Ocwen Financial Corporation (OCN) received a subpoena in June from the Securities and Exchange Commission over its close relationships with its affiliated companies, the company disclosed in an SEC filing.
Ocwen’s close relationship with Altisource Residential (RESI), Altisource Asset Management Corp (AAMC), Altisource Portfolio (ASPS), and Home Loan Servicing Solutions (HLSS) has been under scrutiny since New York's Department of Financial Services first sent a letter to Ocwen’s general counsel about the dealings between the affiliated companies in February.
In 2009, Altisource spun off of Ocwen to become a publicly traded REO and title insurance company. In the February letter, NYDFS Superintendent Benjamin Lawsky questioned the relationship between the companies, all of which are chaired by Ocwen founder William Erbey.
"Presently, Ocwen’s management owns stock or stock options in the affiliated companies,” Lawsky said in his February letter. “This raises the possibility that management has the opportunity and incentive to make decisions concerning Ocwen that are intended to benefit the share price of affiliated companies, resulting in harm to borrowers, mortgage investors, or Ocwen shareholders as a result."
Per Ocwen’s most recent filing, Erbey owns shares in each company. The following is excerpted from Ocwen’s SEC filing and details Erbey’s involvement with each company:
As of June 30, 2014 , Mr. Erbey owned or controlled approximately 13% of the common stock of Ocwen, approximately 27% of the common stock of Altisource, approximately 1% of the common stock of HLSS, approximately 27% of the common stock of AAMC and approximately 4% of the common stock of Altisource Residential. At June 30, 2014 , Mr. Erbey also held 3,620,498 options to purchase Ocwen common stock, of which 2,845,498 were exercisable. On April 22, 2014, Mr. Erbey surrendered 1,000,000 of his options to purchase Ocwen common stock. During the second quarter of 2014, Ocwen recognized the remaining $5.4 million of previously unrecognized compensation expense associated with these options as of the date of surrender. At June 30, 2014 , Mr. Erbey held 873,501 options to purchase Altisource common stock and 87,350 options to purchase AAMC common stock , all of which were exercisable.
Lawsky again probed Ocwen’s business dealings in April when he questioned the company’s relationship with Altisource Portfolio and its subsidiary, Hubzu, which Ocwen uses as its principal online auction site for the sale of its borrowers’ homes facing foreclosure, as well as investor-owned properties following foreclosure.
“Hubzu appears to be charging auction fees on Ocwen-serviced properties that are up to three times the fees charged to non-Ocwen customers. In other words, when Ocwen selects its affiliate Hubzu to host foreclosure or short sale auctions on behalf of mortgage investors and borrowers, the Hubzu auction fee is 4.5%; when Hubzu is competing for auction business on the open market, its fee is as low as 1.5%. These higher fees, of course, ultimately get passed on to the investors and struggling borrowers who are typically trying to mitigate their losses and are not involved in the selection of Hubzu as the host site,” the April letter states.
“The relationship between Ocwen, Altisource Portfolio, and Hubzu raises significant concerns regarding self-dealing. In particular, it creates questions about whether those companies are charging inflated fees through conflicted business relationships, and thereby negatively impacting homeowners and mortgage investors,” Lawsky wrote in April. “Alternatively, if the lower fees are necessary to attract non-Ocwen business on the open market, it raises concerns about whether Ocwen-serviced properties are being funneled into an uncompetitive platform at inflated costs.”
Now the SEC is questioning the company’s dealings as well. According to Ocwen’s most recent filing, the company received an SEC subpoena on June 12, in which the SEC requested “production of various documents relating to our business dealings with Altisource, HLSS, AAMC and Altisource Residential and the interests of our directors and executive officers in these companies.”
In the filing, Ocwen provides greater detail on its relationship with its associates. Ocwen said that its business is “dependent” on its relationship with Altisource and its affiliates. According to the filing, Altisource provides various services under “long-term contracts,” including: service agreements, technology products services agreements, intellectual property agreements and the data center and disaster recovery services agreements.
Ocwen and Altisource also “provide administrative and corporate services to each other” and a “data access and services agreement,” in which Ocwen provides “certain data” to Altisource its servicing portfolio in exchange for a per asset fee.
Services, including residential property valuation, residential property preservation and inspection services, title services and real estate sales, provided by Altisource to Ocwen are “generally charged to the borrower and/or loan investor.”
Ocwen states that it “believes” the rates charged for these services are “market rates,” because the rates are consistent with what “Ocwen pays to or observes from other service providers and the fees we believe Altisource charges to other customers for comparable services.”
Ocwen also details its relationship with HLSS in the filing. “Ocwen and HLSS provide each other certain professional services including valuation analysis of potential mortgage servicing rights acquisitions, treasury management services and other similar services, licensing and regulatory compliance support services, risk management services and other similar services under a professional services agreement,” Ocwen states.
And Ocwen reports that it has also “entered into a long-term servicing and a support services agreement with Altisource Residential and AAMC, respectively.”
Ocwen also made news recently when it announced that it would be restating its 2Q14 earnings because of potential “material weakness” in its previously filed earnings statement.
According to the report, Ocwen said it expects to reduce pretax income for the first quarter by $17 million and to increase it by the same amount for 2013.
Per Ocwen’s Monday filing, the SEC intends to issue an additional subpoena “in relation to such amendments.”
Ocwen said that it the company is cooperating with the SEC on these matters.
Ocwen’s entire SEC filing can be read here. Relevant information on the SEC subpoena can be found on page 48.