William C. Erbey, the executive chairman of Ocwen Financial, is a billionaire with a problem. After years of homeowner grievances, Ocwen has become ground zero for regulatory shelling by government agencies — and some members of the investment community aren’t happy with Erbey, either.
What do all these folks have against the 64-year-old Erbey, who cut his financial teeth as head of GE Capital’s mortgage Insurance unit in the early 1980s? After all, he looks kindly enough: more like a 1960s encyclopedia salesman than the head honcho of the country’s largest nonbank mortgage servicer.
The problem, it seems, is that even as Erbey’s power has grown, so too has the number of homeowners complaining about how their mortgages have been serviced — close to 9,500 since 2011, according to the Consumer Financial Protection Board (CFPB). In December 2013, the CFPB teamed up with authorities from 49 states to force Ocwen to settle allegations that the servicer refused to honor agreements with previous servicers, improperly denied homeowners loan modifications and levied unauthorized fees and penalties upon them.
According to Richard Cordray, head of the CFPB, “Ocwen took advantage of borrowers at every stage of the process.” In response, Cordray and his allies ordered the company to provide $2 billion in the form of principal loan reductions to homeowners struggling to stay afloat; there was also a provision that $127.3 million in refunds be set aside to pay the approximately 185,000 people whose properties had already been foreclosed upon.
Though the settlement didn’t force Ocwen to actually admit to wrongdoing, it was just the latest round in a series of escalating regulatory actions that have put Erbey and his empire in an increasingly unflattering public light.
Erbey’s tangled woven web
Now, William C. Erbey isn’t the kind of guy who likes to spend his considerable wealth on the accoutrements of high living. It’s well-known in the industry that his all-work-no-play approach to business has paid off in spades, allowing him to create a matrix of companies that focus on the millions of Americans over their heads in mortgage debt.
In addition to Ocwen Financial — a servicer which collects monthly mortgage payments, modifies loans and initiates foreclosures — Erbey is chairman of the board and the largest shareholder for four other real estate companies that step in when a foreclosed-upon resident steps out. There’s Altisource Portfolio Solutions, which runs Hubzu.com, a real-estate site that bills itself as “the easy way to buy and sell homes online” and where a former homeowner’s now bank-owned property can join tens of thousands of others like it for a quick, down-and-dirty sale. Or there’s Altisource Residential Corporation, which might decide to re-purpose a home as a rental property after acquiring it through a foreclosure auction or directly from the foreclosed home’s investor. Altisource Asset Management offers reinsurance and title services, and Home Loan Servicing Solutions exists only as a holding company that purchases assets from—you guessed it — Ocwen.
And Erbey knows how to save a corporate tax buck or two. Ocwen and Altisource Asset Management are sheltered in an economic development zone in the Virgin Islands; Altisource Portfolio Solutions and Altisource Residential Corporation call Luxembourg home, and Home Loan Servicing Solutions is headquartered in the Caymans.
Erbey’s efforts in creating a mortgage-servicing domain have certainly made him the envy of more than one billionaire investor, including Leon Cooperman, the scion of the heavyweight hedge fund Omega Advisors, who called him “brilliant” in a recent New York Times article.
But New York’s increasingly muscular Department of Financial Services, helmed by a young former prosecutor named Benjamin Lawsky, has been watching Erbey too. This February, in a letter sent to Ocwen’s chief counsel, Lawsky “[raised] 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 also mused that “a tangled web of conflicts could create incentives that harm borrowers and push homeowners unduly into foreclosure.” According to some critics, Ocwen has been doing just that: deliberately edging Americans into defaulting on their loans so that those other jewels in Erbey’s corporate crown can prosper.
Ocwen denies that there’s any sort of “misery hedging” taking place; a spokesperson told the New York Times that the corporation keeps a “strictly arms-length business relationship” with Altisource. But try telling that to Brad Smith, a Georgia resident who visited a house he owned that was in default with Ocwen but not yet in foreclosure. When he arrived on January 21, Smith says he found the doors smashed and the locks re-keyed, despite the fact that he had clearly posted notices indicating the house was not abandoned and certainly not ready for the foreclosure auction. Those notices also included contact information; Smith says he never got a heads-up. He did, however, find a note from the company that did the handiwork: Altisource.
According to homeowner advocate Chris Wyatt, who’s examined Erbey’s dealings extensively for two years, one of the real estate services provided by Altisource is so-called “property preservation.” When it comes to major bank mortgage services, corporations such as Wells, Chase and Bank of America often outsource services like property inspections, foreclosure sales, auctions and rentals to independent third-party companies to prevent any perception of impropriety relating to the servicing and disposition of the loan. But for Erbey’s customers, Wyatt says, the homeowner’s fate and the fate of their home are frequently controlled by any one of his companies, giving special meaning to Altisource’s motto: “Thinking Ahead, Delivering Today.”
Wyatt claims this business strategy gives Erbey’s empire a leg up, so to speak, regarding which homes in the Ocwen portfolio are about to go into foreclosure. If Altisource has access to this knowledge — including how much is owed by the homeowner, the value of the collateral and the condition of the property — it could then make certain decisions about the disposition of the property that will maximize profits for one or all of the corporations. These are presumably questions that Lawsky will be looking into as he investigates the possible links among them.
This comes on the heels of other Lawsky-driven initiatives, including a December 2012 demand that Ocwen place an independent compliance monitor inside the company to make sure it conformed to agreements designed to put an end to any “servicing practices that were depriving homeowners of the opportunity to avoid foreclosure.” And in February of this year, Lawsky paired his warning with action: He halted the transfer of some $39 billion worth of mortgage servicing rights (MSRs) from Wells Fargo to Ocwen until assurances are given that the company could properly service this new wave of homeowners, a problem which has plagued Ocwen for years.
Homeowners still suffering
Likely thanks to the regulatory action by New York’s DFS and CFPB, Ocwen’s stock valuations have taken quite the hit. Between the first of the year and the end of February, the company dropped nearly 30 percent in value. That’s resonated with some heavyweights in the mutual fund world like BlackRock and Pimco, who aren’t thrilled by the prospect of losing any shareholder income as the result of principal reductions for underwater homeowners memorialized in the December 2013 CFPB settlement. Recently, the Association of Mortgage Investors claimed that the settlement was “potentially harmful to mortgage bond owners,” and promised some action down the pike. “Look for a forthcoming letter to Trustees, Mast[e]r Servicers,” it announced on Twitter.
And in a rather amusing turn, on March 19, a California-based hedge fund called Glaucus Research — an investor in Altisource Residential—posted a video online using a familiar clip from the movie “Downfall” to parody Erbey’s investment strategy. Glaucus has also threatened to sue Altisource Residential’s independent directors.
As Ocwen struggles to satisfy regulators and investors, however, there are still some 1.7 million homeowners currently on the servicer’s roll — and many of them are still facing problems. Last November, I documented the plight of three specific Ocwen clients trying to survive foreclosure proceedings on their homes; all three are still floundering around waiting for answers.
Wyatt, who has been working with those homeowners in addition to others, has started a campaign on Change.org to document the trials and tribulations of trying to deal with Ocwen representatives. With a Texas homeowner’s permission, Wyatt recently recorded a phone call in which the customer tried to clarify some issues arising from charges on his monthly mortgage statement, including a $10.50 property inspection fee. Although the invariably polite customer service employee tried to justify the charge as legitimate, Wyatt later pointed out (citing his own experience as a former Litton Loan servicing executive) that a property inspection should have only been carried out if the homeowner was in default with his loan. In this case, the homeowner was current.
It gets worse, though. On the same call, the Ocwen representative indicated that it would take 24 hours for the company to process the payment once the homeowner paid via Ocwen’s website. That’s a no-no, according to Wyatt: a servicer is required by law to process a homeowner’s payment on the day it’s received. Anything else sets up a potential default situation, given that a mortgage company could post the payment after the due date.
On its own, the call would have been frustrating enough. But when Wyatt looked more thoroughly into the homeowner’s statement, he found evidence of more miscalculations from Ocwen.
Wyatt points out that this homeowner’s current statement — with a modification in place — shows a principal balance owed to Ocwen in the amount of $220,210, of which $9,124.84 is set aside in an escrow account to pay taxes and associated expenses. But the entire modified balance of the loan seems to be inflated, because it includes $3,211.32 in late charges that Ocwen had agreed to waive under the terms of the modification, an excess escrow amount of $6,668.84 and an additional $1,417.38 in unspecified fees and charges. In short, according to Wyatt, the homeowner now owes approximately $11,300 more than he should under the terms of the loan modification.
In a second recorded call, an Ocwen representative, confronted by Wyatt with the inconsistencies, couldn’t offer any compelling justifications for the problems encountered by the homeowner. It seemed to echo the often-bizarre experiences confronting homeowners seeking any information regarding their loans. These are the kind of hair-pulling stories that no doubt will leave Erbey’s empire vulnerable to further inquiries by federal and state regulators.
The empire strikes back?
Despite the tumult surrounding Erbey, he seems to have few plans to retaliate. A query to Ocwen’s chief spokesperson, Katarina Wenk-Bodenmiller, failed to elicit a response by the deadline. But the aforementioned CFPB settlement may not be as devastating to Ocwen as it initially appeared. As reported by David Dayen in The New Republic, Ocwen noted in a regulatory filing after the case that it would actually split the money owed to its foreclosure victims with some of their previous servicers, meaning only $66.9 million would actually exit Ocwen’s coffers.
While this may be a silver lining of sorts for the company, Erbey’s concern right now will likely be surviving Ben Lawsky’s inquiry into any conflicts of interest surrounding the empire. He’ll also be trying to open the $39 billion revenue stream of Wells Fargo servicing that the Department of Financial Services temporarily blocked. “We [at Ocwen] are working cooperatively with the New York Department of Financial Services to address its concerns that led to an indefinite hold on our transaction with Wells Fargo,” he’s recently been quoted as saying.
But betting on misery isn’t just the province of Ocwen. The whole mortgage industry remains riddled with problems — and whether they involve accusations of mortgage fraud, improper servicing procedures, or illegal foreclosures, nothing will change until there’s a concerted effort among both regulators and lawmakers to make homeowners a top priority.