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A Clash of Titans Over a Lucrative Corner of the Mortgage Market

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Four years after a financial meltdown that was fueled by high mortgage defaults, mortgages and mortgage-related products are enjoying increased popularity again. Mortgage servicing rights have been in the news recently, as these assets, which are considered a separate entity from the mortgage itself, begin to draw attention from companies both large and small.

As small servicers scoop up cast-off portfolios from banks and other sources, some big fish have begun swimming in these waters, attracted by this profitable offshoot of the mortgage business.

Lots of interest in the detritus of the housing crash
The current drama surrounding the bankruptcy of Residential Capital, Ally Financial's distressed mortgage arm, is a case in point. For a time, the planned auction of ResCap's mortgage servicing rights and mortgage origination units was going brilliantly, and Fortress Investment Group's NationStar Mortgage Holdings (NYSE: NSM  ) was the chosen one to open bidding on the proceedings. It looked as if NationStar had the whole thing sewn up, and would probably walk away with the whole kit and caboodle.

Then things started to go a little crazy. Berkshire Hathaway (NYSE: BRK-A  ) suddenly decided to horn in, and it looked like a bidding war might be in the offing. Now, another big player is looking to participate in the auction: IBM (NYSE: IBM  ) , having recently formed an alliance with another interested party, Ocwen Financial (NYSE: OCN  ) .

On the face of it, you might wonder why Berkshire Hathaway and IBM would have any interest at all. Berkshire, of course, is headed by Warren Buffett, whose bullish outlook on housing could explain at least part of the attraction. In addition, Buffett holds an interest in ResCap himself, and some feel that this ploy could be a way to push up the bidding price on these assets. This may be a valid point, since Berkshire has been required to partner with a mortgage servicing company in order to bid, since Buffett's company doesn't own a servicer.

For its part, IBM does own a mortgage servicer, Seterus, which it may be looking to bolster after fielding boatloads of consumer complaints over the years.

Banks are looking to rid themselves of these assets, too
The auction is anticipated to raise approximately $4 billion and takes place on October 23 -- so ducks will have to be all in a row very soon. While it looks as if Buffett's interest is only to stir the pot in order to reap the benefits, there is no denying the rising interest in this particular auction, and mortgage servicing rights in general. Big banks are expected to sell off many of these rights over the next few years, as holding them has become more of a headache than they are worth.

Banks like Bank of America (NYSE: BAC  ) , JP Morgan Chase and Wells Fargo are being pushed and prodded by the government to clean up their servicing act, and B of A has already unloaded much of its servicing portfolio to none other than NationStar. The foreclosure settlement earlier this year has put banks' mortgage servicing behavior in the spotlight, and the newly formed Consumer Financial Protection Bureau has been busily promulgating new rules in regards to timely disclosures to borrowers.

A new day favors specialty mortgage servicers
Although the new regulations will cover servicers of all stripes, some see specialty companies like Ocwen and NationStar as being better situated to take on the extra weight of such mandates. This makes sense, since these companies are concentrated in such a narrow area. Banks, on the other hand, have myriad problems to deal with -- and still have not managed to implement servicing changes mandated two years ago. Now, with over 300 new rules to learn and apply, chances are very good that many banking institutions will find selling off these mortgage-related assets much easier than trying to maintain them.

As banks continue to shed these rights, NationStar and Ocwen are poised to take the best advantage. The tenaciousness of these two servicers, even in the face of mounting interest from huge companies, is a testament to just how lucrative these rights can be -- especially in light of the news that the rate of mortgage delinquencies headed for foreclosure are the lowest in three years. NationStar very recently raised $400 million, at least some of it specifically for the ResCap auction, so it seems that their confidence has not been dinged.

The participants are suiting up for battle, and the company that emerges victorious will be one to keep an investor's eye on.

Of all the big banks, there is one that hasn't abandoned the mortgage market -- and is a favorite of Buffett himself. Find out why Wells Fargo is considered the only big bank built to last by grabbing this special report right here.

Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of JPMorgan Chase, Bank of America, International Business Machines, and Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo. Motley Fool newsletter services have recommended creating a synthetic long position in International Business Machines. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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