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

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. 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. 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:

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. 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.