The consent order is now up on the DBO’s website (PDF). The original issue seemed to be that the DBO requested information on 10 + 1200 + 120 loan files and did not feel that Ocwen fully complied with its request. The consent order now dictates that an auditor will look into many aspects of Ocwen’s business including “the adequacy of Ocwen’s staffing levels” and “staff training”. It seems to me that the DBO has decided to change the rules on Ocwen.
*Disclaimer: I am definitely NOT a lawyer.
In the past, it didn’t seem to be the case that servicers were legally required to maintain certain staffing levels. For example, this webpage summarizing of the California Housing Bill of Rights does not mention anything about the servicer’s staffing levels. The chaptered bill text does not seem to contain the word “staff”. This strikes me as the DBO deciding to change the rules of the game.
It is highly likely that the auditor will find some problems at Ocwen because all mortgage servicers will make mistakes. I do not believe that the DBO or California mortgage law has defined what an acceptable error rate is (or what acceptable staffing levels are, etc. etc.). So, they can put the goalposts wherever they want. If they can put the goalposts wherever they want, then I think that the DBO will be able to use servicing problems as a pretext to go after Ocwen and to punish them. In contrast, the CFPB has been a more reasonable regulator for Ocwen because it has clearly defined what the acceptable errors rates are for its compliance metrics. While the CFPB has been continually adding more compliance metrics, I believe that it has behaved far more reasonably than the NY DFS or the California DBO.
At the end of the day, I think that Ocwen’s operating expenses will continue to go up due to the current regulatory environment. As well, I believe its nonagency MSRs will become less profitable due to Altisource’s decision to exit the lender placed insurance “brokerage” business. The regulatory and litigation issues will reduce the value of its MSR portfolio. I do not have access to current market pricing on MSRs so I do not have a means to quantify the current market value of Ocwen’s assets beyond what Ocwen provides in its investor presentations and SEC filings.
The bigger picture
So far, Ocwen’s long-term advantages as a low-cost operator seem intact. This could change if management is not as good without Bill Erbey around.
The nasty regulatory environment creates slightly bigger barriers to entry. However, the regulatory environment is also stifling subprime lending and eroding the size of the subprime MSR market. In the shorter-term, I think that the big banks will be strongly incentivized to sell off their subprime MSRs portfolios given the regulatory climate, reputation risk and litigation risk (e.g. big banks have been sued over kickbacks on force-placed insurance). Wells Fargo already tried to sell subprime MSRs to Ocwen but unfortunately the deal was scuttled by the NY DFS. Ocwen’s future returns on invested capital will depend on the volume of subprime MSRs it can buy (limited by what regulators will allow it to buy) and the pricing on those purchases. A large number of motivated subprime MSR sellers and a limited supply of buyers may mean attractive prices for Ocwen someday… even if Ocwen were to try to dramatically grow its market share in a rapidly shrinking market. Once the subprime MSR opportunity gets smaller, Ocwen will need to find something else to do. This will be a big problem if it cannot stick to its bread and butter.
Over the past year, Ocwen’s share price has fallen dramatically. In my opinion, a good portion of this decline was justified. However, I think that investors have overreacted. In October 2014, Ocwen repurchased shares at an average price of around $23.63 (See Note 23 in the 10-Q). At the time it was negotiating with the NY DFS (the settlement announcement was on Dec 22) and would have known that the California DBO was threatening to revoke its license (around October 3). Ocwen’s current market price is well below the $23 it paid for share repurchases a quarter ago.
*Disclosure: Long OCN and ASPS.