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.