Twinkies Made A Comeback, Can Ocwen?

Mortgage servicer Ocwen Financial Corp. has had its well-publicized ups and downs, but the company says it is working to resolve the issues and is moving forward.

In July, Ocwen, which is based in West Palm Beach, Fla., and has operations throughout the U.S., as well as in India and the Philippines, reported a net loss of $87.2 million for the second quarter; however, the company did have a quarter-over-quarter increase in revenue of $42 million – the first such increase since the first quarter of 2015. It sounds like a routine earnings release from a financial institution that had a mixed quarter, but for Ocwen, a former servicing giant that is still handling issues related to the National Mortgage Settlement (NMS) and other agreements, it was one of many recent announcements indicating that the company is working to improve operations and move forward.

“We remain focused on returning the company to profitability, and we are making steady progress,” says Michael Bourque Jr., Ocwen’s executive vice president and chief financial officer, in a recent email. “Ocwen will continue to look for additional opportunities to drive revenue and reduce costs, with the dual goals of providing world-class customer service while restoring the company to bottom-line profitability and, eventually, earnings growth.”

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The operating results release indicated that included among the expenses that the servicer had to pay in the second quarter was $28.1 million of monitor costs. That refers to monitors from not only the NMS, but also the New York Department of Financial Services (NYDFS).

In the NMS, Ocwen must perform consumer relief activities and is tested for these using certain metrics. In reports filed with the U.S. District Court for the District of Columbia on Ocwen’s progress through Sept. 30, 2015, the monitor, Joseph A. Smith, indicated that the company had met its consumer relief obligation of $2.1 billion. “In total, I have credited Ocwen with $2,127,661,401 in consumer relief credit and have determined that Ocwen has exceeded its consumer relief obligations,” he wrote.

Also, Ocwen had implemented corrective action plans, or CAPs, for several metrics, including some metrics that it had failed in 2014. The metrics involved, for example, the timeliness of pre-foreclosure initiation letters, compliance with requirements to notify borrowers of missing documents, the propriety of default-related fees and other issues. In Metric 31, which “tests whether the servicer sent a loan modification denial notification to a borrower that included the reason for the denial,” Ocwen had some delays, and the monitor wrote that he will determine whether that CAP has been implemented.

In addition to the NMS, there is also a monitor in place in New York – under a settlement with the NYDFS. (A spokesperson said the monitor is still in place and would not comment further.) In California, in 2015, Ocwen agreed to a $2.5 million settlement with the Department of Business Oversight (DBO) stemming from an accusation that the firm had failed for more than a year to provide loan information needed by the DBO to assess Ocwen’s compliance with state mortgage lending laws. Under the agreement, the DBO would select an independent, third-party auditor, paid for by Ocwen, whose duties would include ensuring Ocwen provides the DBO with all of the information it had requested from loan files.

The goal for Ocwen is to regain approval to acquire mortgage servicing rights again – and it needs clearance from California and the NYDFS to do so.

For its part, Ocwen says it continues to review its control infrastructure using a risk-based approach. “We launched an initiative using an independent third party to perform targeted mock examinations of certain complex or otherwise highly regulated processes,” Michael Hollerich, chief compliance officer, says in a recent email. “These targeted exams focus on the areas in the organization where we are most likely to impact the consumer. We are committed to being a leader in identifying and self-reporting compliance issues.”

Hollerich also notes that Ocwen makes business unit leaders and subject matter experts available to regulators. “We provide regulators updates about business strategy both proactively and immediately upon request during the course of regulator interactions. This ensures that feedback on potential issues is received firsthand by the business leadership who owns the processes and, ultimately, the compliance risk.”

To make sure employees are up to date with regulations and other issues, there is also an enhanced compliance training program to ensure that employees are receiving customized and targeted compliance training relevant to their specific job functions. Ocwen created a centralized repository for tracking consumer complaints and feedback across the organization.

“We are building the infrastructure to quickly and effectively respond to consumer feedback and use this feedback to identify areas to improve our systems that will enhance the customer experience,” Hollerich says.

Ocwen is also getting attention from other entities. In August, Standard and Poor’s (S&P) upgraded Ocwen to a ranking of “average,” with a “stable” outlook. That was important because if Ocwen had been downgraded, New Residential Investment Corp., which has a subservicer agreement with Ocwen, would have had the right to transfer servicing. “It was great news that S&P decided to upgrade,” says John Devaney, a bond trader with United Capital. “The California settlement and the S&P upgrade were the two most important things to happen for Ocwen.”

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Devaney had written a letter to S&P days before it made its announcement, urging it to upgrade Ocwen to “average.” In the letter, he noted that the upgrade is critical to the entire servicing industry, the Ocwen-serviced residential mortgage-backed securities (RMBS) bondholders and the homeowners. “Ocwen has far more financial stability and expertise in servicing over most other non-bank servicers,” he wrote. “The RMBS investors overwhelmingly want to keep Ocwen as the servicer for their investments.”

The other important event for Ocwen, Devaney says, was that a complaint by RMBS investors was investigated by another entity, which found the accusations not to be supported by evidence. In 2015, Gibbs & Bruns LLP issued a Notice of Non-Performance, so Duff & Phelps, a global corporate valuation and financial advisory firm, was engaged by Wells Fargo Bank NA in its capacity as Master Servicer for 42 Ocwen-serviced RMBS trusts. After a 12-month review, Ocwen announced in a May press release that the firm found no evidence that Ocwen did the alleged misdeeds, which ranged from charging the Master Serviced Trusts for “mysterious” expenses, to making imprudent modifications, to improperly imposing lender-placed insurance.

Devaney says the accusations were groundless. “Nobody is against Ocwen except for the guys that shorted the stock,” he says.

Ocwen, which uses the tagline “Helping Homeowners Is What we Do!” on its consumer website, says it is moving forward.

“Historically, we were considered a transaction company,” says Ron Faris, president and CEO of Ocwen, in a recent email. “We purchased assets that others created. Going forward, we want to be the one that creates the assets. We believe that this strategy will provide us more control and higher operating margins over the long-term. Our strategy is to grow by originating, servicing and refinancing select consumer and commercial loans where Ocwen has or believe we can develop a significant competitive advantage.”

The company is investing in new initiatives, such as its commercial lending business, Automotive Capital Services (ACS), which provides secured floor plan lending to independent used car dealerships. The company reported that in the second quarter, ACS increased loans outstanding by $8.6 million, or 110%. There is also the reverse mortgage business, Liberty, which the company says continues to gain share.

Faris says that moving forward, Ocwen will take limited interest rate risk, moderate credit risk and moderate collateral risk. “Our goal is to be profitable within each business line throughout the asset lifecycle.”

In August, the company announced it had done an early refinancing of $500 million of existing Ocwen Master Advance Receivables Trust notes that were coming due in September and November. Through the transaction, Ocwen says it replaced bonds with a 1.00-year duration with bonds with a 2.47-year duration at roughly the same interest rate.

Nora Caley is a Denver-based freelance writer.


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