New York State Superintendent of Financial Services Benjamin Lawsky has forced the resignation of the chairman and CEO of a mortgage servicer, Ocwen over a range of borrower abuses in violation of a previous settlement agreement, including wrongful foreclosures, excessive fees, robosigning, sending out back-dated letters, and maintaining inaccurate records. Lawsky slapped the servicer with other penalties, including $150 million of payments to homeowners and homeowner-assistance program, being subject to extensive oversight by a monitor, changes to the board, and being required to give past and present borrowers access to loan files for free. The latter will prove to be fertile ground for private lawsuits. In addition, the ex-chairman William Erbey, was ordered to quit his chairman post at four related companies over conflicts of interest.
The Ocwen consent order shows Lawksy yet again making good use of his office while other financial services industry regulators are too captured or craven to enforce the law. Unlike other bank settlements, investors saw the Ocwen consent order as serious punishment. Ocwen’s stock price had already fallen by over 60% this year as a result of this probe and unfavorable findings by the national mortgage settlement monitor, Joseph Smith. Ocwen’s shares closed down another 27% on Monday. And that hurts Erbey. From the Wall Street Journal:
Mr. Erbey’s holdings of Ocwen—he is its largest shareholder, with 15%—have plummeted in value to about $450 million at the close Friday from about $1.24 billion at the peak in October last year, according to regulatory filings.
So make that now more like $328 million.
How did Ocwen get in so much hot water? The truth is that despite the much-ballyhooed mortgage settlements of 2012, perilous little has changed in the servicing industry. The industry needs to be restructured in a fundamental way, but the bank-coddling Obama Administration would never entertain such an idea.
The underlying problem is that the economic incentives of servicers are all wrong. They are not paid to do well for the investors that they supposedly work for. They instead receive a servicing fee, float, and get to keep various fees charged like late fees. The result is that servicing is run as a systems intensive, highly routinized business. That works well for borrowers who pay on time.
But a borrower who becomes delinquent requires much more attention , particularly if he gets in enough trouble that it might make sense to give him a modification. But perversely, servicers are not paid if they give a borrower a mod, even though that is usually a win/win for the borrower and investors. But they are paid to foreclose, so their incentives are to keep a borrower moving towards foreclosure if he gets in trouble, and “trouble” can be simple clerical error. For instance, a dozen years ago, a colleague who is a mortgage securitization lifer sent in two mortgage payments to make sure he didn’t have a late payment while on a long vacation. The bank credited two payments in one month and treated the next month as being late. He was able to get it straightened out, However, he is convinced that if that had happened in the last eight years, he would not have been able to get his records corrected and he would have been on his way to foreclosure.*
The problem is that servicing fee structures were designed assuming a low level of delinquencies, but as we know, that isn’t how it played out. But the payments to services aren’t adequate for them to service a portfolio with more than a trivial level of delinquencies and defaults. So to keep from losing money if their book goes sour, servicers resort to fraud.
And the combination of building what amounted to factories when parts of the business needed to be high-touch, plus failure to comply with strict legal requirements for transferring mortgages to securitization trusts has created an operational nightmare. We wrote this about Bank of America after the fiasco of OCC-mandated foreclosure reviews was abruptly shut down, but it is almost certainly true for all servicers:
At Bank of America, the disorderliness of the project is only part of the story. Focusing on that aspect serves to exculpate OCC, the bank and Promontory. The dirty secret of these reviews is they could never have been done properly. There was no pre-existing, internally consistent, complete and provably correct account of a customer and his loan in the Bank of America systems. All the dysfunction of the reviews was inevitable given the state of the records. The only course of action possible was a cover-up; the only open question was how much effort would be expended to create the appearance a thorough investigation was made. Ironically, we’ve been told by high level insiders that Bank of America made a more serious go at performing these reviews than other major servicers did.
Thus the blame for this epic and costly fiasco rests squarely on the OCC and Promontory. The OCC apparently never bothered understanding that the root of the foreclosure crisis is the lack of integrity in the underlying records. This failing has been tacitly acknowledged in the astonishingly high error rates permitted in the servicing performance metrics for the state/Federal foreclosure settlement of early 2012.
The combination of the 2012 state/Federal and 2013 the OCC settlements putting band-aids on gangrene means that anyone who buys a house with a mortgage in America is taking a gamble that his servicer will abuse him.
So how does Ocwen fit into this picture? After servicing became a costly embarrassment, many banks decided to exit the business or shrink their servicing portfolios. There was a group of smaller “combat servicers” that marketed themselves as able to do the more customized servicing that delinquent borrowers needed. But the only problem with this “combat” or “default” servicing is that those businesses don’t scale. They need to stay relatively small.
Ocwen nevertheless presented itself as able to manage portfolios with meaningful levels of delinquencies and hoovered up mortgage servicing rights from bigger banks. Housing Wire shows Lawsky’s consent order describing poor systems as the root of many problems:
According to the NYDFS, Ocwen’s core servicing functions rely on “inadequate systems.”
As part of a two-year investigation into Ocwen’s servicing practices, the NYDFS placed in independent monitor with Ocwen to review Ocwen’s practices.
“In the course of its review, the Monitor determined that Ocwen’s information technology systems are a patchwork of legacy systems and systems inherited from acquired companies, many of which are incompatible,” the NYDFS said.
“A frequent occurrence is that a fix to one system creates unintended consequences in other systems. As a result, Ocwen regularly gives borrowers incorrect or outdated information, sends borrowers backdated letters, unreliably tracks data for investors, and maintains inaccurate records.”
I can’t wrap my mind around the notion that Ocwen bought companies with incompatible systems. In bank mergers, plenty of otherwise strategically sound deals have been aborted over the inability to integrate systems.
Offshored customers service staff made a bad situation worse. Housing Wire again:
The NYDFS also said that Ocwen is overly reliant on technology, which has led to the company employing fewer trained personnel than its competitors.
And many of those undertrained personnel are located overseas. In fact, a recent report from Fitch Ratings showed that Ocwen has 73% of its servicing staff offshore, operating out of India, the Philippines and Uruguay….
The NYDFS said that Ocwen requires its offshore staff to follow the scripts closely, and has penalized and terminated customer support staff who failed to stick to the script.
“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,” the NYDFS said.
“Moreover, Ocwen’s customer care representatives in many cases provide conflicting responses to a borrower’s question,” the NYDFS continued.
“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 dealings with related parties, where Erbey held a greater ownership stake and thus stood to gain more if he could shift revenues to them from Ocwen, look to be reason alone for throwing the book at him. Ocwen, and therefore its borrowers and mortgage investors, were charged excessive fees for auctions from another company where Erbey held a large stake.
This is a welcome and long overdue step to clean up the mortgage servicing industry. But it is also important to recognize that Lawsky is making a full-bore effort to clean up Ocwen, which will send a message to other servicers, But even with his creativity, the problems of this industry are too deep seated for him to address alone. And as long as the Wall Street party remains in charge of the nation’s capital, it is unlikely that he will find the allies he needs to make root and branch reforms.
____
* This stuff happens. An Alabama attorney told me of a case where a servicer used a single disputed $75 late fee along with illegal pyramiding fees to foreclose on a borrower who was otherwise current.
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long live Ben Lawsky.
we need more like him and show him support
Ref. my site at http://www.phhmortgagemustbedestroyed.weebly.com
Yves, this has been my first stop in the morning for more years than I like to recall, thank you.
And as a Real Estate Broker I see the consequences on a very personal level.
It’s ugly.
You haven’t brought up the problems with Title in a while.
Here’s an example you’d enjoy.
1644 Ronne Dr in Santa Rosa CA, It’s being sold as an REO, this appears to be the third time it has been foreclosed on since 2006 and the tax records show it is held in the name of a family trust…I suspect there might be a few chain of Title issues.
This is great news. Thanks to Mr. Lawsky for his work cleaning up Ocwen and for directing $150m in fine payments to harmed homeowners directly in addition to other penalties.
This post points out the real limitations of what can and cannot be successfully computerized, and the sometimes mindless C-suite attitude that computers are magic boxes.
Many thanks for this post.
I didn’t see the words “criminal charges” or “orange jumpsuit” anywhere…{sigh}
So Old School. That all went out with our City of Shining Lights on the Hill and compassionate Neo-Liberal Conservatism.
Totally, Marty. These days it’s “William Erbey, interviewed without an ankle bracelet…”
I was thinking the same thing. So former billionaire William Erbey is now a mere hectomillionaire. Well, he’s still in the top 0.01%, and possibly still in the top 0.001% in the United States. His pride has taken a hit, but he’s still fabulously wealthy. He’ll really feel the pain only if Ocwen goes the way of Enron and Arthur Andersen.
Lawsky can’t bring criminal charges. Only a prosecutor, meaning the attorney general, can. Lawsky is Cuomo’s guy and Schneiderman, the AG, is his opponent. so no way will Schneiderman ever take up a case generated by Lawsky.
Yes, for scumbags politics always trumps doing the right thing.
But it looks as if it has cost the scumbag $1B. Others are in line for the same treatment.
Good for Lawsky
CATO’s Walter Olson fires up the the whambulance over Erbey’s departure:
Olson must be living in some form of alternate reality.
Olson must be friends with Erbey . Erbey is a crook. He doesn’t care about anything other than lining his pocket. The culture at Ocwen is ridiculous. We laugh because we can’t fix anything right and no one is held accountable, at least not at the top. Heads get chopped off, but they are the underlings. Ocwen screws up simple debit/credits leaving borrowers in a jam. Heaven forbid you are even a penny off. Your payment could end up in the suspended account —- indefinitely. Operations are understaffed and everyone is overworked. The technology is a joke. Ocwen doesn’t even own their technology – Altisource does. I will tell you that Altisource is a big black hole of incompetence. Along with hurting the borrower Ocwen rips off the investor, i.e. billed for services NOT rendered. My list goes on….
Kudos to Lawsky. May Erbey and Ocwen COO Scott Anderson rot in jail.
while these things can be computerized, its just not the normal applications that do them. and for most companies its not what they want to us, cause they are more labor intensive, and cost more to run, but dont bring in much in ‘sales’. so they usually get the short shift, unless there is a court case that ‘forces’ them to do that. and as we have seen even then they will likely not follow through, by dragging their feet on it. these arent money makers, and business focuses on that. even if it does end up costing billions at some point
Yves
Part of the financial equation is the practice of selling servicing right. The mortagage originator receives a additional cash flow in the form of servicing payments. The originator then capitalizes the future cash flow by “selling” the right to service. The servicer’s future income is then diminished by the need to pay-off the purchase price for the servicing. If the servicing fee is too low, then the banks “selling” servicing should actually be paying for someone to taking the servicing off their hands. Oh yes – when servicing rights are sold, the “purchase” price goes into the bonus pool. In my view, it should not be legal to “sell” servicing …
djv
Reading this same story by Michael Corkery in the NYT is like visiting a parallel universe, e.g.
Title: “Head of Mortgage Service to Step Down” [not “ousted”].
Erbey was “praised for devising an effective way to modify troubled mortgages”–cf. Yves’ article, Ocwen avoided them and preferred foreclosures.
“Some mortgage analysts [vague term meaning “Here’s my opinion:”] said that Ocwen was more efficient and nimble than the big banks.”
Erbey is “something of a financial wizard”. [Hogwarts!]
Lawsky led an “aggressive investigation”. By contrast, Ocwen is never described as treating its clients “aggressively”.
I wonder why the editors do not think a little vox pop from one of Ocwen’s contested mortgagees is not required. Corkery certainly quotes the company in full.
The troubling part of all this is that the NYT and its’ co-religionists want their version of reality to be the Master Control Paradigm for the rest of us. It’s a bit like Zero Point Energy. They want to harvest the energy but deny the very existence of the source, much less cut the rest of us in on the ‘take.’
Lets be real here. A huge majority of these mortgages that Ocwen bought were sub-prime, non-agency garbage all the banks were trying to offload. 60% of Ocwen’s portfolio came from GMAC/Ally, in which the govt spun off the toxic stuff in a strategic bankruptcy that Ocwen bought the servicing rights to.
Lets face it here, a huge majority of Ocwen’s servicing portfolio is high-risk, sub-prime trash. These are the loans that all the banks wanted to offload and not deal with. 60% of Ocwen’s servicing came from a portion of GMAC/Ally in which the govt spun off all the toxic assets into a separate entity for planned bankruptcy. Ocwen bought those rights out of the bankruptcy.
We need a suitably laudatory Official NC Nickname for the hardworking, rare-because-uncaptured-by-Money (and not yet “Eliot Spitzered” out of town on a rail) Mr. Lawsky.
How about “the Long Arm of the Lawsky”? Too Southern-style pro wrasslin, mayhap?
I started to make a REALLY big fuss about this in (about) September of 2013. OneWest was going to sell its IndyMac dreck to Ocwen. They needed confirmation letters from the ratings agencies. I called Moody’s and Fitch. I spoke to a very impressive person (Diane Pendley) at Fitch. She seemed to get my complaint–and some of the dreckiest of the batch was rejected–it wasn’t even good enough for Ocwen (those went to SLS.) The guys at Moody’s were really nice, as well. I was very surprised. I’m a “just a housewife,” but they took me seriously and they really seemed to listen, if not even commiserate.
My experience with Ben Lawsky’s office has been phenomenal–they have been so open to listening to my (big picture) concerns that I have with Ocwen and its “Ocwiterations.” (OCN, HLSS, RESI, ASPS, AAMC. ) The culture over at the NYDFS just seems so geared toward –dare I say–fighting for the “average Joe.” I am just really impressed with them.
Mr. Lawsky has gotten Ocwen to agree to pay $10,000 to every New Yorker who was foreclosed upon since 2009. (Granted, $10,000 does not compensate most folks for their total financial ruin–but it’s a heck of lot more than the folks in 49 other states are getting.) Mr. Lawsky saw to it that any compensation was not in the form of a modification, he saw to it that Ocwen could not write this off as a loss on their taxes.
I really think this guy and his staff gets it.
I am also impressed with how aggressive Mr. Lawsky is going after Deutsche right now. Keep in mind, Mr. Lawsky can pull banking licenses and insurance licenses:
1. BEN LAWSKY PROBING DEUTSCHE BANK FOR RIGGING ALGOS: http://www.bloomberg.com/news/2014-12-10/ny-regulator-said-to-probe-deutsche-bank-barclays-fx-algorithms.html
2. BEN LAWSKY VIDEO CLIP (BLOOMBERG) INTERVIEW BASED UPON ARTICLE ABOVE: http://www.bloomberg.com/video/banks-cybersecurity-benjamin-lawsky-on-cyber-risks-Gp7Udx_QT_K7QG2ojtdCuw.html
3. BEN LAWSKY: LAWSUIT ACCUSING DEUTSCHE OF TAX EVASION SCHEME: http://www.bloomberg.com/news/2014-12-08/deutsche-bank-sued-by-u-s-over-alleged-tax-scheme.html
I hope this agency continues to get results and continues to impress. (I’ve been letdown before.) But I’m encouraged right now–for the first time in a long time.
I just want to bask in this sliver of hope for a while. It feels so good to be hopeful. I had forgotten what it felt like.
LOL what Ocwen is not telling anyone is that many of the loan it has on its books from 2006 to 2009 are all flawed, the notes are mainy defective, the debt is subject to the FDCPA and are dischargable in any bankruptcy court, the comapny is putting on this good face to make it look as thought it has sound under backing but this is not at all true.