June 6 (Bloomberg) -- Walter Investment Management Corp., the third-largest U.S. mortgage servicer, has been expanding while its bigger rivals shrink amid probes from regulators.
Walter Investment, which was spun off from a coal-mining and homebuilding conglomerate in 2009, increased its mortgage servicing business by 20 percent in the first quarter, according to data compiled by Bloomberg from regulatory filings. Tampa, Florida-based Walter Investment rose to No. 3 in the period by surpassing PHH Corp.
The business of collecting mortgage payments is undergoing a transformation as large banks retreat from the $9.4 trillion market and regulators investigate non-bank servicers. The two largest non-bank operators, Ocwen Financial Corp. and Nationstar Mortgage Holdings Inc., both lost market share in the first quarter, while Walter Investment enlarged its loan holdings to $234 billion, according to company filings.
“The huge shift in servicing from banks to non-banks has created a landscape that’s rapidly changing,” said Karen Shaw Petrou, managing partner of research firm Federal Financial Analytics Inc. in Washington. “No one can know who the winners and the losers will be until the dust settles.”
Walter Investment had a 2.4 percent share of the servicing market in the first quarter compared with Ocwen’s 4.5 percent and Nationstar’s 3.9 percent, according to Bloomberg data. Wells Fargo & Co. led with 18 percent.
Walter Investment’s stock price gained 13 percent to $28.99 from the beginning of May through June 4, exceeding the 11 percent advance by Lewisville, Texas-based Nationstar, which is majority owned by Fortress Investment Group LLC. Atlanta-based Ocwen, which is controlled by billionaire founder William Erbey, gained 3.1 percent in the period.
The New York Department of Financial Services is investigating both Ocwen and Nationstar. The companies about doubled their holdings of mortgage servicing rights, or MSRs, in 2013, according to company reports.
Ocwen said on Feb. 6 that the department had blocked its deal to buy $39 billion of servicing rights from Wells Fargo.
“It is appropriate for regulators, where warranted, to halt the explosive growth in the nonbank mortgage servicing industry” to protect homeowners, Benjamin Lawsky, the department’s head, said a week later in a speech in New York.
Lawsky also sent a letter in February to Ocwen citing his concerns about potential conflicts of interest among four companies headed by Erbey that provide mortgage-related services to each other.
In a letter to Nationstar in March, the regulator said it was probing the impact of the firm’s rapid growth on homeowners and asked for data about its servicing.
Both companies have disputed Lawsky’s comments, saying they have better performance records than the nation’s biggest banks. The companies are cooperating with the probes.
Spokesmen for Ocwen and Nationstar declined to comment for this story.
Ocwen’s loan portfolio dropped 3.2 percent to $440.7 billion in the first quarter, and Nationstar’s portfolio fell 7.5 percent to $384 billion. PHH, which also manages car and truck fleets, declined 1 percent to $225.7 billion, putting it in fourth place.
“Walter is buying loans, and in the last few months we’ve seen a slowdown in the acquisitions by Ocwen and Nationstar,” said Douglas Harter, a director and servicing analyst at Credit Suisse Group in New York. “Ocwen and Nationstar will have to adjust to a different environment where deal sizes are smaller and there is more focus on integration. That’s going to slow them down.”
Two years ago, Walter Investment and other non-banks held MSRs on less than 2 percent of U.S. home loans. Banks have been selling these rights since the Federal Reserve began drafting new rules in 2012 to implement an international banking agreement known as Basel III aimed at preventing the type of financial shock seen in 2008.
The agreement increases the amount of capital banks are required to have to hold MSRs on their books. Non-banks such as Walter Investment are not bound by the new rules.
Today, non-banks control a total of about 14 percent of the market, according to Bloomberg data. In the next two years, banks probably will sell another $1 trillion in MSRs, according to Harter. That would push the non-bank share to 24 percent, according to Bloomberg data.
Walter Investment is also under scrutiny. In February, the company disclosed in a filing that the Federal Trade Commission and the Consumer Financial Protection Bureau informed it of a possible enforcement action. The details have not been made public.
“We’re currently in discussions,” said Denmar Dixon, Walter Investment’s chief investment officer. “We’d like to find a resolution to that in the near term. Right now, we can’t predict when that will come.”
Joseph Smith, who oversees a $25 billion mortgage settlement between state and federal agencies and five banks, said in May that Green Tree Servicing LLC, a unit of Walter Investment, didn’t use proper procedures in servicing loans it bought last year from Residential Capital LLC, a company covered by the agreement. The former ResCap loans make up about 14 percent of Walter’s portfolio.
“This was our first time through the testing,” said Dixon. “We are a pretty compliant shop, and highly rated. This was layered on top of that. We will be tested again on the metrics,” and expect to pass, he said.
Compass Point Research & Trading LLC in March ranked Walter Investment as the top performer among all loan servicers, based on customer-complaint data from CFPB. Walter had a 0.8 percent complaint ratio when measured against the amount of delinquent loans in its portfolio, followed by Nationstar at 1.3 percent and Ocwen at 2 percent. The average rate for servicers, most of them banks, was 4.3 percent.
Mark O’Brien, CEO of Walter Investment, has his roots in the homebuilding industry. He was CEO of PulteGroup Inc. in 2001, when it was known as Pulte Homes, and oversaw the $1.8 billion purchase of Del Webb that created what was then the nation’s largest residential builder.
O’Brien left Pulte in 2003, saying he was retiring. In 2005, he joined Walter Industries Inc. as a director and in 2009 became head of Walter Investment when it was spun off.
Walter Investment has more than tripled its holdings of MSRs under O’Brien’s leadership. Last year, the company acquired servicing rights on more than $125 billion of mortgages from companies including Bank of America Corp., according to Walter regulatory filings.
“O’Brien comes from a homebuilder background that includes financing those home purchases and really knowing those customers,” said Credit Suisse’s Harter. “It’s a good platform for building a large-scale servicer.”