Earlier this month, Benjamin M Lawsky, who heads New York’s Department of Financial Services, put the brakes on Ocwen Financial Corp (NYSE:OCN)’s plans to acquire from  Wells Fargo & Co (NYSE:WFC) mortgage servicing rights a package of loans worth $39B.

The reason? Unnerved by Ocwen Financial Corp (NYSE:OCN)’s expansion in recent years by buying similar rights from other banks, Lawsky worried that the company may not have the ability to service these loans properly.

Mortgage Servicers Loans

Mortgage servicing companies take over the administration of loans owned by investors, handing functions such as billing, collections and foreclosures in the case of defaulting borrowers.

California Representative Waters too is worried

The New York Times reports that California Representative Maxine Waters, who is the top Democrat on the House Financial Services Committee, has expressed concerns about mortgage servicers’ abilities to handle the huge volume of loans that they have ambitiously acquired.

Waters wrote to the Comptroller of the Currency, Thomas J. Curry, and Joseph A. Smith Jr., the monitor of the national mortgage settlement, asking them to ensure that “non-bank” servicers (such as Ocwen Financial Corp (NYSE:OCN) and Nationstar Mortgage Holdings Inc (NYSE:NSM) had adequate infrastructure and operational capacity to service the additional loans .

According to the NYT article, mortgage servicing companies have now secured about 17% of the market, compared to just 3% in 2010. The transfer of the paperwork from the banks to these companies often resulted in problems for homeowners such as wrongly charged fees, improper documentation, and in some cases unjustified evictions.

What happened in 2010

Mortgage servicers faced media glare and government scrutiny in 2010 for alleged ‘robo-signing’ of foreclosure documents without proper scrutiny and review. They were also accused of shoddy paperwork, falsified dates and other kinds of mishandling of foreclosures.

Ripping off borrowers and loan investors

They have also been accused of making money off hapless homeowners and investors by pressing foreclosures – that’s more profitable than allowing the defaulting homeowner a chance to make good by restructuring the outstanding loan, or reducing the principal.

According to the NYT article, servicers are also known to have indulged in dubious loan modifications that temporarily allow them to make a profit on the loan servicing transaction, but increase the chances of the borrower defaulting again.

Homeowners getting the short end of the stick again

After facing the difficulties of servicing their home loans after the crisis of 2008, homeowners must now contend with problems arising from this new and unexpected angle. Crucial modifications to mortgage agreements that were agreed to by the original lender seem to vanish when the loan is passed on to the servicers. Worse, the customer service offered by the servicers is often poor and unresponsive, resulting in frustration for the borrowers when problems drag on endlessly.

“I request you to exam the extent to which these servicing transfers are potentially being used to evade the modifications of loans for borrowers who would benefit most from the terms of the Settlement, and to work to ensure that borrowers are not subject to any degradation in the protections afforded to tem because of an MSR sale,” wrote Ms. Waters in her above referred letter to the regulators.