SEC probing mortgage servicing fees tied to bad debt?

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The Securities and Exchange Commission is looking at whether mortgage servicers are boosting profits by prematurely unleashing debt collectors on delinquent borrowers, a person with direct knowledge of the matter said.

The probe is focusing on servicers that are not owned by banks, including Ocwen Financial, the person said. Ocwen, which federal and state authorities have scrutinized for issues including mishandling foreclosures, has said in regulatory filings that the SEC was looking at the industry's use of collection agents and the fees and expenses tied to liquidated loans.

Mortgage servicers get paid to process home loan payments from borrowers. When loans go bad, the firms can write them off and send them to outside collectors.

One of the questions the SEC is probing is whether borrowers are getting enough time to make good on their home equity loans once they fall behind, the person said. A servicer may be entitled to a receive a percentage of whatever outside collectors recover, which may be higher than the usual fees it would receive, the person said. Sending loans to collectors prematurely may also cut a servicer's costs.

These collections practices may hurt the bond holders and banks that own the home loans by cutting into their income from the mortgages.

Ocwen and Nationstar Mortgage Holdings are the two biggest servicers that are not banks. Their industry has grown rapidly after financial reform laws spurred big banks to shrink parts of their subprime mortgage businesses, leaving an opportunity for companies like to acquire assets.

John Lovallo, a spokesman for Ocwen, declined to comment beyond the company's prior public statements.

Ocwen said last year that the SEC sent it a letter saying it was investigating the use of collection agents by mortgage loan servicers. The company said it believes the letter was sent to others in the industry.

The company said last month that it received another SEC letter saying the agency was conducting a probe "relating to fees and expenses charged in connection with liquidated loans and REO properties held in non-agency RMBS trusts." The company's shares fell more than 60 percent in the days following that disclosure.

Christen Reyenga, a spokeswoman for Nationstar, said in an e-mail that the company has not received any letter from the SEC about these matters.

Fund managers that own mortgage bonds have long complained about conflicts at servicers that are connected with banks, and at those that are not.

Many of these problems were exposed during the financial crisis and remain unresolved today, said Alessandro Pagani, a portfolio manager at Loomis Sayles & Co, in Boston, who last month helped lead a group of bond funds seeking to reduce conflicts in mortgage securities.

"Investors are powerless in these deals," Pagani said.

Banks including Wells Fargo & Co. and other lenders have sold the rights to process payments on $1.9 trillion of home loans since 2009, when their combined portfolios peaked at $5.9 trillion, according to data from trade publication Inside Mortgage Finance.

Cutting exposure made sense for traditional lenders after new global capital rules known as Basel III increased the cost of holding on to that business. As a welter of subprime mortgage loans went bad, managing delinquencies and defaults increased costs for banks, which also spurred them to reduce their involvement in the business.