Imagine for a moment that you’re William Erbey on the morning of Jan. 22, 2014. The signature company of your empire, Ocwen Financial, is the country’s fourth-largest mortgage servicer and its largest subprime mortgage servicer.
Your company is about to announce that it is purchasing the mortgage servicing rights to $39 billion worth of mortgages from Wells Fargo.
The $2.7 billion deal will be the latest in a series of massive MSR acquisitions that have positioned your company as the largest nonbank mortgage servicer by a wide margin.
As the legend goes, your company has grown from its decidedly humble beginnings, its name derived from scribbling the inverse of “Newco” on a napkin, to become a multibillion dollar empire at the top of the mortgage world.
And you sit atop the multibillon dollar empire, leader of your own personal “Fab Five.”
Your business card reads Executive Chairman of the Board of Ocwen Financial, as well as non-executive chairman of Ocwen’s four associated companies, Altisource Portfolio Solutions, Altisource Residential, Altisource Asset Management, and Home Loan Servicing Solutions.
Ocwen’s stock opens the day at $51.30 per share, and climbs as high as $52.01 during the day’s trading. According to an August filing with the Securities and Exchange Commission, you own “approximately 13%” of Ocwen’s stock, placing the value of your personal interest in Ocwen at $850.67 million.
And over the next 13 months, that price is the highest your stock will trade at by a wide margin.
It never goes higher. It only goes lower. Much lower.
Fast forward to Jan. 29, 2015. When the day’s trading closes, your company’s stock is priced at $5.77, representing a drop of nearly 89% from just 53 weeks earlier. Those 16 million shares in Ocwen are now worth $94.37 million, $756 million less than they were just over a year ago.
And that doesn’t even account for how much money you’ve lost on Altisource Portfolio Solutions. According to the same filing, you also own “approximately 27%” of Altisource Portfolio’s stock.
When the day’s trading opens on Jan. 22, 2014, your shares are worth $896.15 million, with the stock opening at $152 per share. When the day’s trading ends on Jan. 29, 2015, Altisource’s stock sits at $20.56 per share, a drop of more than 86%. Those shares in Altisource are worth nearly $775 million less than they were 53 weeks ago.
If you’re Bill Erbey, between just those two companies, your holdings are worth $1.5 billion less than they were a year ago.
Needless to say, it’s been a rough year.
What happened to cause a drop so precipitous?
An avalanche of regulatory pressures, demands, sanctions, punishments and a mountain of negative headlines, to start with.
The year started out with so much promise for Ocwen. But the afterglow of the Wells Fargo announcement was short-lived.
Within two weeks of announcing the massive MSR deal, the New York Department of Financial Services pulled the emergency brake on Ocwen’s good-time train, placing the deal on hold because it was concerned that Ocwen would not be able to properly service the approximately 184,000 mortgages.
The deal twisted in the wind for nine months, before being quietly abandoned in November. The cancellation of the deal was not publicized and only discovered in in a SEC filing from Ocwen.Ocwen’s SEC filing stated that the company would receive its entire $25 million deposit back.
Wells Fargo said in a brief release announcing the cancellation of the deal that parties have mutually decided to cancel the deal and that the cancellation of the transaction is not expected to be material to Wells Fargo’s consolidated financial results.
In the end, Ocwen couldn’t escape the regulatory pressure placed on it by the NYDFS.
Throughout 2014, the NYDFS, lead by Superintendent Benjamin Lawsky, dug into Ocwen’s business practices and didn’t find a whole lot to like.
Not long after placing the Wells Fargo deal on hold, Lawsky sent a letter to Ocwen’s general counsel, Timothy Hayes, suggesting that Ocwen was potentially harming borrowers and pushing homeowners “unduly into foreclosure.”
Lawsky said that the close relationship between Ocwen, the Altisource companies and Home Loan Servicing Solutions was deeply concerning.
“Presently, Ocwen’s management owns stock or stock options in the affiliated companies,” Lawsky said in his February letter. “This raises the possibility that management has the opportunity and incentive to make decisions concerning Ocwen that are intended to benefit the share price of affiliated companies, resulting in harm to borrowers, mortgage investors, or Ocwen shareholders as a result.”
Lawsky again probed Ocwen’s business dealings in April when he questioned the company’s relationship with Altisource Portfolio and its subsidiary, Hubzu, which Ocwen uses as its principal online auction site for the sale of its borrowers’ homes facing foreclosure, as well as investor-owned properties following foreclosure.
“Hubzu appears to be charging auction fees on Ocwen-serviced properties that are up to three times the fees charged to non-Ocwen customers. In other words, when Ocwen selects its affiliate Hubzu to host foreclosure or short sale auctions on behalf of mortgage investors and borrowers, the Hubzu auction fee is 4.5%; when Hubzu is competing for auction business on the open market, its fee is as low as 1.5%,” Lawsky said in an April letter to Hayes.
“These higher fees, of course, ultimately get passed on to the investors and struggling borrowers who are typically trying to mitigate their losses and are not involved in the selection of Hubzu as the host site,” Lawsky continued.
“The relationship between Ocwen, Altisource Portfolio, and Hubzu raises significant concerns regarding self-dealing. In particular, it creates questions about whether those companies are charging inflated fees through conflicted business relationships, and thereby negatively impacting homeowners and mortgage investors,” Lawsky added.
“Alternatively, if the lower fees are necessary to attract non-Ocwen business on the open market, it raises concerns about whether Ocwen-serviced properties are being funneled into an uncompetitive platform at inflated costs.”
But Lawsky wasn’t the only one to question Ocwen’s interconnected business relationships.
In August, Ocwen disclosed that it received a subpoena from the SEC in June, in which the SEC requested “production of various documents relating to our business dealings with Altisource, Home Loan Servicing Solutions, Altisource Asset Management and Altisource Residential and the interests of our directors and executive officers in these companies.”
In the filing, Ocwen provided greater detail on its relationship with its associates. Ocwen said that its business is “dependent” on its relationship with Altisource and its affiliates. According to the filing, Altisource provides various services under “long-term contracts,” including service agreements, technology products services agreements, intellectual property agreements and the data center and disaster recovery services agreements.
Ocwen and Altisource also “provide administrative and corporate services to each other” and a “data access and services agreement,” in which Ocwen provides “certain data” to Altisource in exchange for a per asset fee.
Services, including residential property valuation, residential property preservation and inspection services, title services and real estate sales, provided by Altisource to Ocwen are “generally charged to the borrower and/or loan investor.”
Ocwen stated that it “believes” the rates charged for these services are “market rates,” because the rates are consistent with what “Ocwen pays to or observes from other service providers and the fees we believe Altisource charges to other customers for comparable services.”
Ocwen also detailed its relationship with HLSS in the filing. “Ocwen and HLSS provide each other certain professional services including valuation analysis of potential mortgage servicing rights acquisitions, treasury management services and other similar services, licensing and regulatory compliance support services, risk management services and other similar services under a professional services agreement,” Ocwen stated.
Ocwen also disclosed that it has “entered into a long-term servicing and a support services agreement with Altisource Residential and AAMC, respectively.”
In another letter to Hayes, Lawsky charged that Ocwen’s indifference to such a serious matter demonstrates a troubling corporate culture that disregards the needs of struggling borrowers.
“In the course of the Department’s review of Ocwen’s mortgage servicing practices, we have uncovered serious issues with Ocwen’s systems and processes, including Ocwen’s backdating of potentially hundreds of thousands of letters to borrowers, likely causing them significant harm,” Lawsky said.
“In many cases, borrowers received a letter denying a mortgage loan modification, and the letter was dated more than 30 days prior to the date that Ocwen mailed the letter,” Lawsky wrote. “These borrowers were given 30 days from the date of the denial letter to appeal that denial, but those 30 days had already elapsed by the time they received the backdated letter.
“In other cases, Ocwen’s systems show that borrowers facing foreclosure received letters with a date by which to cure their default and avoid foreclosure – and the cure date was months prior to receipt of the letter.
“The existence and pervasiveness of these issues raise critical questions about Ocwen’s ability to perform its core function of servicing loans.”
Lawsky said in the letter that in light of these serious issues and the likelihood that thousands of new, inaccurate records are created with each passing day, Ocwen has not approached this problem with the urgency it demands.
Ocwen also ran afoul of the National Mortgage Settlement, which said in December that it doesn’t trust Ocwen’s own internal reviewers and the documents they provide.
“In May 2014, an Ocwen employee contacted a member of the Monitoring Committee and alleged serious deficiencies in the internal review group (IRG) process, which called into question the IRG’s independence and the integrity of the IRG’s operations,” Joseph Smith, the monitor for 2012’s National Mortgage Settlement said in December.
“Additionally, after reviewing a letter issued by the New York Superintendent of Financial Services, which indicated that the date on certain correspondence from Ocwen to its consumers was incorrect, I directed Ocwen to scope, correct and remediate this letter dating problem.”
And by the end of the year, Ocwen’s tangled web of intertwined businesses and substandard servicing practices proved to be too much to overcome.
In late December, the NYDFS announced that Erbey would resign from the Ocwen family of companies and Ocwen will pay $150 million to homeowners as part of a settlement over the NYDFS’ various investigations of Ocwen throughout the year.
Ocwen admitted in the agreement that it didn’t properly deal with distressed homeowners and failed to maintain adequate systems for servicing hundreds of billions of dollars in mortgages.
Additionally, Ocwen was ordered to undertake significant operational reforms to address serious servicing misconduct and conflict of interest issues at the company; host an NYDFS-selected, independent monitor on site for up to an additional three years; and provide “hard-dollar” assistance to New Yorkers totaling $150 million.
Among the charges levied at Ocwen by the NYDFS was that Ocwen’s servicing platform and loss mitigation structure had significant deficiencies.
These included robo-signing, inaccurate affidavits and failure to properly validate document execution processes, missing documentation, wrongful foreclosure, failure to properly maintain books and records, and initiation of foreclosure actions without proper legal standing.
According to the NYDFS, Erbey did not recuse himself from the approval process of transactions between the related companies.
“Mr. Erbey, who owns approximately 15% of Ocwen’s stock, and nearly double that percentage of the stock of Altisource Portfolio, has participated in the approval of a number of transactions between the two companies or from which Altisource received some benefit, including the renewal of Ocwen’s forced placed insurance program in early 2014,” the NYDFS said.
The forced placed insurance program was another of 2014’s casualties, with Altisource announcing it was discontinuing the program in November, citing “uncertainties with industry-wide litigation and the regulatory environment.”
And the conflicts of interest don’t just stop at Erbey’s desk. The NYDFS said that during its review, it discovered that Ocwen’s chief risk officer also served as the chief risk officer of Altisource Portfolio.
“The chief risk officer reported directly to Mr. Erbey in both capacities,” the NYDFS said. “This individual seemed not to appreciate the potential conflicts of interest posed by this dual role, which was of particular concern given his role as chief risk officer.”
Before Erbey’s last day at Ocwen, the company’s chief executive officer, Ron Faris, announced a new direction for the company and said that Erbey’s departure wouldn’t be the only big change for the nonbank.
Faris told investors in a December conference call that Ocwen is planning to exit agency servicing. “We are going to focus our servicing business primarily on non-agency servicing,” Faris said.
Faris said that Ocwen plans to sell off its entire portfolio of agency servicing. “We estimate the difference between our $1.1 billion book value and fair value of our agency MSRs is between $400 and $500 million dollars,” Faris said.
“In addition to potentially realizing these gains, we have the potential to free up $200 to $300 million currently allocated to fund agency advances,” Faris added.
“This strategy has the potential to free up over $1.7 billion of capital to invest in new businesses, to reduce leverage, or to return to shareholders over time.”
Faris said that private-label servicing has proved to be a much more profitable business for Ocwen in the past.
“Over many years, we developed a differentiated capability to service mortgages in private-label securities,” Faris said.
“This capability was founded on a technology platform that integrated well with a social science-based dialogue engine and statistical decision models.
“The result when combined with our human resources was an operating platform able to deliver best in class servicing for homeowners, better cash flow for residential mortgage-backed security bond holders and strong operating margins for the business and our shareholders.”
But Ocwen’s regulatory troubles weren’t over yet. In late January, Ocwen announced that it reached a settlement agreement with the California Department of Business Oversight, which was threatening to suspend Ocwen’s mortgage license because the company failed to turn over documentation showing that it complies with the state’s laws.
Under the terms of the agreement, Ocwen was fined $2.5 million and prohibited from acquiring any additional mortgage servicing rights for loans in California until the CDBO is “satisfied that (Ocwen-subsidiary) Ocwen Loan Servicing can satisfactorily respond to the requests for information and documentation made in the course of a regulatory exam.”
As for Erbey, he may have been forced to give up the leadership of his “Fab Five,” but he certainly didn’t leave empty-handed. Far from it, in fact.
According to a filing with the SEC, Ocwen will pay Erbey $1.2 million in a lump sum cash payment as part of his “retirement agreement.” The payment will come in the form a $725,000 cash payment for severance and an additional $475,000 “in lieu of certain relocation benefits.”
Additionally, as of Erbey’s last day at Ocwen, which was Jan. 16, all stock options granted to Erbey by Ocwen prior to 2012 are now fully vested and exercisable. According to Ocwen’s SEC filing, Erbey holds 2,572,626 stock options from before 2012.
Erbey was granted 69,805 stock options in 2006, with a current exercise price of approximately $5.81 per share. Those options expire on March 8, 2016.
Erbey was also granted 102,821 stock options in 2007, with a current exercise price of approximately $7.16 per share. Those options expire May 10, 2017.
The largest portion of Erbey’s pre-2012 options also have the lowest exercise price. Erbey was granted 2.4 million stock options in 2008, with a current exercise price of approximately $4.82 per share. Those options expire on July 14, 2018.
Despite the hits that Ocwen has taken on Wall Street, Erbey’s options still have the potential to add tens of million dollars to his wealth.
It’s a far cry from $1.5 billion though, but beggars can’t be choosers.
And despite the litany of regulatory troubles Ocwen suffered through in 2014, the worst may be yet to come.
In an SEC filing from February, Ocwen disclosed that it faced 46 examinations from state regulators into one or more of its areas of operation in 2014, and stated that it closed 25 exams involving 19 states as of Dec. 31, 2014.But that still leaves 21 pending examinations from 15 other states.
“Based on our current engagement with state regulators, we are not aware of nor do we anticipate any material fines, penalties or settlements, although we do expect to resolve two open legacy matters for a total of less than $1 million,” Ocwen stated in the filing.
In a separate filing, Faris said that he is “very excited” about Ocwen’s future.
“Ocwen is committed to a culture of integrity, transparency and accountability,” Faris told investors.
“We will continue to change lives by helping homeowners in all that we do. We have learned from our challenges and look forward to restoring everyone’s confidence in Ocwen as we move into 2015 and beyond.”
But if Ocwen’s 2015 is anything like its 2014, the beyond Faris references may be pretty short.
