dealbook.nytimes.com | January 4, 2015
By Michael Corkery
The mortgage industry had high hopes for Ocwen Financial. The company’s chairman, William C. Erbey, had years of experience servicing subprime loans and helping financially troubled borrowers.
But New York’s top financial regulator said that as its business grew, Ocwen subjected borrowers to the same problems as the big banks: missing paperwork, improper foreclosures and robo-signings.
On Monday, Mr. Erbey agreed to step down as chairman of Ocwen, one of the nation’s largest mortgage servicers, as a part of a settlement with Benjamin M. Lawsky, New York’s superintendent of financial services.
The broad settlement capped an aggressive investigation by Mr. Lawsky’s office into Ocwen’s servicing practices and corporate governance. In addition to giving up his top post at Ocwen, Mr. Erbey agreed to step down as chairman of four other companies that he leads as chairman, after Mr. Lawsky’s office cited conflicts of interest.
Ocwen will also pay $100 million for foreclosure relief and community redevelopment programs and $50 million to New York residents whose mortgages have been serviced by the company. New York borrowers whose houses have been foreclosed by Ocwen since January 2009 will receive $10,000 each.
“We believe this agreement is in the best interests of our shareholders, employees, borrowers and mortgage investors,” Ocwen’s chief executive, Ronald M. Faris, said in a statement.
Even after the settlement, Ocwen will remain on a tight regulatory leash. An independent monitor will remain in place at the company for an additional three years.
Instead of bringing relief, the agreement seemed to only deepen investors’ concerns. Ocwen’s share price fell by as much as 31 percent on Monday afternoon, closing down 27 percent, at $16.01. In October 2013, the stock traded as high as $59.97.
Mortgage servicers perform crucial functions that affect millions of borrowers. Servicers collect payments on loans, modify mortgages to make them more affordable and carry out foreclosures. As banks struggled with a crush of mortgage defaults following the financial crisis, Ocwen’s supporters hailed the company as a new model of servicer that would do a better job than the large banks, which could not keep up with the influx of troubled loans.
Some mortgage analysts said that Ocwen was more efficient and nimble than the big banks — and was more likely to give borrowers a good deal in their loan modifications.
Wall Street flocked to Ocwen’s stock as the company took on billions of dollars of servicing business from the banks. Some consumer advocates even said the company was achieving good results for homeowners. In Ocwen’s view, it has been modifying a large number of its loans, and the company says that the borrowers of those loans have been slipping back into default at a lower rate than on loans serviced by large banks.
As of September, Ocwen had modified 60.7 percent of the loans contained in subprime mortgage bonds, compared with 60.8 percent for JPMorgan Chase, according to an Ocwen presentation. But Ocwen said that 25.9 percent of its loans had redefaulted, compared with 28.7 percent for Chase.
The settlement is a blow to Mr. Erbey, a former executive in the finance unit of General Electric who was praised for devising an effective way to modify troubled mortgages — a goal that eluded many large banks following the financial crisis. Friends and colleagues have described Mr. Erbey as something of a financial wizard who devoted his life to his companies.
Mr. Lawsky’s office has been investigating Ocwen and Mr. Erbey’s other companies for years. The investigation found numerous problems, including bookkeeping errors and evidence of wrongful foreclosures.
An independent monitor was installed in the company last year, but Mr. Lawsky’s office said that problems continued to occur.
In February, Mr. Lawsky’s office halted the transfer of $39 billion of mortgage servicing rights to Ocwen from Wells Fargo — a move that shook investors’ faith that the servicer would be able to grow under such a tight regulatory yoke. Last month, Ocwen said it had officially terminated the deal with Wells.
The state regulator also found instances of conflicts between Ocwen and four other companies that Mr. Erbey led as chairman. The companies do things like buying up delinquent loans and renting out foreclosed houses.
For example, Hubzu, a subsidiary of one of the companies, provides an online auction site which hosts nearly all of Ocwen’s auctions. In some cases, Hubzu charged Ocwen more than it did other customers. Mr. Lawsky’s office said those additional charges were then “passed on to borrowers and investors.”
The five companies were created on the theory that they would be worth more separately than if they were included in a single entity. In an interview this year, Mr. Erbey said that spinning off multiple companies also made it easier for investors to understand what each entity did.
To address the potential conflicts, the settlement requires that Ocwen expand its board of directors to include two independent board members, who cannot own equity in any of the other related companies.
Ocwen’s board must also consult with the monitor to determine whether the independent director should approve certain transactions with related parties.
Nancy Duffy McCarron, CBN 164780
Attorney, Real Estate Broker, BBB Arbitrator, CA Notary Public
Certified Forensic Loan Auditor, Property Manager
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