Bernie Palmatier, who lives in a Victorian home he renovated in New Carlisle, Ohio, is one of thousands of property owners with grievances against Ocwen Financial Corp.
Ocwen, the largest non-bank mortgage servicer, sent Palmatier a letter in November saying it had taken over his loan. Palmatier, 72, said he was five months late on his payments and called Ocwen three times to find out how much money he owed to catch up. That only made matters worse.
“One person would say one number, another person would say another number, and when I called back to confirm, it was $600 higher,” said Palmatier, a self-employed job recruiter. “I had to pay whatever they told me. I still don’t know what all the extra money was for.”
Ocwen, controlled by billionaire founder William C. Erbey, agreed to a $2.1 billion accord in December to settle allegations by regulators that it had mistreated homeowners without admitting wrongdoing. Benjamin M. Lawsky, New York’s top banking regulator, said yesterday that he’s probing possible conflicts among Ocwen and four related firms that could harm borrowers and push homeowners into foreclosure. Shares of Ocwen fell almost 7 percent to $36.76 yesterday after plunging 29 percent since Jan 1.
Erbey, 64, and John Britti, Ocwen’s chief financial officer, didn’t return e-mails and phone messages requesting interviews.
“These agreements are fully disclosed in our public filings, and we believe them to be on an arms-length basis,” Katarina Wenk-Bodenmiller, a spokeswoman for Ocwen at Sommerfield Communications, said in an e-mailed statement. She said Ocwen would fully cooperate with the New York regulator.
Ocwen’s battle with regulators comes after Erbey turned the company into a powerhouse, more than doubling its servicing business last year. The firm has grabbed market share as Citigroup Inc., Wells Fargo & Co. and other banks retreat from the almost $10 trillion business of collecting mortgage payments.
In the last two years, more than $1 trillion in servicing rights have changed hands, with the biggest chunk going to Ocwen, according to Inside Mortgage Finance, a trade journal. Ocwen said in December that it employed about 10,800 professionals and staff worldwide.
In 2009 Erbey, Ocwen’s executive chairman, set up the first of four related companies that do business with each other. Altisource Portfolio Solutions SA is based in Luxembourg, and the others are in the Grand Cayman Islands and the U.S. Virgin Islands. Erbey is chairman of each of the four firms.
“Erbey and his team have grown this business massively,” said Daniel Furtado, a San Francisco-based analyst with Jefferies Group LLC who has a “buy” rating on the company. “He’s widely seen as the smartest guy in the servicing business.”
Home Loan Servicing Solutions Ltd. buys mortgage servicing rights from Ocwen and then hires it to collect loan payments. Altisource Residential Corp. purchases delinquent loans, including some from Ocwen, to turn into rental homes. It’s managed by Altisource Asset Management Corp. And Altisource Portfolio Solutions provides services to Ocwen’s portfolio.
“If a mortgage goes into foreclosure and you lose those servicing fees, so what,” said Christopher Wyatt, a housing consultant and former vice president at Goldman Sachs Group Inc.’s Litton Loan Servicing. “You can funnel it to one of your other businesses and still make money from it.”
Ocwen said at a 2013 investor conference that the four firms, or strategic allies, have sound corporate governance with separate boards and management.
Lawsky, the regulator, said in a letter yesterday to the company that two of the five companies had shared a chief risk officer. The practice was ended prior to Lawsky’s announcement yesterday.
“The facts our review has uncovered to date cast serious doubts on recent public statements made by the company that Ocwen has a ‘strictly arms-length business relationship’ with those companies,” Lawsky wrote.
Shares of Altisource Residential fell 7.4 percent to $26.72 yesterday.
Ocwen’s mortgage operation won high marks from housing advocates until the company went on his buying spree, spending more than $1 billion on servicing rights in the past two years.
As of mid-February, American homeowners had filed more than 9,000 mortgage-related complaints against Ocwen -- the highest number of any non-bank servicer, according to data from the Consumer Financial Protection Bureau in Washington. Bank of America Corp. has received more than twice as many complaints.
The consumer bureau sued Ocwen in December, alleging it failed to honor previous agreements with former servicers, denied loan modifications to those who should have qualified and imposed unauthorized fees on homeowners.
“Ocwen is one of the most complained about servicers when we ask housing counselors and lawyers what they are seeing,” said Kevin Stein, associate director of the California Reinvestment Coalition, a San Francisco-based consumer advocacy group. “We’re hearing a lot about foreclosing because of bad servicing practices. With this increase in volume, can the non-bank servicers maintain high quality standards and not just foreclose on people? That’s a big concern.”
In January, the Treasury Department issued a report on the performance of servicers in the government’s Home Affordable Modification Program that started in 2009. Ocwen was responsible for 79,156 loan modifications that later defaulted, the highest of any servicer. Ocwen’s 30 percent redefault rate was the third highest.
Ocwen executives tout their ability to run a lean operation and cut costs, partly by outsourcing work to India. Erbey said in an October call with investors that Ocwen has also been able to maintain its margins in the face of regulatory costs through improvements in technology.
“One thing I think we know how to do is to manage cost,” Erbey said.
Ocwen’s fourth-quarter net income rose 60 percent to $105.3 million, or 74 cents a share, compared with a year earlier, the company said in a statement today. Revenue more than doubled to $556 million.
“Longer-term we believe developments remain positive for our business,” Erbey said in the statement.
Erbey had a net worth of about $2 billion as of Feb. 25, according to data compiled by Bloomberg. At the end of 2013, he owned 13 percent of Ocwen and had stakes in each of the four related firms.
The executive said at a Boston University symposium five months ago that he decided to be a businessman at the age of 12.
“When I was very young I set some goals and was just very interested in management,” Erbey said. “Call it my misspent youth.”
He rose to president of General Electric Co.’s then-mortgage insurance unit before joining Oxford Financial Group, founded by Barry Wish. In 1988, Erbey and Wish started Ocwen. Wish is now on Ocwen’s board.
Under Erbey, Ocwen provided private insurance for residential mortgages, subprime loans, and also acquired distressed assets, including foreclosed properties and delinquent home loans, according to regulatory filings. Erbey helped take the company public in September 1996, and shares soared 40 percent on their first day of trading.
Outsourcing to India
Less than three years later, Ocwen closed its business of making loans to people with poor credit as the tech bubble was about to burst and focused on servicing those loans. The firm expanded through acquisitions and developed technology to allow it to grow more quickly.
These moves put Ocwen in a position to reap profits in the aftermath of the housing collapse in 2008 from millions of delinquent borrowers. Banks later faced regulations limiting the amount of capital they can risk on servicing rights, spurring them to offload the businesses.
Seizing the opportunity, Ocwen bought WL Ross & Co.’s Homeward Residential Holdings Inc. for $750 million. And the company won a $3 billion auction for Residential Capital LLC’s loan-servicing unit, owned by Ally Financial Inc., in 2012.
Erbey kept expenses low as his firm grew. He sold his Atlanta home in 2012 for $6.5 million and moved to St. Croix in the Virgin Islands, where Ocwen opened a call center. The operation is located in an economic development zone that provides tax incentives for 30 years. Tax rates can be as low as 3.8 percent, according Ocwen Chief Executive Officer Ronald Faris.
The company has 60 percent of its staff offshore, the largest number in the Indian cities of Bangalore, Mumbai and Pune, Faris said at a December meeting with investors. Ocwen plans to shift more staff overseas after recently opening an operation in the Philippines.
“It costs us one-tenth in India what it costs in the United States” to do business, Erbey said on a 2012 conference call.
In its investigation of Ocwen, the consumer bureau teamed with state attorneys general and state regulators. In December, Ocwen agreed with 49 states to provide relief for homeowners, pledging $2.1 billion toward writing down the balances of delinquent and underwater mortgages and compensating people who lost homes through erroneous foreclosure practices.
“Ocwen took advantage of borrowers at every stage of the process,” CFPB director Richard Cordray said in a Dec. 19 statement. “Deceptions and shortcuts in mortgage servicing will not be tolerated.”
In the consent decree, Ocwen said it would improve its oversight of its attorneys, bolster training for its employees, refrain from making collection calls when a borrower’s application for a modification is pending, and increase its staff. The decree Ocwen signed has many pages of other standards it has to meet.
“We continue to focus our attention on regulatory compliance and on assisting struggling homeowners,” Erbey said in the statement today. “During 2013 we made significant progress in enhancing our compliance management system. We helped a record number of struggling homeowners.”
Last year Ocwen helped more than 200,000 borrowers receive modifications and other loan resolutions to avoid foreclosure, according to the company.
In February, Lawsky, the New York regulator, blocked a deal by Ocwen to purchase servicing rights on $39 billion of loans without government backing from Wells Fargo & Co., the nation’s largest lender.
Lawsky said in prepared remarks for the New York Bankers Association Annual Meeting and Economic Forum this month that independent servicers were getting “too big, too fast.” He said he favored “special scrutiny” of how firms can achieve promised cost savings without cutting corners.
“Regulators have to ask whether the purported efficiencies at nonbank mortgage servicers are too good to be true” Lawsky said.
A week after Lawsky’s speech, Ocwen raised $123.6 million by selling bonds tied to fees from managing government-backed loans. It was the first securitization of its kind, said Kevin Barker, an analyst who covers the firm with Washington-based Compass Point Research & Trading LLC.
“Erbey is a pioneer in the mortgage servicing industry,” Barker said. “The main challenge for Ocwen now is dealing with the regulation. Overall it’s more a question of whether they can execute well.”