Erbey complex update: California DBO settlement

I’m not sure what the issue with the California DBO was.  The DBO needed information from Ocwen to figure out whether or not Ocwen was following California mortgage laws (California has mortgage laws that are very pro-consumer).  Ocwen seems to have attempted to provide all of the information requested.  They were late in doing so and the DBO was unsatisfied with the completeness of the information given to them.  It is unclear to me whether or not there are issues with Ocwen’s IT systems (or the implementation thereof) that is causing problems.

With the $2.5M settlement announced today, Ocwen has agreed to yet another monitor (PDF press release).  Presumably, this monitor will be able to figure out whether or not Ocwen is compliant with California mortgage laws.  I guess we’ll have to stay tuned for the results.

What might the monitor find?

I have no idea.

California mortgage laws bear some resemblance to the CFPB rules.  You should definitely look into the CFPB metrics that the CFPB monitor (Joseph A Smith) uses to measure Ocwen’s compliance with its CFPB consent order.  In the past, Ocwen was fully compliant.  However, a whistleblower came forward several months ago and raised issues with Ocwen’s Internal Review Group (IRG).  At the time, I believe Ocwen was buying back shares while management was aware of the whistleblower and the issues with the CFPB.

Now, the CFPB monitor has hired an independent firm to re-evaluate Ocwen’s compliance.  Some of the issues are:

  1. Letter mis-dating issues originally identified by the NY DFS.  Because the CFPB metrics stipulate certain timelines, getting the timelines wrong on Ocwen’s part would violate the CFPB metrics.
  2. There were issues regarding the selection of the loans that were reviewed by the monitor.

There is a court document that was filed regarding Ocwen’s compliance issue: https://www.jasmithmonitoring.com/omso/wp-content/uploads/sites/4/2014/12/Pldg-194-Monitors-Interim-Report-re-Ocwen-Loan-Servicing.pdf

The report contains a timeline of events and states that Ocwen has been co-operating with the monitor.  Ocwen has also made changes to the structure of its Internal Review Group.

The CFPB monitor commented (media article):

“I’m not saying everybody there did wrong,” Smith said. “The best you could say about it was it was sloppy. It could be more.”

Basically: Ocwen’s IRG did sloppy work.  There could be more.

California mortgage laws

Some of the more challenging parts of the California Homeowners Bill of Rights (summary and chaptered bill text) may be:

“[…] a specified declaration, notice of default, notice of sale, deed of trust, assignment of a deed of trust, substitution of trustee, or declaration or affidavit filed in any court relative to a foreclosure proceeding or recorded by or on behalf of a mortgage servicer shall be accurate and complete and supported by competent and reliable evidence.”

So here’s the problem: in many cases the mortgage ownership paperwork did not get transferred properly (or is lost) so the servicer would be unable to legally prove that they have standing to foreclose on a property.  I don’t know what Ocwen’s policy is in these situations.  I do not understand what happens in that situation.

In the past, the servicer would sue anyways on behalf of the mortgage investors without proof of ownership in hand.  The servicers would hire attorneys (at budget rates) to show up in court.  Many borrowers do not show up in court and automatically lose their case.  Of those who show up, many do not have the legal savvy to ask for proof that the mortgage investors legally own the mortgage in question.  If the borrower (or their attorney/lawyer) do ask for proof, the servicers’ attorneys may lose their initial attempt at foreclosure.  Some attorneys or servicers may have fraudulently fabricated documents to avoid this problem.  I believe the California HBOR was written to prevent these abuses.  Most of the time, the mortgage investors really do own the mortgage in question.  Unfortunately, the legal system allows savvy borrowers or their lawyers to scam the mortgage investors.  On the other side of the coin, sometimes servicers foreclose on the wrong house causing great harm to random people.

Where paperwork exists, I believe Ocwen will wait until the paperwork is transferred to them before foreclosing (this lengthens the foreclosure timeline).

EDIT (1/24/2015): Given the short turnaround times for the DBO’s information requests (usually several days), it may be unlikely that this was the issue.

Timelines

The mortgage servicer has to give the borrower a certain number of days to respond to certain events.  For example:

If a borrower submits a complete application for a first lien loan modification offered by, or through, the borrower’s mortgage servicer, a mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent shall not record a notice of default or notice of sale, or conduct a trustee’s sale, while the complete first lien loan modification application is pending. A mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent shall not record a notice of default or notice of sale or conduct a trustee’s sale until any of the following occurs:

(1) The mortgage servicer makes a written determination that the borrower is not eligible for a first lien loan modification, and any appeal period pursuant to subdivision (d) has expired.
(2) The borrower does not accept an offered first lien loan modification within 14 days of the offer.
(3) The borrower accepts a written first lien loan modification, but defaults on, or otherwise breaches the borrower’s obligations under, the first lien loan modification.
(d) If the borrower’s application for a first lien loan modification is denied, the borrower shall have at least 30 days from the date of the written denial to appeal the denial and to provide evidence that the mortgage servicer’s determination was in error.

We know that Ocwen has letter dating issues.  If there are also issues that affect Ocwen’s timing in proceeding with a foreclosure, then there are potential violations of California’s mortgage laws.

Implications of today’s settlement

It’s a good thing that the DBO is now working with Ocwen rather than threatening the company with great harm (e.g. removing its servicing license and potentially forcing Ocwen to have a massive fire sale of its MSRs).  The $2.5M payment is mostly immaterial relative to Ocwen’s market cap.

The compliance costs for Ocwen will obviously go up.  This will hurt a little.  I do not know how much this will cost Ocwen.  If the issues are related to the ones that is causing problems with the CFPB (and/or the NY DFS) then the additional costs from the California DBO may not be that much.  However, there will definitely be areas that do not overlap since California’s mortgage laws are very different than the ones in other states.

Overall I see this as a small setback for Ocwen.  In the long run this will look like a small bump in the road.  What the NY DFS did to Ocwen (blocking Ocwen’s ability to purchase MSR portfolios and to a smaller extent the large fine) was far worse.  If the DBO-appointed monitor finds major problems with Ocwen, then there is a chance that the issues morph into something very problematic for Ocwen.  There is uncertainty in the future because I don’t understand what the issues between the DBO and Ocwen were and how difficult it will be for Ocwen to fix them.

I believe that Ocwen and Altisource were repurchasing shares even knowing about these issues.  Altisource has since stopped repurchasing shares and has fired employees since it anticipates a shrinking MSR portfolio at Ocwen.  My theory is that Lawsky’s blocking of Ocwen MSR purchases has severely impacted these companies’ economics as Ocwen has been forced into runoff for the time being.  Until the NY DFS hires a monitor and Ocwen passes all of its benchmarks (no earlier than 210 days after the monitor is appointed?), Ocwen will be shrinking rather than growing.  Because Ocwen accounts for most of Altisource’s revenues and profitability, Altisource will be similarly affected.  (Altisource may suffer more than Ocwen from a shrinking MSR portfolio.)

EDIT (1/24/2015): I forgot to mention the following:

The settlement also prohibits Ocwen from taking on any new California customers until the DBO determines the firm can fully respond in a timely manner to future requests for information

Like the NY DFS settlement, this is bad for Ocwen as it prevents Ocwen from executing its business strategy.  The punishment dealt out so far seems like a lighter version of the NY DFS settlement.

Links

California Homeowner Bill of Rights blocks BofA foreclosure

*Disclosure: I am long OCN and ASPS.

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