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Analysts Warn of ‘Next Generation’ of Subprime Lenders

In a report spurred by recent remarks on practices at non-bank servicers, analysts at Moody’s Investors Service took the opportunity to express their own concerns about the dramatic growth of these firms.

Referring to a recent speech in which Benjamin Lawsky, superintendent of financial services for New York, urged regulators to “halt the explosive growth in the non-bank mortgage servicing industry” when warranted, Moody’s analysts Warren Kornfeld and Jason Chung noted they themselves have held worries about growth at large servicers—albeit for slightly different reasons.

“We have regularly cited the special servicers’ extraordinary growth as a key credit constraint, given the operating risks associated with the complex integration of acquired mortgage servicing rights and the potential for deterioration in servicing metrics,” the analysts say in the agency’s latest ResiLandscape report.

In fact, Kornfeld and Chung say, if Lawsky’s speech (and his halting of a major mortgage servicing rights deal between Ocwen and Wells Fargo) “signals a more general moderation in the rapid growth of the special servicers, it would be credit positive.”

At the same time, they worry that companies might attempt to offset any slowdown in growth by shifting business models and originating non-prime mortgages, “a net credit negative.”

“We have said that Ocwen and the other special servicers could become the next generation of non-prime originators, given their wealth of non-prime servicing experience along with the cyclical, low-margin nature of prime mortgage originations,” they write. “But originating non-prime loans increases legal risks and performance volatility.”

Although non-prime loan volume remains low, Moody’s expects the market to redevelop “with active participation by special servicers.”

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