Ocwen Financial: Can a Company Be Too Successful? (Part II)


"The product we service is a very difficult product to service by and large." -- Ocwen Executive Chairman Bill Erbey

That could be the understatement of the year!

A daunting regulatory environment, a deluge of bad press, and increased costs involved with attempting to service and resolve delinquent mortgages have big money center banks running for the exits. Wells Fargo (NYSE: WFC  ) , Bank of America (NYSE: BAC  ) , JP Morgan Chase (NYSE: JPM  ) , and Citigroup (NYSE: C  ) are selling the mortgage servicing rights, or MSRs, to third-party companies. The largest of these is Ocwen Financial (NYSE: OCN  ) . Part I of this series focused on the recent performance of the five publicly traded Ocwen entities .

The financial settlement
On March 18, 2014 Joseph A. Smith of the National Mortgage Settlement monitor reported that all four of the money center banks had fulfilled their financial obligations under the 2012 settlement agreement. Based upon the formula in the settlement, each bank achieved its required share of over $20 billion of homeowner debt forgiveness and refinancing assistance.

This consumer relief primarily resulted from the practice of robo-signing and other faulty foreclosure documentation. In aggregate, the banks provided over $50 billion of relief to more than 600,000 households. Ocwen entered into a similar agreement with the same monitor in December, 2013 to provide $2.1 billion in relief to homeowners. This settlement was approved by the court on Feb. 26, 2014.

Compliance with mortgage servicing rules
This is proving to be difficult for all of the banks, and to a certain extent Ocwen as well. There are 304 servicing standards and 29 metrics used to measure compliance. This past December, Joseph Smith reported that B of A failed three metrics, and JPMorgan and Citi each failed two.

ResCom, a portfolio managed by Ocwen passed all 29 metrics. Wells Fargo did not fail in any of the metrics that were tested. Does that mean that these two companies are out of the regulatory woods? Nope.

In October, 2013 the New York Attorney General filed a lawsuit against Wells Fargo for allegedly not processing loan modification requests in a timely manner. The NYDFS has initiated several investigations into Ocwen servicing practices and business structure. The NYDFS has also caused Ocwen to put a deal to acquire the MSR's to 184,000 loans from Wells Fargo -- with $39 billion of unpaid principal balance, or UPB -- on "indefinite hold."

One man's trash is another man's treasure
In the words of Ocwen's Bill Erbey "... the more difficult the environment becomes, the less attractive it becomes" for others. At the end of the day this is a very thorny environment for the money center banks. Let's face it, losing money is bad, being hassled by regulators is annoying, but the constant bad press is toxic. These homeowners are also potential retail banking customers who could provide low cost deposits and sign up for high margin financial products.

On the other hand this is a comfy briar patch for Ocwen. Mr. Erbey created a company with patented technology and processes designed specifically to maximize the net present value of delinquent loans for customers. Meanwhile, the current pricing of MSRs is generating a targeted 25% return of equity for Ocwen.

Plans for future growth
Investing in compliance management programs will eventually allow Ocwen to continue to grow its lucrative sub-prime MSR business. Recently the company has announced additional profit centers including:

·       Ocwen Asset Servicing Income Series, or OASIS. This is an agency MSR financing program whereby the company issues notes backed by individual closed-end pools of Ocwen MSR's. These notes will help accelerate growth in prime mortgage origination for Ocwen, while shifting the prepayment risk to investors. The initial private placement is for $11.8 billion in unpaid principle balance with a 14 year term. 

·       Reverse mortgages. In April, 2013 Ocwen purchased Liberty Home Equity Solutions -- the company pitched on TV by Robert Wagner. Liberty currently has a 16% of this $90 billion market. Ocwen estimates it has the potential to grow to $1.9 trillion.

Investor takeaway
Clearly servicing delinquent loans is not for the faint of heart. Ocwen appears to be building a competitive moat based upon patents and processes developed over the past 15 years. According to the Fed -- five years after the sub-prime crises came to light -- 8.5% of residential mortgages are still delinquent.

This is a sad state of affairs, however, it represents tremendous opportunity for the Ocwen family of companies. The regulatory environment appears to be both a blessing and a curse. In the short-term it is slowing Ocwen's growth; but moving forward it will limit competition, which will accelerate growth and help protect margins.

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Read/Post Comments (6) | Recommend This Article (3)

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  • Report this Comment On March 26, 2014, at 12:23 AM, completeopposite wrote:

    Great article...cannot agree more with you on the patented technology that Ocwen has made their core strength.

    Ocwen does 90% ( if not higher ) of their Servicing out of India in Bangalore, Mumbai and Pune....almost 6000 workers. That is the secret to low Cost of Servicing. Much as they may say that technology brings their cost down, it is the cheap Indian labor that brings the cost down...an UW for $8,000/yr...wow!!!

    Ocwen is the NIke of the 2000s.....remember the picture of poor Chinese laborers stitching shoes. Ocwen is committing every possible labor law violation in India.....10-14 hour days without overtime is normal. Staff churn/attirition is above 35% per year....yet the HR department has some novel ways of calculating this number and the rating agencies get shown a very rosy picture. Ocwen runs sweat shops in India and it is only a matter of time before this reaches the U,S, shores and borrowers will think before they want to deal with Ocwen. As a borrower I would not want to deal with a bank that will sell my loan's servicing rights to Ocwen...... "new co." spelled backwards but the strategies are still very old...exploit cheap labor and fill the coffers of Mr. Erby, Mr. Farris and now Mr. Ross. At least Mr. ERby is not treating the American labor class badly, he is only helping them save their homes with his patented technology!!! ( next time I will talk about this technology and advantages of having you own servicing platform...love it when the maker and checker are the same person!!)

  • Report this Comment On March 26, 2014, at 12:23 PM, 45ACPbullseye wrote:

    @completeopposite Thanks! I am glad you enjoyed reading my articles. I am aware of the call centers and employees in India. I chose not to make that a major point of focus, (which you have highlighted). I have a friend in India who I have encouraged to write for Motley Fool. I was hoping he would shed some light on the call center issues. Best, Bill

  • Report this Comment On March 27, 2014, at 10:48 AM, TarasTeaParty wrote:

    OLS induce foreclosures so ASPS can earn revenues by sell these foreclosed homes through HUBZU.com and providing insurance, escrow and preservation services. RESI's business model too relies on Ocwen's ability to push borrowers into foreclosure. AAMC too are dependent on the same. Regulators are not after Erbey's shops just because he is in the loan servicing business. Regulators know that Erbey's companies engage in a wide variety of predatory and fraudulent practices. Ocwen are not just another loan servicer. Unlike a Wells Fargo or Bank of America, Ocwen has a Chairman who benefits from foreclosures through his interests in ASPS, RESI and AAMC. None of his companies are good long term businesses. AAMC stock has shown astronomical gains on a tiny "free float". Only Erbey and his partners in crime have grown richer. There are many good businesses to invest in. Investors should stay away from Erbey's firms. Its an empire built on theft.

  • Report this Comment On March 27, 2014, at 11:29 AM, 45ACPbullseye wrote:

    @TTP ~75% of Ocwen NPL's were resolved without foreclosure in 2013. It isn't because of regulation. It is a bit counter-intuitive that the net present value for an Ocwen customer is lowest for a foreclosure outcome. TTP, all of the other outcomes are better for the homeowner as well as the holder of the note secured by the mortgage on the property. It also is a better outcome for neighbors, and communities.

    The relationships and fee schedules between the Ocwen family of companies are currently being reviewed. If there are/were any non-arms length arrangements, regulators appear to be well positioned to investigate and share their findings. Best, Bill

  • Report this Comment On March 27, 2014, at 2:12 PM, TarasTeaParty wrote:

    I understand that Ocwen claim to have a high pre-foreclosure resolution rate on their website. Such statistics do not provide and accurate indication of Ocwen's performance with respect to foreclosure prevention activities. We do not have the data to check the accuracy of such claims and it is unclear as to which loan portfolios were included in this calculation. We need to look at the whole Ocwen-Altisource group to understand what they are up to.

    The Department of Treasury and Housing and Urban Development tracks the performance of lenders and loan servicers participating in HAMP. According to their statistics Ocwen approved 23% of loan modifications requests received since the inception of the program as compared to Bank of Americas approval rate of 44%, Citi's 43% and Wells Fargo's 35%. This data is in line with the experience that homeowners have shared with CFPB, DFS and public in general.

    Ocwen are rated 'F' by the BBB. That is the lowest possible rating that can be awarded to any company. Factors that lowered Ocwen Loan Servicing, LLC's rating include:

    2549 complaints filed against business

    Failure to respond to 1952 complaints filed against business.

    136 complaints filed against business that were not resolved.

    Overall complaint history with BBB.

    Government action(s) against business.

    Business has failed to resolve underlying cause(s) of a pattern of complaints.

    Consumer concerns include inability to reach the same person at the company in order to discuss their problems and dissatisfaction with what consumers feel are excessive add-on fees. Other concerns include not processing of payments in a timely fashion and failure to respond to requests for loan modifications in a timely manner. The company states that fees associated with each loan are agreed to as part of the loan servicing agreement it has with the owner of the loan which may be the loan originator or investors, not the consumer.

    In 2012, following complaints about Ocwen’s servicing practices, the DFS "conducted a targeted exam of Ocwen’s performance and discovered gaps in the company’s compliance." The Department required that the company hire a monitor so that the DFS can be sure that the homeowners have a real chance to avoid foreclosure. Ocwen failed to implement the agreed reforms and after over a year of being patient, the DFS acted by blocking the Wells Fargo loan servicing deal.

    The CFPB investigatios also came up with similar conclusions. According to the CFPB, Ocwen mistreated consumers and committed “systemic misconduct at every stage of the mortgage servicing process". This misconduct included unfair shortcuts, unauthorized fees, deception, and other illegal practices.

    According to the complaint filed in federal district court in the District of Columbia, Ocwen’s violations of consumer financial protections put thousands of people across the country at risk of losing their homes. Specifically, the complaint says that Ocwen:

    • Took advantage of homeowners with servicing shortcuts and unauthorized fees: Customers relied on Ocwen to, among other things, treat them fairly, give them accurate information, and appropriately charge for services. According to the complaint, Ocwen violated the law in a number of ways, including:

    o Failing to timely and accurately apply payments made by borrowers and failing to maintain accurate account statements;

    o Charging borrowers unauthorized fees for default-related services;

    o Imposing force-placed insurance on consumers when Ocwen knew or should have known that they already had adequate home-insurance coverage; and

    o Providing false or misleading information in response to consumer complaints.

    • Deceived consumers about foreclosure alternatives and improperly denied loan modifications: Struggling homeowners generally turn to mortgage servicers, the link to the owners of the loans, as their only means of developing a plan for payment. Ocwen failed to effectively assist, and in fact impeded, struggling homeowners trying to save their homes. This included:

    o Failing to provide accurate information about loan modifications and other loss mitigation services;

    o Failing to properly process borrowers’ applications and calculate their eligibility for loan modifications;

    o Providing false or misleading reasons for denying loan modifications;

    o Failing to honor previously agreed upon trial modifications with prior servicers; and

    o Deceptively seeking to collect payments under the mortgage’s original unmodified terms after the consumer had already begun a loan modification with the prior servicer.

    • Engaged in illegal foreclosure practices: One of the most important jobs of a mortgage servicer is managing the foreclosure process. But Ocwen mishandled foreclosures and provided consumers with false information. Specifically, Ocwen is accused of:

    o Providing false or misleading information to consumers about the status of foreclosure proceedings where the borrower was in good faith actively pursuing a loss mitigation alternative also offered by Ocwen; and

    o Robo-signing foreclosure documents, including preparing, executing, notarizing, and filing affidavits in foreclosure proceedings with courts and government agencies without verifying the information.

    Ocwen are a habitual offender and Erbey needs to be held personally accountable.

    The software Ocwen use to service loans - RealServicing is flawed and despite numerous complaints over the years, nothing has changed. A software consultant testified in a case against the company in which Ocwen was hit with a $3 Million verdict in Guzman V. Ocwen highlighting the flaws. This software is one of the famous Altisource's REALSuite products.

    In order to understand why Ocwen work this way, we need to understand its relationship with Altisource. Altisource stand to gain from foreclosure. The more the foreclosures, the more the revenues for ASPS. Higher foreclosures would translate into more rental properties for RESI.

    RESI acquire NPLs and gets Ocwen to service these loans. They intend to foreclose on as many of these loans as possible so they can acquire properties, renovate them and rent them out. They have vested interests in getting these loans foreclosed.

    There are too many other practices that Erbey's companies engage in that hurts investors, borrowers, home buyers, realtors, employees and people in general.

    These are not the foundations on which a "successful" company is built.

  • Report this Comment On March 28, 2014, at 11:41 AM, 45ACPbullseye wrote:

    @TTP, thanks for your detailed reply. Clearly, Ocwen has some process and customer service issues. I think the latest moves by regulators got the attention of all of the stakeholders involved with the Ocwen family of companies. This is a story which will continue to evolve, and I intend to follow it. It sounds like you will be keeping an eye on it as well! Best, Bill

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