If Ocwen Financial (OCN) thought that its regulatory troubles were over now that it settled with the New York Department of Financial Services for $150 million, the beleaguered company has another thing coming, according to Morningstar.
In a note to clients, Morningstar analysts say that the real cost of the NYDFS settlement will definitely be more than the $150 million Ocwen must pay to homeowners in New York.
In Morningstar’s analysts' opinion, Ocwen’s real losses may be the loss of soon-to-be former chairman William Erbey, who is being forced to resign as part of the NYDFS settlement, as well as settlement terms that require ongoing monitoring of corporate governance and a ban on acquiring mortgage servicing rights until certain process and technology improvements are implemented to the satisfaction of the NYDFS.
“The real cost of compliance with the terms will undoubtedly be greater than the $150 million stated in the settlement and is likely to slow or altogether halt any long-term growth for Ocwen,” Morningstar’s analysts said.
As part of the settlement with the NYDFS, an independent monitor will be placed at Ocwen by the NYDFS, who will have oversight over “significant operational reforms” at Ocwen. Included in those is:
- Information technology systems and personnel, including with respect to record keeping and borrower communications
- Number of personnel and the training and expertise of its personnel in all servicing operations
- Onboarding process for newly acquired mortgage servicing rights, including Ocwen’s ability to onboard newly acquired MSRs without interruption to servicing newly acquired loans or its existing loan portfolio
- Controls in identifying and correcting errors made by Ocwen’s personnel or system
- Risk management functions
- Contracts or proposed contracts with third parties, including but not limited to related parties
- Fees charged by Ocwen to borrowers or mortgage investors
- The Ocwen borrower experience
Ocwen’s board of directors is also now required to consult with the monitor to determine whether any additional members of senior management should be terminated or whether additional officers should be retained to achieve the goals of complying with the agreement — and all other applicable laws, regulations, and agreements — as well as creating a corporate culture of ethics, integrity, compliance, and responsiveness to borrowers, the NYDFS said.
As a result of the settlement with the NYDFS, Morningstar said that it is placing four of Ocwen’s operational risk assessment rankings on “alert,” including “MOR RS2” residential non-prime servicer, residential special servicer, and residential prime servicer rankings for Ocwen Loan Servicing, and the ‘MOR RV2’ residential vendor ranking for Ocwen Financial Solutions.
“The settlement has potentially far-reaching consequences for Ocwen’s continued viability as a mortgage servicer,” Morningstar said.
Ocwen is already subject to the servicing standards established under the 2012 National Mortgage Settlement as well as a $2.1 billion settlement with the Consumer Financial Protection Bureau announced in December 2013. And Morningstar said that the new NYDFS-generated servicing standards will have a significant impact on Ocwen’s future.
“The homeowner relief payments and compliance costs associated with the NYDFS settlement and the cost of ongoing monitoring requirements and operational improvements could further endanger Ocwen’s ability to adequately perform its loan servicing responsibilities,” Morningstar said. “The change in corporate leadership and the influence of the operations monitor on daily governance issues will undoubtedly affect the company’s future business course.”
Ocwen, for its part, told its investors earlier this week that it planned on transitioning into a new direction, exiting agency servicing completely and focusing on non-agency servicing, mortgage originations, and securitizations.
Ocwen CEO Ron Faris said that despite the news of the week, he is “very excited” about Ocwen’s future.
“Ocwen is committed to a culture of integrity, transparency and accountability,” Faris said. “We will continue to change lives by helping homeowners in all that we do. We have learned from our challenges and look forward to restoring everyone’s confidence in Ocwen as we move into 2015 and beyond.”