to none in efficiency,’’ said Daniel Furtado, an analyst at Jefferies.
In some cases, housing advocates say Ocwen has been more responsive to home owners than the large banks, which have had to pay billions to settle regulatory issues related to servicing problems. The company has earned plaudits for working with homeowners to make principal reductions for underwater loans, which are for more than the house is currently worth.
But Ocwen’s track record is far from perfect. Last month, Ocwen agreed in a consent order with the Consumer Financial Protection Bureau, various state attorneys general and other regulators to provide $2 billion in mortgage principal reductions to underwater borrowers and refund $125 million to borrowers that had already been foreclosed on. The federal agency said, “Ocwen took advantage of borrowers at every stage of the process.â€
The company said in a statement at the time that that the agreement “is in alignment with the same ultimate goals that we share with the regulators â€" to prevent foreclosures and help struggling families keep their homes.â€
A Wells spokesman declined to comment on how much Ocwen paid for the bank’s servicing rights.
In the Citigroup deal, the bank paid Fannie Mae to settle outstanding fees it owed to the government-sponsored enterprise. The sale included nearly 20 percent of the total loans serviced by Citigroup that are 60 days or more past due.
