Distressed Outlook: Big Banks Continue to Whittle Down Legacy Loans

Editor’s Note: This story is part of National Mortgage News’ 2015 Outlook coverage. Click here for more stories previewing the industry’s biggest trends for 2015.

The nation’s largest banks have attacked their delinquent loan portfolios with gusto, but they may hit barriers in 2015 as they try to further whittle down their distressed assets.

Some industry experts are predicting a new wave of delinquencies and foreclosures in the coming year if interest rates rise, causing home prices to decline.

Many of the largest banks continue to sell off nonperforming loans. Hedge funds and private-equity firms have bid up the prices of distressed loans as they seek to profit from recent home price increases, which could abate in the coming year.

Bank of America has made the greatest strides in whittling down its distressed assets afterselling off more than $1 trillion in nonperforming loans since 2009. The $2.1 trillion-asset bank in Charlotte, N.C., held 221,000 delinquent loans on its balance sheet in the third quarter, a 44% drop from a year earlier.

About three-quarters of its nonperforming loans are legacy assets from its 2008 acquisition of Countrywide Financial. B of A held roughly $10 billion in nonperforming residential mortgage loans at the end of the third quarter, and $32 billion in delinquent loans inherited from Countrywide. Those totals exclude home equity loans and lines of credit.

B of A has estimated that it will get back to a normal level of delinquent loans by 2016. Some analysts think that is an optimistic assessment, since some loans probably cannot be sold, and working out problem loans — especially those at the bottom of the barrel — is notoriously slow and labor intensive.

Meanwhile, Wells Fargo held roughly $10.7 billion of loans that were 30 days or more delinquent in the third quarter, according to the bank’s 3Q14 earnings. It also holds $46.4 billion in legacy loans in its Pick-a-Pay mortgage portfolio acquired from its 2008 purchase of Wachovia.

Overall, the seven largest banks and one large thrift saw an improvement in the number of seriously delinquent loans held on their balance sheets at the end of the third quarter, as of Sept. 30 according to a December report from the Office of the Comptroller of the Currency.

Roughly 5.2% or 117,673 residential mortgages were seriously delinquent at the end of the third quarter, down from 5.5% a year earlier, the report found. The reporting banks include Bank of America, J.P. Morgan Chase, Citibank, HSBC, PNC, U.S. Bank, and Wells Fargo, while OneWest Bank is the largest thrift.

But the report also noted that about 8% of mortgages held in bank portfolios lack credit scores at origination and are a mix of prime, Alt-A, and subprime mortgages.

“Since 2009, mortgages owned by the servicers have performed worse than mortgages serviced for (Fannie Mae and Freddie Mac) because of concentrations in nontraditional loans, weaker markets, and delinquent loans repurchased from investors,” the OCC said.

Large bank lenders have opted to sell defaulted loans to avoid the high costs of servicing and holding the debt. Large banks in particular have relied on sales of mortgage servicing rights, as well as servicing transfers, pay-downs and payoffs to reduce their holdings of nonperforming loans. An estimated $60 billion in nonperforming loans is expected to have changed hands in 2014.



Wells Fargo, U.S. No Longer Optimistic on Mortgage Pact

Lawyers for the U.S. and Wells Fargo & Co. told a judge they doubt they can reach a settlement in a government lawsuit accusing the bank of home-mortgage fraud, a person familiar with the matter said.

The U.S. sued San Francisco-based Wells Fargo in 2012, claiming it made reckless mortgage loans that defaulted and cost a federal insurance program hundreds of millions of dollars. The government said the bank’s misconduct spanned more than a decade while it participated in the Federal Housing Administration’s program.

The suit by Manhattan U.S. Attorney Preet Bharara is part of a larger effort to recoup losses from defaulted mortgages insured by the FHA. It follows cases against lenders including Citigroup Inc. and Deutsche Bank AG.

At a hearing yesterday, attorneys for both sides told U.S. District Judge Jesse Furman they no longer thought a settlement was within reach, said the person, who wasn’t authorized to speak publicly about the case and asked not to be identified. Both sides had halted the pre-trial exchange of evidence for four months to engage in settlement talks, according to a court filing.

Furman warned lawyers that he wouldn’t give them a four-month extension to collect evidence because they’d agreed on their own to pause the process. The judge said he considered a two-month extension a “gift” to the parties.

“I’m going to give you two months,” Furman said, according to a transcript of the hearing. “You did this at your peril, as far as I’m concerned. And had you asked me four months ago for leave to do this, I might have had a different view, but having taken this upon yourselves, you took the chance and you’re going to suffer some consequences.”

Tom Goyda, a Wells Fargo spokesman, said the bank will continue defending itself against the allegations.

“Our good-faith efforts to work with the federal government on a possible resolution of the complaint have not yet resulted in a settlement,” Goyda said in a statement. “We will move forward with presenting our case in support of our prudent and responsible FHA lending practices.”

Furman last year dismissed some claims because the government filed them too late. The bank had sought dismissal of the entire case.

The FHA program enabled the bank to certify loans for government insurance without prior agency approval.

Jim Margolin, a spokesman for Bharara, declined to comment on the case or the bank’s statement.

In 2012, Wells Fargo agreed to pay $5 billion as its share of a settlement of U.S. and state suit probes into abusive foreclosure practices.


Ocwen Backdated Thousands of Foreclosure Notices, Lawsky Says

New York’s top banking regulator claims mortgage servicer Ocwen Financial sent more than 6,100 borrowers notices of possible foreclosure only after their payment deadlines had passed.

The systems failures that Ocwen outlined previously as “isolated” are much greater in scope than what the company had previously disclosed, according to Benjamin Lawsky, superintendent of the state’s Department of Financial Services.

Lawsky sent a warning letter Tuesday to Ocwen Chairman William Erbey, his counsel and directors, regarding what Lawsky described as a practice that is possibly still ongoing.

“Ocwen must fix its systems without delay,” the letter said.

Officials of Atlanta-based Ocwen are cooperating with the investigation and “deeply regret the inconvenience to borrowers who received improperly dated letters as a result of errors in our correspondence systems,” an Ocwen spokesman wrote in an email. They have identified 281current New York-based customers who were affected and are reviewing the other cases cited by Lawsky, the email said.

Shares of Ocwen were down 20%, to $21, in midafternoon trading.

Ocwen, the country’s largest nonbank mortgage servicer, has been under regulatory scrutiny over the past year, as consumer protection regulators scrutinize nonbank servicers’ ability to adequately administrate loans. Servicers’ portfolios have more than doubled in just a year’s time, as banks attempt to shed their servicing rights before new regulatory capital rules take effect.

In September Ocwen told monitors the backdating issue was an isolated incident, but the issue is far larger, Lawsky’s letter said. There may have been 6,100 problem letters sent to borrowers before Ocwen addressed the issue in May 2014, after an employee alerted a monitor of the problem five months prior. The company told monitors it responded and corrected the issue in May.

“Each of these representations turned out to be false,” the letter said.

The problem may prove to be even more widespread, perhaps affecting hundreds of thousands of borrowers, according to the letter.

The Consumer Financial Protection Bureau has also tightened the screws on servicers. It took its first enforcement action under new servicing rules last month against Flagstar Bank after claiming the Michigan bank blocked customers’ attempts to save their homes.

That enforcement action underscored the regulatory headaches facing nonbanker servicers Ocwen and Nationstar Mortgage Holdings, Guggenheim analyst Jaret Seiberg told clients recently. “The policy environment will make it more expensive to be a mortgage servicer, which will hurt profitability,” he wrote.

Seiberg added in a follow-up note Tuesday, after the release of the Lawsky letter, that “if Ocwen intentionally misdated letters to deprive borrowers of modifications, then it could be exposed to serious legal liability,” especially if the loans in question were backed by Fannie Mae or Freddie Mac.

Highly critical lawmakers in Congress have called for capital requirements on nonbank servicers. Ocwen, Nationstar and others responded last month and are organizing a new trade group in Washington to represent their interests.

Isaac Boltansky, an analyst at Compass Point Research & Trading, believes the Federal Housing Finance Agency will this fall outline capital and liquidity standards for servicers, which could go into effect as early as first quarter 2015, he said last month after Ginnie Mae released a 20-page assessment of the sector.