Sometimes You Get No Respect

George Yacik - Contributor - Fed & Interest Rates

Ocwen Financial Corp. just can’t catch a break.

A recent research report says it does a better job than its competitors of modifying mortgages for struggling homeowners to enable them to stay in their homes. At the same time, some of its bondholders are complaining it does too many modifications at their expense. All along, the company has been the focus of state and federal regulators and consumer groups for supposedly abusing the subprime borrowers it services.

Which is it? Can all of this be true?

Ocwen, of course, is today’s favorite whipping boy in the subprime mortgage business. In late 2013 the company agreed to a $2.1 billion settlement with federal and state regulators to settle charges of alleged misconduct in how it services loans. Last December it reached a settlement with New York State that required it to change its practices and provide $150 million to help struggling homeowners. The agreement also forced founder William Erbey to resign as chairman of the company as well as four related companies.

Those are just some of its problems. It’s also been downgraded by the rating agencies, and its stock price has taken a beating, down more than 80% in the last year to less than $10 a share from a November 2013 peak of $57.

Now comes the Houston law firm of Gibbs & Bruns, which says it represents 25% of the holders of 119 residential mortgage-backed securities (RMBS) with a face value of $82 billion. In a January 23 press release, the firm accuses Ocwen of “imprudent and improper servicing practices” in servicing the loans and wants Ocwen replaced.

What did it do wrong? Gibbs & Bruns says Ocwen’s policy of granting modifications to struggling borrowers of loans that back the securities damages its clients and has “enriched” Ocwen.

Ocwen fired back in a January 26 letter and press release, in which it accuses the law firm of trying to stop servicers like Ocwen “from modifying loans and force them to foreclose on and evict as many struggling homeowners as quickly as possible.”

Now, is this rich or what? Here we have the largest servicer of subprime mortgage loans going to bat for troubled borrowers to help them keep their homes even while they’re being hounded by regulators, alleged consumer protection groups, and now the plaintiffs’ bar.

I’ve watched so many subprime mortgage lenders and servicers get tarred and feathered over the past 20 years for allegedly abusing consumers. Some of them have deserved it, but some of them have not, so I’m always a little skeptical when I see a company being accused of wrongdoing. You don’t really know if these companies are getting a fair shake or not.

Subprime mortgage lenders and servicers make inviting targets for politicians and so-called consumer protection groups. They’re often the only source of home financing for people with iffy credit. Not surprisingly, a much higher percentage of their borrowers have trouble making their payments, many of them becoming delinquent and then facing foreclosure. A disproportionate number of them are minorities. That creates a perfect opportunity for politicians to show how much they care, siding with the borrower against the big, bad money lender, regardless of the facts.

Now comes a new independent report by Morgan Stanley about Ocwen’s pro-modification servicing practices that validates my skepticism.

Morgan Stanley’s researchers found that compared to other subprime servicers, Ocwen does a better job of reducing the principal troubled homeowners owe on their mortgages or reducing their monthly payments, enabling more of them to keep their homes.

“Ocwen has been far more generous to borrowers than the overall subprime market,” the company’s February 25 report says.

“Since the beginning of 2011, they were more likely to perform a principal modification, and from 2011 through 2014, they were far more likely to cut a borrower’s monthly P&I (principal and interest) payment by 50% or more,” the report said.

Moreover, “this modification style does appear to have been effective in keeping borrowers in their homes. Whether a borrower first went delinquent while being serviced by Ocwen, or fell delinquent and was then transferred to Ocwen, we find that these borrowers are more likely to be in their home today than if the MSR was held elsewhere.”

And here’s the kicker: “To the extent the [Obama] Administration wants to keep borrowers in their homes, Ocwen seems to be accomplishing that – at least for now,” the report says.

Perhaps most importantly, at least from the investors’ point of view, Ocwen’s policies don’t unduly hurt the majority of bondholders, at least compared to its industry peers, Morgan Stanley said.

“In our base case, legacy non-agency MSRs [should] remain with Ocwen,” the Wall Street firm advises. “It doesn’t appear in investors’ best interest to replace Ocwen as servicer. In addition to the potential for short-term cash flow disruption, Ocwen’s current servicing practices are very similar to market averages, leaving investors with little to gain from an MSR transfer.”

Keep in mind that Ocwen never made any of these loans. The company services subprime mortgage loans for other originators; it doesn’t originate loans itself.

Ocwen has established this rather enviable track record despite servicing the loans of homeowners in the deepest trouble. Ocwen is the biggest subprime mortgage servicer, with over 25% of the legacy non-agency RMBS market, including almost 40% of the loans originated from 2004-2007, when underwriters took a holiday. It also services other risky loans, including more than 20% of Alt-A mortgages and option ARMs.

Ocwen also tends to service loans that are far more delinquent than loans serviced by its competitors.

Is Ocwen perfect? Probably not. But when a company that’s normally in the media for allegedly doing bad things, they should get some credit when they do the right thing.

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George Yacik Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.