(OCN/ASPS) Ocwen settles with the NY DFS, Erbey steps down

Ocwen has reached a settlement with the NY DFS on onerous terms.  Highlights are:

  1. Bill (William) Erbey steps down from every single company in his empire (OCN, ASPS, AAMC, HLSS, RESI).  It’s unclear to me whether he decided to join his wife in retirement or whether he was forced out.  I suspect that it is more of the former than the latter.
  2. Ocwen will eventually be able to buy more MSRs though it does not look like this will happen in the short term.  Firstly, NY DFS must appoint an Operations Monitor.  Then, the Operations Monitor will develop a set of benchmarks to measure Ocwen’s capability in boarding new MSR portfolios.  Once Ocwen can demonstrate that it can meet all of the benchmarks, Ocwen will be able to board new MSR portfolios.  Future servicing transfers are conditional on the NY DFS’ approval.  Its approval is “not to be unreasonably withheld” according to the consent order.
  3. The cost of servicing will go up due to more regulations.  For example, Ocwen must provide credit reports to borrowers in New York state if their credit was negatively impacted by Ocwen “regardless of whether such borrower’s loan is still serviced by Ocwen”.

For the original source material on Ocwen’s settlement, refer to:

  1. Ocwen’s 8-K filing.  The press release summarizes the terms of the settlement.  The 20 page consent order is also attached to the 8-K filing.
  2. The NY DFS’ press release.

Between Ocwen’s and the NY DFS’ press release, they paint a different picture as to Ocwen’s ability to buy future MSR portfolios.  The NY DFS press release states:

Ocwen will continue to not be permitted to acquire additional mortgage servicing rights (MSRs). Ocwen may not begin to acquire additional MSRs until and unless it receives prior approval from NYDFS, and meets benchmarks developed by the independent monitor concerning the adequacy of Ocwen’s onboarding process for newly acquired MSRs and its ability to adequately service both those newly acquired MSRs and its existing loan portfolio.

The consent order does allow Ocwen to acquire additional MSRs given certain conditions.  The press release misleadingly suggests otherwise.

The press release also takes a few digs at the CFPB (without naming it) when it explains why the loan modification promises under the CFPB consent order don’t mean much:

Ocwen may not use so-called “soft-dollar” mortgage modifications of loans it does not own to satisfy any of this $150 million penalty. As a servicer, Ocwen is already under a legal obligation to make such modifications if they are in the best interest of homeowners and investors. As such, soft dollar settlements do not represent either a punitive penalty to Ocwen for its misconduct or provide significant additional relief to consumers.

Implications of the restrictions on servicing transfers

  • Future servicing transfers will require the approval of the NY DFS “not to be unreasonably withheld”.
  • Because the benchmarks have not yet been announced, it is unclear how onerous they will be.

While I’m no lawyer, it seems that the wording of the consent order might be open to interpretation(?).  If the NY DFS really wanted to, I suspect that it could perform another ‘shake down’ on Ocwen and find ways to extort Ocwen.  This could be a big problem for Ocwen and Altisource in the future depending on what the benchmarks are.

Why did Erbey leave?

If I were in Bill Erbey’s shoes, I would feel a great sense of injustice.  The real reason why so many ordinary Americans are losing their homes is because of bad lending and bad actors.  The NY DFS did not go after the bad actors like the mortgage brokers, underwriters, ratings agencies, Fannie Mae (which issued risky loans though not as risky as what the private sector did), etc. etc.  Instead, the NY DFS went after the mortgage servicers which only had a very small role to play in making the foreclosure problem worse.  For the most part, mortgage servicers did not behave irresponsibly.  They are incentivized to modify loans so their incentives are mostly aligned with borrowers when it comes to avoiding foreclosure.  Erbey has put in a lot of work in making Ocwen good at giving out loan modifications.  Ocwen likely behaved more responsibly than many of its peers.

It is possible that Erbey decided to leave because his job isn’t fun anymore.  In my opinion, Lawsky’s crusade against Ocwen resembles hazing.  Lawsky clearly has an axe to grind.  In one of his speeches, he singled out Ocwen as an evildoer without naming the company directly (“one large non-bank servicer touted that it can service distressed loans at a more than 70 percent discount”).

Today’s consent order with Ocwen attacks the company for making sure that its employees follow the company’s scripted dialogue engines.  At the same time, the NY DFS attacks Ocwen for its employees giving conflicting information:

Despite these issues, Ocwen continues to rely on those systems to service its portfolio of distressed loans. Ocwen’s reliance on technology has led it to employ fewer trained personnel than its competitors. For example, Ocwen’s Chief Financial Officer recently acknowledged, in reference to its offshore customer care personnel, that Ocwen is simply “training people to read the scripts and the dialogue engines with feeling.” Ocwen’s policy is to require customer support staff to follow the scripts closely, and Ocwen penalizes and has terminated customer support staff who fail to follow the scripts that appear on their computer screens. In some cases, this policy has frustrated struggling borrowers who have complex issues that exceed the bounds of a script and have issues speaking with representatives at Ocwen capable of addressing their concerns. Moreover, Ocwen’s customer care representatives in many cases provide conflicting responses to a borrower’s question. Representatives have also failed in many cases to record in Ocwen’s servicing system the nature of the concerns that a borrower has expressed, leading to inaccurate records of the issues raised by the borrower.

The NY DFS has continually stretched the truth in its attacks on Ocwen.  Characterizing Ocwen’s letter dating errors as “backdating” is another example.  (Ocwen did not intentionally put the wrong date on its letters nor would it have any incentive to do so.  It has the right to say no to loan modifications because it has no legal obligation to essentially give free money to delinquent borrowers.)

(This section added 12/22/2014) Erbey will be completely gone

Erbey will not have any role at any of his companies according to the consent order:

Effective January 16, 2015, William Erbey will resign from his position as Executive Chairman of Ocwen, his position as Chairman of the Board of Directors of Altisource Portfolio, his position of Chairman of the Board of Directors of Altisource Residential Corporation, his position of Chairman of the Board of Directors of Altisource Asset Management Corporation, and his position of Chairman of the Board of Directors of Home Loan Servicing Solutions Ltd. Mr. Erbey will have no directorial, management, oversight, consulting, or any other role at Ocwen or any related party, or at any of Ocwen’s or the related parties’ affiliates or subsidiaries as of the date of his resignation. Effective at his resignation, Ocwen’s Board members and management will not disclose to Mr. Erbey any non-public information about Ocwen that is not available to other shareholders.

I would note that Erbey will not step down right away.  However, after January 15 2015 he will be completely gone.  He will not be allowed to have a role at Ocwen.  He will not be able to have access to any non-public information about Ocwen.

Implications of Erbey’s departure

In any case, regardless of why Erbey is leaving, his departure is not good news.  In my opinion, Erbey is unusually talented as a CEO.  He is the reason why Ocwen is able to service loans at a much lower cost than competitors.  There will likely be reversion to the mean in his successors; it is unlikely that they will be as talented.

Overall, the settlement does not strike me as a great one for Ocwen and Altisource shareholders.  It is onerous and does not completely clear the uncertainty over the companies.  On the other hand, there is a path for Ocwen to eventually execute its business plan and to buy up more MSRs.  I think that the consent order will make the whole industry fearful about future mortgage servicing costs.  It is likely that MSRs will trade at very depressed valuations and create opportunities for Ocwen to have high rates of return whenever it buys more MSRs.  Unfortunately it will be limited in its growth due to the consent order with the NY DFS.  It will not be able to fully capitalize on the opportunities created by more regulation.

Currently, I think that Ocwen and Altisource are very cheap.  Going forward, it is likely that both business will be somewhat above-average given that Ocwen is the only servicer that has successfully managed to offshore some of its operations.  I think that Ocwen will be able to retain its cost advantage going forward.  I think that the upside is lower given Erbey’s departure but there is still a lot of upside in the stock.  Unfortunately there is now some management risk.  If Erbey’s successors turn out to be terrible, then there is the possibility of losing money.  The risk/reward is still good but not as good as before.

*Disclosure:  Still long OCN and ASPS.  I do not plan on selling anytime soon.

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30 thoughts on “(OCN/ASPS) Ocwen settles with the NY DFS, Erbey steps down

  1. Glenn, you might find this of some interest.

    http://cleanupcall.blogspot.com/2014/12/musing-on-ocwens-liquidity-situation.html

    I wrote that a week ago and was worried about OCN’s liquidity. With the new settlement I’m even more puzzled. $150mm of penalty really isn’t that much – not enough to justify the way they acted with those ginnie mae EBO loans…Looking back, this could mean a) OCN was preparing for much larger fines and they’re pleasantly surprised by the $150mm, or b) or their liquidity was much weaker than I thought, that they needed to pinch every penny to handle the $150mm.

      • It is very, very clear by the statement from the DFSNY that he was forced to resign as part of the agreement. Literally the first sentence is “to address serious conflicts of interest…Erbey will step down”. They are not even letting him have a consulting role at ANY of the companies.

        I think you do your analysis a huge favor by trying to look at this in an unbiased way. Claiming Erbey may not have been forced out is preposterous and no one who isn’t biased could think that.

        Love the blog in general, though!

      • It seemed a little extreme to force him out of every company… including RESI and AAMC. RESI/AAMC have very little to do with mortgage servicing though they might get into insurance. It seemed to me that Erbey said “**** it, I’m retiring”. Part of that might be because living in the US virgin islands for half the year is no fun.

        It’s unusual for regulators to push people out without fining them or accusing them of a lot of wrongdoing. DaVita for example endangered its patients unnecessarily (some might characterize it as murder). Kent Thiry is still the CEO.

      • It seems like Erbey is doing a swan song to me. If he is the problem, then why is he allowed to stay on until Jan 2015?

        In any case, he will be gone and that is unfortunate for the longs (IMO). If he stayed the longs would make more money in the long run (e.g. over a timeframe of 3-10+ years).

  2. Erbey fell on his sword after spending 100s of millions in buybacks in all his companies. Either the guy was clueless or this was his trump card to allow his companies to stay in the market. Working at these companies was his entire life, why give up so easily unless he got assurances to remain in the industry? Totally unreal.

  3. WSJ language made it seem as though Erby’s departure was part of settlement:

    The executive chairman of Ocwen Financial Corp. will resign as part of a legal settlement with New York’s financial regulator, people familiar with the matter said, an extraordinary twist in a two-year-long battle over the mortgage-servicing firm’s practices.

    William C. Erbey, a billionaire who built Ocwen during more than two decades into the largest nonbank company handling mortgage payments and administering foreclosures, will step down by mid-January as part of a wide-ranging proposed consent order with the New York Department of Financial Services, these people said.

  4. Ocwen is going to exit the agency market and sell their MSRs. Didn’t catch if they are going to retain the sub-servicing or get out completely. That’s going to be material to Altisource.

  5. I believe one has to assume that Erbey sacrificed himself in the hopes of bringing the matter to a conclusion that was less onerous to the Ocwen complex overall. His departure generates a big headline for Lawsky (which is what he’s really after), and unreasonably punitive to shareholders of the company but it would be silly to suggest that it was done for any reason other than to shield the company from an even worse outcome. Whether it was the right move in terms of long-term shareholder value is anyones guess, but that it was done with the best of intentions for shareholders seems a reasonable conjecture.

  6. Glen – this stock has been an uphill battle for a while and it feels like that hill just got steeper. Apart from maybe a tradable bounce, what would be your reasons to continue to allocate capital here when there are plenty of other names with the wind at their back?

    • If OCN, NSM, and WAC will face the same set of rules and regulations, then OCN is the best stock to own because it’s cheap and it’s the low-cost operator. Given how onerous the NY DFS was on OCN, I think that WAC may be in big trouble. Both WAC and NSM may/will face issues over kickbacks on force-placed insurance.

      Given that Ocwen is the low-cost operator, it should be somewhat of a downhill battle for them going forward. Unfortunately they won’t be able to make a killing because I doubt that the NY DFS will allow them to continue their hyper-growth. But I could be wrong.

      WAC costs the most to borrow on IB (about 8.6%), then NSM 4.1%, then ASPS 2.6%, then OCN 0.8%. The short sellers rate OCN as the least bad.

      I have no idea about short-term trading.

      • I dont know glen, I don’t think you want to own any of them for more than a trade. They have all turned out to be disasters and OCN and ASPS are the worst performers of the bunch. I got stopped out of my OCN this morning, and cut my NSM in half.

  7. I cannot speak for Mr. Chan. But Buffett’s letter about Gieco back in the 70’s elegantly sums up my thinking on why OCN is probably a worthwhile investment in the long run.

    ““I have always been attracted to the low cost operator in any business and, when you can find a combination of i) an extremely large business, (ii) a more or less homogenous product, and (iii) a very large gap in operating costs between the low cost operator and all of the other companies in the industry, you have a really attractive investment situation. That situation prevailed twenty five years ago when I first became interested in the company, and it still prevails.”

    Now granted, the DFS monitors may impose additional constraints on profitability in the near-term but I think it is also reasonable to assume that OCN will not be placed at a permanent disadvantage relative to its competitors. If this is the case, and we assume that Erbey’s deputies can maintain the cost advantage that was heretofore incarnate at OCN, then stock is likely trading at a discount to its intrinsic value.

    • Do you think for a moment the customers of Ocwen have a smile on their face from their services? They are in the business of foreclosing on homes. That is an inherently risky business model. This is no different than being in the business of making safety helmets for football players. Even with the best of intentions you are going to get wacked by the regulators.

  8. So let’s say ASPS reaches 70$, would you sell? What if OCN reaches 25$?

    Im really rethinking this investment.

    I think OCN would be a great trade right now because it trades so cheap and a lot of panic is in the price. But i dont really like it anymore at higher prices.

    Part of the thesis was new MSR’s. But that seems dead right now. It seems the really distressed ones have been bought already. So that pretty much leaves banks, and they are going to be out of that one now.

    • They will be allowed to buy some MSRs. I think the NY DFS will limit Ocwen’s growth so that servicing quality does not drop.

      I would think about selling ASPS at $160 and OCN at $40.

      • Don’t you think ASPS will run into issues with their debt load? Ocwen is going to offload about half their MSRs so that’s going to hurt their cash flows. I guess they can aggressively pay it down assuming they didn’t blow it on buybacks at $50.

      • Ocwen will sell their agency MSRs, or sell excess servicing rights to them. Suppose they flat out sell the agency MSRs without retaining sub-servicing. They will be selling stuff with low delinquencies. Those MSRs don’t generate a lot of fees for Altisource.

        What Ocwen does with the excess cash is up to Ocwen. I think that they will buy high-delinquency subprime non-agency MSRs, though there will be limits as to how much they can buy due to the consent order. Depending on how much they buy, Altisource could stand to benefit. Otherwise Altisource will see its cash flows decline if delinquencies go down on Ocwen’s portfolio.

      • Call seemed to indicate that they wouldn’t be looking to purchase MSRs in the near future.

        The Company was vague in regards to how this is all going to work, but there is the possibility that the Prime sale constitutes a mandatory repayment on the term loan. It fits several of the criterion, though there is a reinvestment period in which they could channel the money into origination and the RMBS call strategy instead.

        They mentioned on the call that the goal was to return capital to shareholders and that there wasn’t much possibility of them reinvesting in MSRs.

        Impossible to really gauge without more information/guidance.

  9. Hi Glenn,
    Kudos for your blog, it is high up on my “quality blogs” list.

    A quick question.

    In the recent ASPS 10Q we can see in the segment revenue breakdown that out of $823 million in revenue, 502.7 million came from related parties (i.e. OCN).

    But the cost of revenue for the 502.7 million was only 27.9 million.

    (This line of the cost of revenue for related parties was not there till the 10Q for the second quarter, not even in the 10Ks. I find this odd as this is a very important disclosure.)

    This means that for the rest of the revenue that is derived not from related parties, 320 million, bears almost all of the COGS – just about 500 million.

    As I see it, if we net out related parties transactions, without OCN, ASPS is -172 million in the red already in the gross margin line.

    So the companies fates are tied together – if OCN dies or breaks the contract with ASPS, ASPS will probably go belly up. ASPS profits are actually a portion of OCN profits, the company was spun off from OCN but still exists as a department within OCN, a public one.

    As they are tied together so strongly, ASPS should behave as an option on OCN.

    Am I correct?

  10. Looks like Erbey ‘retired’ because he knew about all the unethical/illegal practices going on in his companies, and didn’t want to stick around for the nasty cleanup job. NY and now CA, that’s now 2 states….48 more to go

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