Altisource exits force-placed insurance “brokerage” business

Today, Altisource stated that it is discontinuing its lender placed insurance brokerage business (press release).

The discontinuation of this business line is expected to reduce Altisource’s quarterly diluted earnings per share by an average of approximately $0.50 – $0.65 for the period October 1, 2014 through December 31, 2015.

My guess is that Altisource was involved in taking kickbacks for force-placed insurance.  It is Ocwen that should decide whether or not to take kickbacks and it is Ocwen that would get to keep such kickbacks.  However, it could be the case that Ocwen took its kickbacks as a lump sum fee when it sold Beltline Road Insurance to Altisource.  See this Associated Press article which explains how it works.  The article quotes a source that argues that what Ocwen/Altisource are doing is wrong.

Currently, Erbey wants Altisource to get out of (kickbacks on) force-placed insurance due to “uncertainties with industry-wide litigation and the regulatory environment”.

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(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

AAMC: A wonderful asset management company

AAMC is the asset manager that controls the operations of RESI.  Asset management is a business with potentially wonderful economics because the returns on capital can be absurdly high.

Suppose that AAMC generates returns on equity of 16%.  After taking its fees, the owners of the ‘closed-end fund’ (RESI shareholders) would receive a 10% dividend yield on their REIT.  In the current environment of low interest rates and yield hungry investors, it is likely that such a REIT will trade at a premium to book value.  AAMC can then sell shares in secondary offerings to further grow their assets under management.  High management fees combined with a rapidly growing AUM base can translate into very high returns for AAMC shareholders.  The economics are somewhat similar to midstream GPs such as Kinder Morgan.

*Disclosure:  No position.

The market cap is around $1.49B.  The shares are quite illiquid.

Homebuilders revisited

In the past, I’ve written various posts about shorting US homebuilders.  This post look at lessons that could be learned from the experience.  I was largely right about which companies were the worst.  However, I was hurt by the favorable macroeconomic environment for homebuilders.

What Ocwen and Altisource do

Erbey’s empire of publicly traded companies (OCN, ASPS, HLSS, AAMC, RESI) is a little confusing.  Here’s my understanding of what his companies do.

Altisource recap

This is just my opinion, but I think that Altisource is pretty cheap despite being one of the fastest growing stocks around.  Here are the company’s historical earnings per share (diluted):

2008: $0.38
2009: $1.07
2010: $1.88
2011: $2.77
2012: $4.43
2013: $5.19
Trailing twelve months: $6.69

Despite this incredible growth, the current TTM P/E is 12.8.

(Ocwen/Altisource) Force-placed insurance

Altisource’s share price fell dramatically today following a letter by Benjamin Lawsky to Ocwen (PDF link) that finds problems with a practice called force-placed insurance.  Normally, lenders will require the homeowner to pay for hazard/property insurance.  Part of each mortgage payment goes into an escrow account that pays for insurance and property taxes.  However, there are some rare cases where the borrower pays hazard/property insurance separately.  Perhaps they already had insurance before getting a HELOC.  Or, they wish to exercise their right to choose their own insurance provider.  In those situations, a borrower who has run into financial difficulties may stop paying their hazard/property insurance because they have more important expenses to pay.  This exposes both the lender and the borrower to the risk of catastrophic damage to the home.  Mortgage contracts generally allow the mortgage servicer to obtain hazard/property insurance elsewhere on behalf of the borrower.

There are two issues with force-placed insurance:

1. It’s almost always significantly more expensive than the original hazard/property insurance policy.
2. The mortgage servicer can take kickbacks/commissions from the insurance company.