--Ocwen Financial Corp. succeeds at servicing, but cuts costs
with tax moves, offshore workers
--Company bought chairman's house for 50% more than he paid six
years earlier amid Virgin Islands relocation
--Offshore workers raise housing agency concerns, appear to
influence recent deal
By Christian Berthelsen and Andrew R. Johnson
Ocwen Financial Corp. (OCN) is far from a household name, but it
is about to become a lot better-known to millions of Americans.
With a $3 billion deal in October, it is now poised to become
the fifth largest servicer of mortgages in the U.S., many of them
to borrowers with shaky credit histories. Ocwen--the name is
N-E-W-C-O spelled backwards--is buying up the business from banks
that are more familiar to U.S. borrowers, including Goldman Sachs
Group Inc. (GS) and Morgan Stanley (MS).
The expansion has been paying off: Net income more than doubled
in the third quarter, jumping to $51.4 million from $20.2 million a
year earlier, while revenue nearly doubled to $232 million, as the
balance of loans serviced by the company rose 20%. And the rapid
growth has made the company a stock market darling, sending its
shares up 259% in the last two years.
What emerges through extensive interviews and a review of
securities filings is a complex portrait of a company that has
seemingly found a way to succeed at a costly business where other
banks have struggled--but has done so at least in part through
practices that raise regulatory, housing agency and corporate
governance concerns.
Ocwen has been scrutinized by regulators and plaintiff lawyers
over its practices, even as it has won praise from consumer
advocates for its willingness to re-work mortgages and help
struggling borrowers stay in their homes. It does business with
related companies that share the same chairman. It also keeps
expenses down through an offshore labor force, and uses foreign
incorporations to minimize taxes--including the creation of a new
subsidiary in St. Croix, the U.S. Virgin Islands, that will hold
most of the company's operations.
And in August, it bought an Atlanta-area home from its chairman,
William C. Erbey-- for nearly 50% more than he paid six years
earlier--so he could relocate to the Virgin Islands to oversee the
new subsidiary.
While the moves are legal and disclosed in regulatory filings,
"There are certainly some fairly serious red flags in terms of
behavior that are raised there," said Paul Hodgson, chief research
analyst for GMI Ratings, a corporate governance and risk management
research firm. Whether the dealings raise shareholder concerns
depends on their size relative to overall company operations, but
"we would recommend they flag it anyway," Hodgson said.
In a series of prepared statements, Ocwen said it has saved
300,000 homeowners from foreclosure while helping mortgage
investors earn better returns on their investments. The company
further stated that its corporate governance practices were sound;
that its tax moves were cost-effective and its offshore labor force
best serves shareholders, customers and mortgage investors; and
that the purchase of the chairman's home was consistent with
company practice.
"We have a superior ability to resolve delinquent loans and keep
people in their homes, while returning present value-positive
results for investors," Paul Koches, Ocwen's general counsel, said
in an interview.
Rapid Expansion, Offshore Employees
Ocwen, working with partner Walter Investment Management Corp.,
outbid rival Nationstar with a $3 billion offer in an Oct. 24
bankruptcy auction for the mortgage servicing assets of Residential
Capital LLC, the onetime mortgage division of auto lender Ally
Financial. The deal, combined with other recent transactions, will
nearly triple the principle value of mortgages managed by Ocwen to
more than $360 billion, and a total of 2.3 million loans. A
bankruptcy judge approved the deal last month, and it is expected
to close in the first quarter of 2013.
Ocwen's rapid expansion has helped it grow into the dominant
player in an evolving industry: a nonbank that manages hundreds of
billions of dollars in home loans on behalf of investors who own
the loans through mortgage securities.
The work has historically been done by banks, but they are now
eager to shed the business in the face of new capital requirements,
risk measurements and regulatory scrutiny. Ocwen's fast growth has
made it a favorite among investors.
Another shareholder appeal: low costs, achieved through a
largely foreign labor force, and taking advantage of offshore tax
incorporations.
Ocwen has long emphasized its cost advantages and low operating
expenses as a competitive advantage, with at least three-quarters
of its 5,000 employees based in India and Uruguay, where it says
its per-employee costs are one-eighth of those of a U.S.
worker.
Ocwen's use of offshore employees to service mortgages has
raised concerns among government agencies. Fannie Mae (FNMA), in
particular, feared whether proper controls could be enforced with
call centers in foreign jurisdictions, borrower's private financial
information would be safeguarded and loans and workouts would be
effectively managed, according to a person familiar with the
agency's thinking.
The agency has approval oversight whenever control over mortgage
servicing portfolios are transferred; as the recent ResCap deal
ultimately took shape, Ocwen's bidding partner in the deal, Walter
Investment Management Corp., took over the Fannie Mae mortgages in
the portfolio.
In a statement, Ocwen said it is "committed to retaining a
substantial portion of the existing ResCap employees in their
various facilities around the country," adding: "We do have an
obligation to operate in ways that best serve our shareholders and
customers, as well as the investors who own the mortgages we
service. And those obligations affect where we have our
operations."
Mr. Koches, the company's general counsel, declined comment on
the company's communications with Fannie Mae or the ultimate shape
of the deal with Walter and ResCap.
Like other mortgage servicers, Ocwen has faced regulatory and
legal scrutiny. Last year, it paid $5.1 million to settle a
class-action lawsuit alleging it overcharged delinquent borrowers,
though the company denied wrongdoing or liability as part of the
settlement agreement. On Wednesday, the company agreed to install
an outside observer to monitor its servicing practices at the
request of the New York Department of Financial Services.
In securities filings, it has disclosed information requests and
subpoenas from agencies including the Federal Trade Commission and
Massachusetts attorney general over servicing activities and
foreclosures. Ocwen warned that the regulatory actions could result
in fines, penalties and higher servicing costs. An FTC spokeswoman
declined comment on the status of the inquiry. A spokeswoman for
the Massachusetts attorney general declined comment.
Still, the company has shown its willingness to work with
struggling borrowers, with strong results: It modifies loans well
above the industry average rate, and its share of loans "seriously
delinquent" 12 months after a workout is below the average of other
subprime lenders, a Citigroup analysis found.
And consumer advocates say Ocwen has done a better job of
working with struggling borrowers than banks have historically, and
that new regulatory oversight by the newly created Consumer
Financial Protection Bureau has given borrowers added
protections.
"In the current crisis, servicers who are not conflicted for a
variety of reasons that the big bank servicers are have been more
aggressive and more creative in their loan modifications," said
Julia Gordon, director of housing finance and policy at the Center
for American Progress, a Washington, D.C., left-leaning policy
advocacy group. "What differentiates these mono-line servicers is
they're not servicing the loans they made, and they're not holding
a portfolio of second mortgages, so they're not conflicted in that
respect. That does give them more of an incentive to focus on what
works for a sustainable loan modification."
Chairman Home Purchase, Related Company Transactions
In August, Ocwen purchased Mr. Erbey's home for $6.5 million so
he could relocate to the new St. Croix headquarters of the
company's servicing subsidiary, company securities filings
show.
The securities filing by Ocwen said the company bought Mr.
Erbey's house at his "cost basis." Mr. Erbey and his wife E. Elaine
Erbey bought the home, a 14,400-square-foot European-style estate
on two acres in Sandy Springs, for $4.4 million in 2006, Fulton
County, Ga., property records show.
The Fulton County assessor's office valued the property at $3.1
million in 2005. Real estate website Zillow estimates the value of
the home at $4.6 million, and lists nearby and comparable homes in
the low $3 million to mid-$5 million range. According to Zillow's
home value index, the median value of top-tier homes in the Sandy
Springs area is down 11.2% since July 2006, just after the Erbeys
bought the house.
In a prepared statement, Ocwen said the transaction "is
consistent with our senior executive relocation policy and
practice. The purchase price reflected Mr. Erbey's documented cost
basis in the property and was within the market value range
provided by an independent third-party appraiser." Mr. Koches, the
company's general counsel, said Mr. Erbey documented improvements
to the property that justified the higher price. Mr. Koches said
Mr. Erbey was not available to discuss the matter.
Ocwen is now selling the house and has listed it at $6.7
million. It has been on the market for more than 10 weeks.
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As of the beginning of October, Ocwen placed its servicing
operations--which account for the vast majority of its
revenue--into a subsidiary domiciled in St. Croix. Analysts expect
the move to drive down Ocwen's effective tax rate, which averaged
nearly 37% in the last several quarters, into the single digits,
saving the company tens of millions of dollars each quarter. The
company officially has its headquarters in Atlanta.
It is the third such Ocwen-related entity to be domiciled in a
foreign tax haven, joining others in Luxembourg and the Cayman
Islands.
The Luxembourg company, Altisource Portfolio Solutions SA
(ASPS), was spun off from Ocwen in 2009, and the shares have more
than quintupled since. The company uses a team of psychologists to
develop computer-generated scripts that Ocwen employees use to talk
borrowers through loan workouts. In a securities filing, Altisource
said: "Our services are primarily centered on our relationship with
Ocwen." Its effective tax rate over the last six quarters has been
9.3%.
Michelle Esterman, Altisource's chief financial officer, said
the company based itself in Luxembourg to be in a time zone closer
to its employees in India, where a majority of its workforce is
located, as well as the tax benefits afforded to technology
companies by the western European nation.
She said that while Ocwen accounts for 60% of Altisource's
revenue, it could be a viable stand-alone company in its own right
without Ocwen's business. She said the company maintains an
arms-length relationship with Ocwen and that Mr. Erbey abstains
from any board vote involving both companies.
The Cayman Islands company, Home Loan Servicing Solutions Ltd.
(HLSS), purchases mortgage rights to be serviced by Ocwen. It was
founded by Mr. Erbey as a separate entity in 2010 and went public
earlier this year, raising $200 million in an offering to finance
acquisitions of mortgage assets and servicing rights. Its effective
tax rate over its three quarters as a public company has been 1.2%,
and it has paid out more than 80% of its profits to
shareholders.
Since the IPO, the shares have gained nearly 40%.
John Van Vlack, the president of HLSS, said in an interview that
the dividend payout was intended to be similar to those of real
estate investment trusts or business development companies, to
attract similar kinds of income-seeking investors, which help keep
capital costs low if the company goes back to the market for
additional fundraisings. He said the company is domiciled in the
Caymans so it would receive similar tax treatment to a REIT, and
that all transactions between HLSS and Ocwen are done at a fair
market-value price.
Mr. Erbey is chairman of all three companies. He owns 25.5% of
Altisource and 2.8% of HLSS, in addition to his 13.2% ownership of
Ocwen's common stock, according to company stock ownership filings.
Mr. Erbey drew $1.87 million in compensation from Ocwen in 2011,
$135,000 as a board member of HLSS and $163,000 as a board member
of Altisource, the companies' most recent proxy and incorporation
filings show.
HLSS's prospectus, meanwhile, said it could have conflicts of
interest with both Ocwen and Altisource because of Mr. Erbey's role
as chairman of all three companies and executives who have moved
between them, and that certain agreements between the companies
were "not negotiated on an arm's length basis."
In a prepared statement, the company said the formation of the
St. Croix subsidiary "is part of our initiative to cost-effectively
expand our U.S.-based servicing activities." The statement said
Altisource and HLSS handle discrete functions different from
Ocwen's mission and allow Ocwen to focus more on its core loan
servicing business. The statement said strong corporate governance
is a priority for Mr. Erbey and that the companies maintain "arm's
length business relationships" with separate boards of
directors.
"Tight governance is what makes the relationship between the
companies work," the statement said.
Write to Christian Berthelsen at
christian.berthelsen@dowjones.com and Andrew R. Johnson at
andrew.r.johnson@dowjones.com
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