Reg Pressures a Tighter Squeeze for Small Servicers: Walter Exec

Mortgage & Real Estate

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Regulatory pressure on servicers is more likely making it tougher for smaller players than larger ones, Denmar Dixon, vice chairman and chief investment officer at Walter Investment Management Corp., predicts.

Among other things, the government-sponsored enterprises and other regulators want to ensure servicers have sufficient capital ratios, which could increase, he said at a financial services conference in New York Sept 9.

The costs to keep up with increasing regulation are also rising, making it more likely that large players with economies of scale will have an edge when it comes to keeping up with them, Dixon noted.

“I think some of the media discussion that’s gone on is, when independent or nonbank servicers get mentioned, they gravitate right to the ‘Big Three,'” said Dixon. “I think a lot of what’s going on with the regulators is thinking about the smaller guys.”

Walter was the No. 3 nonbank servicer and the eighth-largest servicer overall as of June 30, according to MortgageStats.com.

Still, regulatory constraints on servicing transfers have constrained how much servicers can scale their operations, company executives acknowledged during a question and answer session. But they don’t expect these restrictions to have much impact.

Despite the regulatory uncertainty around servicing transfers and trades, Dixon said, “We are seeing transactions pick up.”

“We would expect that the size of the transfers would be smaller but still sizable transfers,” said Gary Tillett, executive vice president and chief financial officer at Walter.

Walter is working to ensure it has the resources to keep up with increasing costs resulting from evolving regulation, he said. Among efforts to ensure optimal financial operation, the company is aiming to “right size” the origination unit it acquired from Ally Bank in early 2013 to bring it in line with current market conditions, added Tillett.

The company is seeing originations through the Home Affordable Refinance Program remaining strong, as government agencies encourage borrowers to take advantage of it before it ends, he said.

The company plans to adjust to the program’s expiration at the end of 2015 by offsetting the anticipated lost HARP volume with a stronger build-out of the retail channel, said Tillett.

There also will likely be more types of loans available to serve more borrowers by then. “As the sector evolves, there could be other products coming back to the market,” he said.

As the market gains more comfort with ability-to-repay rules that went into effect early this year and the qualified mortgage definition that loans need to meet to gain increased protection from related liability, the could also eventually be more non-QM loans originated, said Tillett.

Regulatory reform in the reverse mortgage market, which is dominated by the government’s Home Equity Conversion Mortgage program, has somewhat constrained the sector. But it still has attractive demographic prospects. Recently, the profitability has been more attractive in the retail channel than in the correspondent channel, and the company is shifting accordingly, he said.

Walter continues to be heavily involved in HECM securitization and finds margins have held up well in that business, added Tillett.

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