Ocwen Financial Corp (NYSE:OCN), the fourth largest servicer of mortgage loans in the US, is under investigation by Benjamin Lawsky, New York State’s superintendent of financial services for its relationships with related businesses.  The concern is borrowers may be harmed due to the close financial ties among related companies, as well as questions being raised regarding the firm’s capacity for growth.

Ocwen

The investigation comes on the heels of Moody’s warning on the sector.

The stock is down nearly 7.5% in mid-afternoon trading.

Regulator notes “tangled web of conflicts”

An “ongoing review of Ocwen Financial Corp (NYSE:OCN)’s mortgage servicing practices has uncovered a number of potential conflicts of interest between Ocwen and other public companies with which Ocwen is closely affiliated. This tangled web of conflicts could create incentives that harm borrowers and push homeowners unduly into foreclosure,” Lawsky said in a letter to Ocwen, reviewed by the Wall Street Journal.

Common chairman and related ownership at issue

The companies named in the letter include Altisource Portfolio Solutions SA, which provides various technology services to Ocwen, which is Altisource’s largest customer accounting for 65% of the business.  William Erbey, Ocwen’s executive chairman, is also chairman of Altisource as well as chairman of Home Loan Servicing Solutions, another firm related to Ocwen and cited in the letter and its largest shareholder, according to the report.

Ocwen’s capacity issue

Lawsky has been examining Ocwen Financial Corp (NYSE:OCN)’s business, which has doubled in size over the past year.  The regulator is considering Ocwen from the perspective that the company isn’t equipped to handle the growth of its servicing portfolio, the report noted. Earlier this month, Lawsky’s office had intervened in a deal where Ocwen agreed to purchase the rights to service $39 billion of mortgages from Wells Fargo & Co (NYSE:WFC).

An article in the Financial Times by Tracy Alloway notes that mortgage servicers such as Ocwen Financial Corp (NYSE:OCN) have been buying hundreds of billions of dollars worth of “mortgage servicing rights” (MSRs) from big banks.  Banks have sold the rights amidst worrisome post-financial crisis foreclosures as well as regulatory pressure to offload toxic assets. The amount of outstanding mortgages serviced by Ocwen has risen from $43bn in 2005 to more than $500bn now, the report notes.