Imagine for a moment that you’re William Erbey on the morning of Jan. 22, 2014. The signature company of your empire, Ocwen Financial, is the country’s fourth-largest mortgage servicer and its largest subprime mortgage servicer.
Your company is about to announce that it is purchasing the mortgage servicing rights to $39 billion worth of mortgages from Wells Fargo.
The $2.7 billion deal will be the latest in a series of massive MSR acquisitions that have positioned your company as the largest nonbank mortgage servicer by a wide margin.
As the legend goes, your company has grown from its decidedly humble beginnings, its name derived from scribbling the inverse of “Newco” on a napkin, to become a multibillion dollar empire at the top of the mortgage world.
And you sit atop the multibillon dollar empire, leader of your own personal “Fab Five.”
Your business card reads Executive Chairman of the Board of Ocwen Financial, as well as non-executive chairman of Ocwen’s four associated companies, Altisource Portfolio Solutions, Altisource Residential, Altisource Asset Management, and Home Loan Servicing Solutions.
Ocwen’s stock opens the day at $51.30 per share, and climbs as high as $52.01 during the day’s trading. According to an August filing with the Securities and Exchange Commission, you own “approximately 13%” of Ocwen’s stock, placing the value of your personal interest in Ocwen at $850.67 million.
And over the next 13 months, that price is the highest your stock will trade at by a wide margin.
It never goes higher. It only goes lower. Much lower.
Fast forward to Jan. 29, 2015. When the day’s trading closes, your company’s stock is priced at $5.77, representing a drop of nearly 89% from just 53 weeks earlier. Those 16 million shares in Ocwen are now worth $94.37 million, $756 million less than they were just over a year ago.
And that doesn’t even account for how much money you’ve lost on Altisource Portfolio Solutions. According to the same filing, you also own “approximately 27%” of Altisource Portfolio’s stock.
When the day’s trading opens on Jan. 22, 2014, your shares are worth $896.15 million, with the stock opening at $152 per share. When the day’s trading ends on Jan. 29, 2015, Altisource’s stock sits at $20.56 per share, a drop of more than 86%. Those shares in Altisource are worth nearly $775 million less than they were 53 weeks ago.
If you’re Bill Erbey, between just those two companies, your holdings are worth $1.5 billion less than they were a year ago.
Needless to say, it’s been a rough year.
What happened to cause a drop so precipitous?
An avalanche of regulatory pressures, demands, sanctions, punishments and a mountain of negative headlines, to start with.
The year started out with so much promise for Ocwen. But the afterglow of the Wells Fargo announcement was short-lived.
Within two weeks of announcing the massive MSR deal, the New York Department of Financial Services pulled the emergency brake on Ocwen’s good-time train, placing the deal on hold because it was concerned that Ocwen would not be able to properly service the approximately 184,000 mortgages.
The deal twisted in the wind for nine months, before being quietly abandoned in November. The cancellation of the deal was not publicized and only discovered in in a SEC filing from Ocwen.Ocwen’s SEC filing stated that the company would receive its entire $25 million deposit back.
Wells Fargo said in a brief release announcing the cancellation of the deal that parties have mutually decided to cancel the deal and that the cancellation of the transaction is not expected to be material to Wells Fargo’s consolidated financial results.
In the end, Ocwen couldn’t escape the regulatory pressure placed on it by the NYDFS.
Throughout 2014, the NYDFS, lead by Superintendent Benjamin Lawsky, dug into Ocwen’s business practices and didn’t find a whole lot to like.
Not long after placing the Wells Fargo deal on hold, Lawsky sent a letter to Ocwen’s general counsel, Timothy Hayes, suggesting that Ocwen was potentially harming borrowers and pushing homeowners “unduly into foreclosure.”
Lawsky said that the close relationship between Ocwen, the Altisource companies and Home Loan Servicing Solutions was deeply concerning.
“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.”
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%,” Lawsky said in an April letter to Hayes.
“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,” Lawsky continued.
“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 added.
“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.”
But Lawsky wasn’t the only one to question Ocwen’s interconnected business relationships.