(OCN/ASPS) Benjamin Lawsky’s fishing expedition

Benjamin Lawsky has gone after Ocwen looking for wrongdoing.  So far it seems that he has found very little.  Here are some of the claims that he has made:

  • Ocwen’s rapid growth has hurt its ability to maintain the same servicing quality.  A press release on the NY DFS’s website (May 20, 2014) essentially makes these claims about Ocwen without naming the company specifically.  (But it’s pretty obvious that he is implying Ocwen with the reference to 70% lower costs.)
  • Ocwen is potentially harming homeowners or MBS investors due to the conflicts of interest between Bill Erbey’s publicly traded companies.  See the February 26, 2014 letter (this Housingwire article provides some background).
  • Ocwen may be harming homeowners (and MBS investors) by taking kickbacks on force-placed insurance.  Housingwire has an Aug 2014 article that provides some context.
  • Ocwen has “backdated” some of the letters it has sent homeowners, potentially hurting their ability to stay in their home with a loan modification.  Here is a copy of their letter dated October 21, 2014: 243853685-Lawsky-Ocwen-Letter

It seems to me that nothing has come out of his previous claims.  I’m actually surprised that nothing came out of the force-placed insurance accusations because many mortgage servicers have paid settlements over such practices.  Unfortunately I was never able to figure out if Ocwen was guilty or innocent when it comes to taking kickbacks.

Regarding Lawsky’s latest set of claims, Ocwen has issued a press release that tries to clarify the situation:

“Ocwen regrets that, due to software errors in our correspondence systems, we inadvertently sent improperly dated letters to some borrowers. As always, our goal is to avoid foreclosure. In the case of the 283 borrowers in New York who received letters with incorrect dates, 281 are currently borrowers with us. We are continuing to review the rest of the cases. We believe that we have resolved the letter dating issues that have been identified to date, and we continue our investigation as to whether there are additional letter dating issues that need to be resolved. We are working with and fully cooperating with DFS and the Monitor to address their concerns.”

Ocwen says that the backdating was unintentional and due to a flaw with their systems.  That 281 of 283 are still borrowers suggest that 281 out of 283 are still in their homes.  The remaining 2 borrowers may have lost their homes.  It is likely that they would have lost their home anyways though the wrong dates on Ocwen’s letters could have caused them to lose their home unnecessarily.  2 borrowers who may or may not have been hurt by Ocwen’s errors are not a big deal.

Recall that Ocwen has undergone a great deal of scrutiny because the CFPB and NY DFS have installed monitors in the company.  If Ocwen has major problems with its loan servicing, these issues likely would have come out by now.

If you look around online, all the major mortgage servicers have generally made far more serious errors.  The robosigning controversy is just one of the many mistakes mortgage servicers have made.  Robosigning meant that scores of homeowners did not receive due process when they had their homes foreclosed on.

Ocwen’s correction

Ocwen later issued a second press release correcting its earlier statement:

“Ocwen wishes to correct its statement in a press release earlier today that 283 borrowers in New York received letters with incorrect dates. Ocwen is aware of additional borrowers in New York who received letters with incorrect dates but does not yet know how many such letters there were. Ocwen is continuing its investigation into these matters. We are working with and fully cooperating with DFS and the Monitor to address their concerns.”

I’m not that bothered by the existence of other letters with incorrect dates.  These are not meaningful errors compared to all of the other mistakes Ocwen and other servicers have made.

The bottom line

I think that the stock market has made a mountain out of a molehill.  Normally, it is ridiculously easy for a regulator to find wrongdoing.  All regulators have to do is to investigate an investment bank, where the participants are highly incentivized to rip off their clients in unethical ways.  Instead, he has gone after Ocwen and hasn’t found much wrongdoing.

Nonetheless, Ocwen and the other Bill Erbey companies have seen their share prices fall dramatically.  Ocwen is down 61%.  Altisource is down 47%.  I think that this is a massive overreaction.

What I’m doing

I sold CACC shares and covered some of my shorts to buy more shares of OCN and ASPS.  All of the publicly-traded Bill Erbey stocks (OCN, ASPS, RESI, AAMC, HLSS) have traded down today.

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22 thoughts on “(OCN/ASPS) Benjamin Lawsky’s fishing expedition

  1. It sounds like the WFC MSR deal will be further delayed though. So I’m not sure how OCN and by extension ASPS will continue growing their revenues if the MSR acquisition pipeline is frozen, even if as you say the issues being raised are molehills…

  2. I think the market is assigning a very low probability to the WFC MSR deal. so we don’t have to worry about that anymore!

    Glenn, what’s the basis for your complacency? Sounds like you’re not taking any of this seriously…How do you think the whole saga is going to play out?

    • A lot of companies that harmed consumers paid a settlement and moved on. This is what happened with the CFPB and its settlement with Ocwen and the big banks. In this case, it seems like Lawsky hasn’t found wrongdoing on Ocwen’s part. And frankly, Lawsky is basically extorting Ocwen for a settlement. He is playing dirty and not acting in the public’s best interest. Perhaps Lawsky is being greedy and hoping for a huge settlement like with the NY DFS’ settlement with investment banks.

      In any case… both sides will probably settle and life will move on. I think the fears have been massively overblown. If Ocwen did something wrong, then they’d settle. If Ocwen didn’t do something wrong, then even better because the settlement will be lower.

      • Or here’s another way. Think of all of the awful things that can happen to a company and rank them. Being investigated by an Elliot Spitzer-type character (Benjamin Lawsky) just isn’t that awful. I’d rather have that problem than problems with derivatives, a securities lending division owning toxic CDOs, disruption by new technology, etc. etc.

      • I don’t think it’s as harmless as you make it out to be, since Lawsky can essentially halt OCN’s growth by preventing any further acquisitions. And if it was easy as a settlement, I’m sure Erbey would’ve done that long ago. Lawsky has the leverage here – every time he sends a new letter with concerns, OCN gets hammered, and he knows it. The buy-the-dippers were probably thinking the same thing in feb and aug, but the truth is noone but Lawsky knows when this will end. What’s the stop him from sending another letter in 2 months and creating another bloodbath in OCN?

        I think Erbey is trying to cooperate as much as possible because he wants this settled properly once and for all, but Lawsky’s game plan so far seems to be to drag this out as long as he can.

  3. And interesting point is that Cuomo, lawsky’s boss is up for reelection in 2 weeks. That could be the end of all this. He basicly found a mistake on Ocn’s end, so he can move on without losing face.

    • -They bought back a lot of shares.
      -The foreclosure process lengthened due to CFPB settlement. This has pushed back revenues from foreclosure services a little bit, but also helps ASPS generate more revenues.
      -Erbey asked for ppl not to ask questions about Ocwen’s letter from the NY DFS.
      -Not a lot of analyst questions on the conference call.

  4. Glen what do you make of this quote:

    Regarding the investment in cleanup calls relating to MBS, some of these whole loans are left over. Do you plan to sell them to potentially Altisource Residential? Or would you expect it to be bid out to several parties?

    William Charles Erbey – Executive Chairman and Chairman of Executive Committee
    We would have to bid those out. We just can’t assign them to one company. But I think you’ll see a large — it will create a meaningful amount of product that will be coming to market as a result of that.

    Kevin Barker – Compass Point Research & Trading, LLC, Research Division
    Can RESI participate in these auctions? Or is that off limits?

    William Charles Erbey – Executive Chairman and Chairman of Executive Committee
    That would be something you’d have to ask RESI.

    Im trying to piece together AAMC, and I feel like Im just missing something there.

    • I don’t think that RESI would buy those homes from Ocwen. When Ocwen takes control of all those loans, some of them will be performing loans, some non-performing, some in foreclosure, etc. etc. It makes sense for Ocwen to use its existing skills to manage the non-performing loans. I don’t think that they will sell any NPLs given the value that they can create in working out those loans. They will likely only sell NPLs after they become REO.

      RESI on the other hand wants to buy NPLs so that the Ocwen playbook can be applied to those loans. They haven’t been buying REO directly. And they’ll probably stay out of that because that’s not where RESI+Ocwen’s strengths lie.

      • Sorry, I misunderstood what a whole loan is. I’m not sure why Resi would buy a whole loan. I would think that it would make sense for RESI to buy assets in order of risk/reward:
        – NPLs
        – REO
        – Houses with rental tenants in them
        – Whole loans

        I think they will focus only on NPLs.

    • In the long run, it could be that AAMC is worth the most and then ASPS and then OCN and then RESI and then HLSS.

      In the short run, I think OCN is the cheapest followed by ASPS if one were to sell everything to private buyers.

      However, do your own homework. I could be wrong.

  5. Glenn –

    Is this why you started buying OCN recently instead of just ASPS? If you think AAMC may be worth the most, why haven’t you invested in it yet? You mentioned in an earlier post prior to this one that you had 1/3 of your portfolio invested in ASPS. Care to share how much is in it now with your recent addition?

    Thanks.

  6. At what point do you get in AAMC? When they are on schedule with the 1000 or so rentals by the end of the year? If resi announces more juicy acquisitions?

    • Depends on the ROE and RESI’s assets under management.

      I don’t think that the economics of renting homes is that attractive. 10% of the rental income might go to property management. There isn’t a lot of room for value creation by lowering expenses there. You might see RESI try to “sell” rental units via non-recourse securitizations.

      I’m much more interesting in RESI flipping non-performing loans. The banks suck at it and there’s a lot of room for value creation. They rarely renovate and market the properties properly. And Ocwen is working on reducing the commissions paid to real estate agents.

      • Well AMH is pulling it off with a 5% yield on unlevered assets? And they have higher costs and bought at lower discounts? It seems a better strategy then just flipping them right away. First you get some rental yield when demand for rentals is high, and when demand for rentals is going down you sell them for a bigger profit later on when house prices are higher.

        Also AAMC and RESI’s AR state that the rental aspect is an important part of the strategy.

      • Well I suppose it will always depend on the economics of renting out a house versus selling it. Cap rates will fluctuate over time. When cap rates are high, you want to rent out houses. When cap rates are low, you want to sell houses.

  7. Thanks for the explanation. So did you purchase some OCN because it’s the cheapest in a private transaction even though ASPS is a higher quality business?

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