Servicing Complaints are Down, Yay, Now Close to 2012 Levels

It's mid-February already, and now that the numbers are out it's time for our annual update on mortgage servicing complaints – which are handsomely down for the second year running: the number of complaints to the CFPB for the calendar year 2015 declined 6% from 2014 levels (vs. 12% decline from 2013 to 2014).

Ocwen, the mortgage servicer that's perhaps been most regularly under the microscope, saw its number of customer complaints decrease by a mammoth 1292, the largest absolute improvement.  However, by our calculations in 2015 Ocwen sold roughly $89 billion in mortgage servicing rights (MSRs), reducing the size of its MSR portfolio by 22%, in terms of unpaid principal balance (UPB), notwithstanding any runoff.  So, Ocwen’s decrease in complaints appears to be roughly in line with its more modestly sized servicing assets.

Within 2015’s top 10 (complaints-wise), only Ditech Financial/Green Tree and Seterus experienced an increase in complaints.  Ditech Financial LLC merged with Green Tree Servicing last year (data in table reflect combined totals); both were subsidiaries of Walter Investment Management Corp. and the combined entity still is.  Seterus is an IBM subsidiary – it is unclear to us whether it enjoyed an improvement in market share that might explain its 69% increase in complaints. 

For the top 5, we also looked at complaints relative to total loans serviced, by UPB. We would prefer to consider the number of loans serviced instead of UPB but, alas, only Ocwen and BofA provide those numbers, and only as of 4Q14. Ocwen outpaces the group at 12 complaints per billion dollars of UPB serviced. It is possible that these five servicers have widely varying average loan servicing balances, although Ocwen’s and BofA’s are fairly similar ($160,387 and $162,617 per loan, respectively, as of 4Q14).

Shaambles at AAMC

We have from time to time covered the mortgage servicing industry, paying particular attention to Ocwen (ticker: OCN) and its affiliates.[1]  While the past 20 months have been rocky for shareholders of Ocwen and its affiliates, for Altisource Asset Management Corporation (ticker: AAMC) it has been catastrophic.[2]

What is going on at AAMC?

Since reporting 2Q15 earnings before the open on August 10^th, shares of AAMC have plunged 75%!  By comparison, the Russell 2000 has fallen 6% over the same timeframe.  So … what is going on with AAMC that has investors panicked?    

AAMC is “an asset management company that provides portfolio management and corporate governance services to investment vehicles that own real estate related assets.”[3]  By our reading, AAMC’s only significant client is another Ocwen affiliate, Altisource Residential Corporation (ticker: RESI).  RESI and AAMC are, uh, closely affiliated – they have the same management team (CEO; CFO; CAO; GC). 

Essentially all of AAMC’s revenue is dependent on the asset management fees it collects from RESI.  Those fees are determined by an Asset Management Agreement, which until recently, had been quite favorable to AAMC – at the expense of RESI shareholders.  (It probably won’t surprise you to learn that back in the day former Ocwen, RESI, and AAMC chairman William Erbey had a much larger dollar stake in AAMC than RESI.) 

But in February, RESI shareholder Capstone Equities complained about the one-sidedness of the arrangement, and demanded that the RESI board “terminate the Asset Management Agreement, dated as of December 21, 2012, (the “AMA”), for cause without paying a termination fee….” (emphasis in original) [4]

On March 31, 2015, RESI and AAMC revised their agreement[5], apparently (and oddly) to the relief of AAMC investors, who drove shares of AAMC up 40% over the following week.  Perhaps they were relieved that AAMC was able to retain its sole client.  But the new agreement apportions more of the pie to RESI and is much less favorable to AAMC. 

But the full extent of the damage to AAMC earnings may not have been readily apparent to shareholders until they were able to digest a quarter’s worth of post-agreement earnings, which they got August 10.  See table below for daily price action, which shows the slide beginning on the 10^th of August.  

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[1] You may recall that Ocwen has garnered the attention of regulators such as the CFPB, New York Department of Financial Services, and the California Department of Business Oversight, as well as investors such as BlueMountain Capital.

[2] AAMC is one of four companies to have spun off from Ocwen (technically AAMC spun off from ASPS, which itself spun off from Ocwen).

[3] http://www.altisourceamc.com/About_us.aspx

[4] http://bit.ly/1hhJkRc

[5] http://1.usa.gov/1NX4r6e

Ocwen Wins this Weekend

Shortly after our blog posting went out on Friday evening, Ocwen (OCN) and Nationstar (NSM) and affiliated companies announced two agreements that sent all of their shares higher.

It will be interesting to see if some of them come back today: the reasoning for the bounce isn't immediately clear -- certainly for some of the Ocwen affiliates (AAMC, ASPS and RESI) who might reasonably be expected to miss out on future revenue opportunities as a result of the sale of HLSS.

Or is this just a win-win-win-win-win-win-win?

Ocwen selling MSRs to Nationstar ($9.8 billion of loans). 

Link: http://www.bloomberg.com/news/articles/2015-02-23/ocwen-to-sell-9-8-billion-servicing-portfolio-to-nationstar 

New Residential (NRZ) to buy HLSS: http://www.wsj.com/articles/new-residential-to-buy-home-loan-servicing-solutions-for-1-3-billion-1424692915?mod=yahoo_hs

Serving Up the Servicing Complaints

It's February 20th, and time to update our post from Feb. 20th last year, when we investigated state of the mortgage servicing arena.

Firstly the good news: overall, complaints for the year 2014 are down roughly 12% over 2013 levels.

Non-bank servicer Ocwen has been all the rage of late, and has risen to the most complained-about mortgage servicer out there in 2014.  Meanwhile many of the bank-servicers have decreased their servicing businesses and platforms -- often selling to non-bank servicers -- and with it their tally of complaints!

Notably, Ocwen has settled with the CFPB and related state AGs for alleged misdeeds between 2009 and 2012.  The settlement was to the tune of $2.1 bn, but much of this cost may well be absorbed by investors in RMBS trusts serviced by Ocwen.  Importantly, though, Ocwen's complaint count seems only to be rising, and is now roughly 70% higher than in was in 2012.

Also of interest, if you look in the list below at the five servicers whose complaints grew fastest between 2012 and 2013, all five of them continued to have complaint growth in 2014.  This unwelcome trends seems not to be abating.  For example, for Select Portfolio Servicing, Inc (SPS) complaints more than tripled from 2012 to 2013.  They're again up another 65% from 2013 to 2014.

For another take on this, see Tom Adams' interesting read in Naked Capitalism, entitled "Ocwen’s Servicing Meltdown Proves Failure of Obama’s Mortgage Settlements."

Ocwen Letter Spooks the Market

Ocwen just can't seem to get a break.

After a rough first 9 months to the year -- stock was down 53.5% YTD as of Monday's close -- the release of NY State Fin. Dept. Superintendent Benjamin Lawsky's letter to Ocwen's general counsel sent the stock tumbling again. 

Our last coverage was back in February, after Ocwen had agreed to a settlement fee, with the CFPB, of $2.2 billion, for its missteps from 2009-2012.  We showed the potential for this litigation expense to grow, as there were even more complaints in 2013 against Ocwen than in 2012.

The stock is now down 24.8% from Monday's close: Lawsky's letter included some powerful language, some of which could have repercussions to Ocwen beyond the immediate scope of the letter.

Lawsky's previous letter to Ocwen, dated April 2014, brought to the fore what Lawsky's office saw to be a "particularly troubling issue" - "the relationship between Ocwen and Altisource Portfolio’s 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%. 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.

In August, Moody's downgraded Ocwen's primary servicer and special servicer ratings - and left both assessments on watch for further downgrade.  The shareholder class action complaints started to trickle in in August, and by September 2014 a handful of shareholder complaints had been filed.  (See for example NORBERT TUSEO, Individually and on Behalf of All Others Similarly Situated v. OCWEN FINANCIAL CORPORATION, RONALD M. FARIS, JOHN V. BRITTI and WILLIAM C. ERBEY)

The recent information about Ocwen's potentially backdating thousands of foreclosure documents is relevant not just insofar as it affects the nature of all current shareholder litigation, but insofar as Ocwen is being sued by mortgage borrowers, directly, and by mortgage market players and investors.  Crucially, Ocwen's servicing performance can be critical to the performance of RMBS securities.

For example, at least five third-party complaints have recently been filed by Nomura Credit & Capital, Inc. against, among other co-defendants, Ocwen as the servicer of the RMBS trusts. The complaints argue that Ocwen's underperformance has harmed the plaintiff, or that the breaches ought alternatively to relieve Nomura of certain of its duties to the trust.  The following excerpt comes from Nomura Credit & Capital, Inc. v Wells Fargo Bank, N.A., and Ocwen Loan Servicing, LLC, filed 8/11/14.

This public embarrassment can make it more difficult for Ocwen to defend itself in the existing and future litigation as it will inevitable have suffered a deterioration in reputation capital.  Last but not least, it will likely further hinder any near-term hopes Ocwen may have had of buying additional mortgage servicing rights (MSRs), and expanding its business.

Mortgage Servicers, Underserving?

There's been a lot of news coverage in the last few months on the changing nature of the mortgage servicing industry, and consumer and regulatory difficulties with status quo. (See for example, here and here.) 

Among other things, late last year mortgage servicer Ocwen Financial (OCN) paid roughly $2.2bn to settle claims made against it by the Consumer Financial Protection Bureau (CFPB) that it, according to bureau director Richard Cordray, had "violated federal consumer financial laws at every stage of the mortgage servicing process." 

According to the NY Times, the $2.2bn settlement covers activities from 2009 to 2012 by Ocwen and two companies it recently acquired.

But what about "activities" since 2012?

We did some digging into the number of CFPB complaints being filed by borrowers against mortgage servicers in 2013.  Looking at only those complaints pertaining to (1)    loan servicing, payments, escrow account or (2)    loan modification, collection, foreclosure, we found an increase of over 20% from 2012 to 2013, broken down as follows: