A Florida pension fund for firefighters and police has sued Nationstar Mortgage for securities fraud, alleging that Nationstar executives concealed a variety of unsavory dealings from its potential investors. The complaint alleges:
[U]nbeknownst to investors… defendants knew or recklessly disregarded that:
(a) Nationstar’s deficiencies in management control and supervision rendered it unable to comply with laws and regulations applicable to servicing MSRs [mortgage servicing rights];
(b) Nationstar was gouging mortgagors – and illegally enhancing its profits through unsustainable means – via illicit practices, such as charging for repeated, unnecessary inspections, which resulted in additional late payment fees, and by pressuring mortgagors to carry out expensive modifications and refinancing of their mortgages;
(c) Solutionstar’s increasing profitability was largely attributable to unlawful and inappropriate customer gouging, rather than improving business metrics;
(d) Heightened regulatory scrutiny into MSR transferring and servicing – including a probe into Nationstar’s own loan servicing practices launched by the New York State Department of Financial Services (“NY DFS”) in March 2014 – had significantly increased Nationstar’s costs of servicing MSRs and diminished the profitability and carrying value of the Company’s MSR portfolio;
(e) In order to deflect regulatory scrutiny in the wake of the regulatory enforcement actions taken against Ocwen, Nationstar had abandoned certain of its own abusive loan servicing practices and adopted others required by regulators, which had made its loan servicing business less profitable and rendered Nationstar’s MSR portfolio less valuable to the Company…
…In January 2015, Nationstar was named as a defendant in a federal civil action accusing the Company of racketeering activity and seeking hundreds of millions of dollars in damages on a classwide basis and alleging that the Company essentially paid itself kickbacks through its Solutionstar billings for improper fees.
…While Nationstar blamed the decline [in profits] on lower interest rates causing higher pre- payments, commentators recognized that in reality, it was “heightened scrutiny into the servicing space by regulators such as the Benjamin Lawsky-headed New York Department of Financial Services” which had significantly diminished profits in and the carrying value of the Company’s servicing business.
In other words, Nationstar juiced its profit reporting through illegal, unfair, or just plain bad business practices, and when it was forced to abandon those illegal practices to avoid government investigations of its practices, its profitability fell, and its investors suffered.
The case is CITY OF ST. CLAIR SHORES POLICE AND FIRE RETIREMENT SYSTEM v. NATIONSTAR MORTGAGE HOLDINGS INC. and you can read the complaint here: Nationstar Complaint [PDF]