Ocwen's Challenge

After trimming back its agency servicing holdings, Ocwen Financial intends to gradually shift its business model from that of a servicing specialist to a full-fledged mortgage company.

 

Mortgage Banking

October 2015

By Robert Stowe England

 

“In theory, there is no difference between practice and theory. In practice, there is,” baseball legend Yogi Berra famously quipped. President and Chief Executive Officer (CEO) Ronald Faris and other senior managers at Ocwen Financial Corporation, Atlanta, are learning all about the difference between theory and practice as they implement changes integral to their turnaround strategy.

 

In the near term, Ocwen will soon complete its plans to sell about half its agency servicing. Blocked from acquiring new servicing rights by regulators, Ocwen’s revenues, earnings and book values have been declining. Proceeds from the sale of agency assets are being applied to reduce corporate debt the company took on to make acquisitions and to lower the company’s overall leverage ratio.

 

In the longer term, Ocwen intends to gradually ramp up its currently modest origination volumes so that the flow of new mortgage servicing rights it generates from its own originations can eventually replace the natural runoff from its servicing portfolio. Such a transition would transform the company from a servicing-focused business to one that looks more like a traditional mortgage banking company, according to Faris.

 

The vision

 

The road ahead is challenging, acknowledges Faris, who addressed his vision for the company in an exclusive interview with Mortgage Banking at his office in West Palm Beach, Florida. “It’s going to take some time to transform the company into a long-term profitable and sustainable enterprise,” he says.

 

“I think in the end, what we want to do is provide really good service to our customers, both on the servicing and origination side. We want to have a very strong corporate governance and compliance infrastructure. We want to have great leaders within the organization. And we want to have engaged employees,” Faris says. “And I think over time, all of that will take hold and the profitability part will take care of itself.”

 

So far, equity analysts have taken a wait-and-see attitude.

 

“The good thing is that it looks like most of their regulatory issues have been largely addressed. Now they can focus on executing their plans,” says Bose George, equity analyst at Keefe Bruyette & Woods Inc. (KBW) in New York, which has a neutral rating on the company’s stock.

 

In George’s view, Ocwen has made the right strategic moves.

 

“I think they are moving in the right direction. They need approval from regulators to grow again through acquisitions. Until that happens, they are essentially running off the main portfolio,” George says. “It’s going to be hard to do anything apart from cutting costs until they are allowed to become active again on the acquisitions side.”

 

In the near term, Ocwen is facing a squeeze, according to Kevin Barker, senior vice president and research analyst at Compass Point Research and Trading LLC, Washington, D.C. “The company is in the process of shrinking its servicing portfolio to satisfy regulator demands and pay down term loans to satisfy debt holders,” he says.

 

“The process of selling part of their portfolio is reducing the revenue faster than they can cut expenses,” Barker points out. “At the same time they need to satisfy regulator demands, which is causing them to increase staff, consultants, compliance and risk management personnel. This is very expensive,” Barker notes.

 

“So what you have is a company that is going to end up losing money for a few quarters before they right-size operations for the amount of revenue they are bringing in,” Barker says. Compass Point upgraded Ocwen’s shares August 26 from a “sell” to a “neutral” rating.

 

The CFO’s perspective

 

Ocwen Chief Financial Officer Michael Bourque is positive about the progress the company has made in downsizing its agency servicing portfolio. “So far, it’s gone as expected. From an asset sale standpoint, we actually sold more faster--and that allowed us to get on with the strategy very quickly,” says Bourque.

 

The company should complete and close on all its planned asset sales by the end of 2015. “It’s a big deal for the company to work through both the sales strategically, to follow on with cost optimization but also to de-lever and position the company in 2016 for hopefully what will be a bit more of offense” in terms of its strategic focus, Bourque says.

 

In the short term, the transition will be challenging. “Until your transfers are actually done, you can’t begin to right-size the cost structure accordingly. So, there will be a lag between the time the revenue comes out and the cost comes out,” says Bourque.

 

In the second quarter, Ocwen earned $10 million on revenues of $463 million, down from earnings of $43 million on $510 million in revenues in the first quarter. In a July 30 conference call after the markets closed, Faris and Bourque answered questions by analysts about the company’s statement that it plans to reduce its cost by “at least $150 million.”

 

Analysts raised questions about the timing, pace and the extent of the costs savings. The next day there were two downgrades of Ocwen. Bank of America Merrill Lynch lowered its rating from “neutral” to “underperform” while Sterne Agee lower its rating from “buy” to “neutral.” The same day Ocwen’s share price plunged 28 percent to 8.43 from the prior day’s 11.76 closing price. A week after the conference call, three analysts had a “sell” rating on Ocwen shares while eight analysts rated it a “hold.”

 

Bourque, however, thinks the markets jumped to the wrong conclusion. “We were aiming above $150 million but we were just not saying where,” Bourque says. “It was a point that was somewhat missed by the markets,” he adds, as investors appeared to have assumed the cost-improvement target was $150 million and no more.

 

During the conference call, Faris outlined a framework for the company’s future revenues and earnings expectation that gave more hints on expected cost improvements. Faris explained that structural changes in the business made it necessary for the company to reset its operating margin benchmark from 57 percent, where it was set in 2012, to 43 percent.

 

Faris cautioned, however, that operating margins for 2015 may ultimately come in between 20 percent and 30 percent before heading back up toward the company’s new benchmark. If agency servicing sales go as planned, “we should remain profitable for the full year,” Faris said.

 

Ocwen is more upbeat about 2016. “We believe we will be profitable next year and show margin improvements next year,” Bourque says. “That’s going to be largely the result of cost improvements, but also continued operational improvements and our investment in our infrastructure and technology,” he adds.

 

Growth brings challenges

 

Ocwen’s meteoric rise as a servicer peaked in 2013 with a $455.17 billion servicing portfolio, according to Inside Mortgage Finance, when the company toppled mortgage industry giant Citibank from fourth place on the servicing rankings.

 

Nationstar Mortgage Holdings Inc., Coppell, Texas, pushed Ocwen down from fourth to fifth place in servicing rankings in the first quarter of 2015. At the end of the second quarter of 2015, Nationstar held a $404 billion servicing portfolio, while the size of Ocwen’s portfolio had fallen to $316.02 billion, mostly from the sale of agency servicing rights.

 

After growing exponentially in the years after 2010, when big banks began to cast off huge chunks of their servicing portfolios to non-banks like Ocwen, the company captured negative headlines for operational problems and servicing missteps as it integrated vast new servicing portfolios into the company’s operations. The problems, in turn, led to intense regulator scrutiny, on-site monitors, and intrusive agreements with federal and state authorities.

 

For Ocwen, the slip-ups have been a painful experience because in actual practice--not just in theory--Ocwen blazed the trail in the 1990s and 2000s for innovative ways to keep homeowners in their homes, including principal reduction for loans where this option was allowable in the securitization documents.

 

Ocwen pioneered the practice of using net present value calculations of loan modifications to see if a given option, such as principal reduction, would likely result in a better recovery for investors.

 

Since 2009, Ocwen has completed 519,700 loan modifications, according to a company tally through the end of the first quarter of 2015. That includes 235,100 loans with principal reduction, 157,500 Home Affordable Modification Program (HAMP) loan revisions, 59,000 shared appreciated modifications and 303,200 non-HAMP modifications.

 

A February 2015 report titled “Understanding Ocwen Servicing” by New York-based Morgan Stanley credit analysts James Egan, Jeen Ng and Vishwanath Tirupattur estimated that Ocwen was servicing 40 percent of the 2004–2007 subprime universe, 22 percent of the alternative-A universe and 23 percent of the option adjustable-rate mortgages (option-ARMs).

 

The Morgan Stanley report also found that while Ocwen had similar rates of loan modifications as other non-banks, Ocwen’s modifications were more likely to include principal reductions than the market as a whole.

 

“Ocwen appears to be significantly better at keeping borrowers in their homes,” the credit analysts stated.

 

Ocwen’s advantage in homeownership retention is due in part to its pioneering effort in loan modifications with principal reduction.

 

In cases where the borrower is underwater and the modification is likely to be better for investors than foreclosure, Ocwen is likely to recommend going forward with principal reduction when it is allowed, according to Faris. Typically, it has been an option only with subprime non-agency securitizations, according to Faris. Fannie Mae and Freddie Mac disallow principal reductions.

 

Trustees and master servicers of mortgage securities review Ocwen’s proposed loan modifications before they are offered to consumers.

 

“They’ve looked at our models. They’ve looked at our net present value calculations. They’ve looked at the data that we have that supports our models,” says Faris. “And they’ve concluded, as we have, that principal reduction is not only allowed under the agreement, but arguably it is the right and best alternative the servicer should take.”

 

New direction

 

A new direction for the company was born of necessity after Ocwen’s prior strategy of growing by acquiring large portfolios of mortgage servicing rights ran into a brick wall in February 2013. That’s when former New York State Superintendent of Financial Services Benjamin Lawsky put an indefinite hold on the company’s plans to acquire the mortgage servicing rights for a $39 billion portfolio of 184,000 loans from San Francisco-based Wells Fargo & Co. In November 2013, Ocwen and Wells Fargo backed away from the deal.

 

A year later, in December 2014, the New York financial regulator put a hold on all servicing acquisitions until Ocwen could meet benchmarks developed by an operations monitor to demonstrate that its onboarding process for newly acquired mortgage servicing and the processes for handling its existing loan portfolio could meet benchmarks for operations, quality control and accuracy.

 

The New York State Department of Financial Services chose as its monitor Goldin Associates LLC, a New York-based consulting firm, to develop the benchmarks and measure the company’s progress in meeting them.

 

Ocwen agreed to the monitor and the benchmarks as part of a $150 million settlement with the New York State Department of Financial Services under which it would pay $50 million ($10,000 each to 5,000) to foreclosed borrowers and $100 million to New York state for housing, foreclosure relief and community development.

 

The consent order forced out William Erbey, Ocwen’s chairman, a founder of the company and its largest shareholder. Faris became the top executive officer in the company after Erbey left his post as executive chairman on Jan. 16, 2015. Ocwen board member Barry Wish was named the new non-executive chairman of the board.

 

The company’s technology systems and its personnel are at the top of the monitor’s list as well as the size of its servicing workforce, its training and expertise. Goldin also monitors internal controls the company has set up to identify and correct errors, along with the company’s overall risk management efforts.

 

The monitor’s job is to identify weaknesses and deficiencies in operations and oversight, and to make recommendations to Ocwen and the superintendent of the New York State Department of Financial Services to address those problems. Once recommendations have been adopted, the monitor oversees the implementation of recommended reforms.

 

Consent order conditions

 

When the New York financial regulator forced out Erbey as executive chairman, it was done in part because former superintendent Lawsky saw a conflict of interest in having Erbey serve as chairman of Ocwen while also serving as chairman and sometimes key shareholder of other companies with close business ties to Ocwen.

 

Erbey “now has a fiduciary duty to recuse himself from contract negotiations,” says Compass Point’s Barker, because “he does have a vested interest in ensuring that both parties benefit from any transaction.”

 

The consent order identified four related parties that together were valued at more than $1 billion. Under the consent order, Erbey is not allowed to have any role at Ocwen or any related party. Ocwen is to conduct semiannual benchmark studies of price and performance standards for fees or expenses from the related parties.

 

Chief among the related parties with ties to Erbey is Altisource Portfolio Solutions SA, Luxembourg, a company that was spun off from Ocwen in 2009. Altisource has dozens of subsidiaries that perform fee-based services for Ocwen, including Hubzu, an online auction site that hosts all Ocwen auctions. “Hubzu has charged [Ocwen] more for its services than to other customers--charges which are then passed on to borrowers and investors,” according to the consent order from the New York financial regulator.

 

Ocwen also has an ongoing business relationship with Home Loan Servicing Solutions Ltd., based in the Cayman Islands, a company originally launched by Erbey and Ocwen “as a better way to finance our servicing business,” Faris says. Erbey is not the largest shareholder of Home Loan Servicing Solutions, although he did serve as chairman, Faris notes. The company was dissolved and its assets sold to New Residential Investment Corporation, a public company real estate investment trust (REIT) based in New York, which has no affiliation with Erbey or Ocwen.

 

With Erbey gone, senior management at Ocwen “may be more likely to look out for Ocwen’s best interests” in its relationship and contract negotiations with Altisource and other companies with ties to Erbey, observes Barker.

 

A rapid ascent in servicing

 

Ocwen’s quick rise into the big leagues in servicing was startling to some. The company, founded in 1988, began to expand rapidly after 2000 when it began to acquire the servicing rights created by Wall Street’s burgeoning subprime private-label securitization business.

 

Buying up Wall Street servicing rights pushed Ocwen for the first time into the top-40 ranks in 2002 when it reached No. 25 in the rankings with $30.52 billion in loans, according to Inside Mortgage Finance.

 

“From 2000 to 2007, most of our growth was purely as a third-party servicer and almost exclusively in subprime--servicing non-agency securities,” says Faris.

 

Its servicing portfolio rose to $52.75 billion in 2007, ranking 24th among top servicers that year, according to Inside Mortgage Finance.

 

After the private-label subprime securitization business collapsed in 2007, it brought a halt to Ocwen’s growth strategy tied to Wall Street’s non-agency securitization business. Then a new opportunity arose from the servicing shops that Wall Street firms had either created or acquired, Faris recalls.

 

Wall Street firms decided to sell off their captive servicing operations and Ocwen became a major acquirer, starting with the $1.3 billion purchase of Barclays’ mortgage servicer company, Sacramento, California-based HomEq Servicing, in September 2010. By year-end 2010, Ocwen had servicing rights for loans with $71.74 billion in unpaid principal balances, according to Inside Mortgage Finance.

 

In June 2011, Ocwen purchased Litton Loan Servicing from Goldman Sachs and followed that with the acquisition of Saxon Mortgage Services from Morgan Stanley in October. By year-end 2011, Ocwen’s servicing rose to $99.51 billion, according to Inside Mortgage Finance.

 

In 2012, Ocwen set its sites on larger targets. One was Homeward Residential, a company put together by billionaire distressed-asset investor Wilbur Ross, who had acquired American Home Mortgage out of bankruptcy and also acquired Option One’s servicing portfolio.

 

Then in October 2012, Ocwen made its biggest acquisition of all when, in conjunction with Walter Investment Company, it won its $3 billion bid for the servicing and origination platform assets of Residential Capital LLC (ResCap), the old GMAC Mortgage company based in Fort Washington, Pennsylvania, and owned by Ally Capital.

 

“ResCap was the biggest, and in some ways the most transformational, for Ocwen,” says Faris.

 

Together, Ocwen and Walter Investments purchased the ResCap servicing rights for 2.4 million loans with $374 billion in unpaid principal balance. About 68 percent of the servicing portfolio was for loans owned by Fannie Mae or Freddie Mac, or guaranteed by Ginnie Mae.

 

Under the joint bidding agreement, Walter Investments, which owns GreenTree Servicing, got most of the Fannie Mae portion of the deal, representing the servicing rights for $50.4 billion in home loans. Ocwen got all the rest.

 

“We were mostly interested in the non-agency servicing, but it was a package deal,” Faris recalls. The ResCap acquisition made Ocwen the fourth-largest servicer in the country, displacing Citibank.

 

Ocwen’s last big acquisition, completed in 2013, was a deal to buy a $78 billion mortgage servicing portfolio from OneWest Bank, Pasadena, California. OneWest had acquired many of its assets from a bankrupt IndyMac in 2009.

 

Selling agency servicing

 

Ocwen’s decision to sell off most of its agency servicing from a peak ownership stake of $200 billion down to about $80 billion or $90 billion is a logical and appropriate strategic move, according to Guy Cecala, chief executive officer and publisher of Inside Mortgage Finance in Bethesda, Maryland.

 

“The strategy is to reduce debt on the company’s balance sheet,” he says. “And the easiest way to do that is to sell servicing.” The company has focused on selling servicing rights on agency loans (those sold to Fannie Mae and Freddie Mac) because it tends to get the best value and it can be sold at a profit, Cecala says.

 

Agency servicing sales benefit Ocwen in a number of ways. For one thing, agency servicing is a thinner margin business than non-agency servicing. For another, it does not fit neatly into the company’s central strategic focus.

 

“Our original intent and design was never to be a large agency servicer,” says Faris. “Most of the agency servicing came with acquisitions where we were really focused on the non-agency [servicing], but the agency came along with it,” he adds.

 

Agency servicing is very interest-rate-sensitive and requires hedging, which can be expensive and can often fail to offset losses, according to Faris. Subprime, on the other hand, was more attractive in part because the value of the servicing assets was “very insensitive to interest-rate changes and there was never a need to hedge the portfolios and never a concern about taking large losses because of changes in interest rates,” says Faris.

 

“In the end, the decision to sell just over $90 billion in mostly agency servicing simplified the business and makes us, we think, financially stronger,” says Faris.

 

Ocwen used the bulk of the proceeds to reduce corporate debt by paying down the senior secured term loan by $341 million. Paying down debt levels lowered Ocwen’s debt-to-equity ratio to 1.2 at the end of the second quarter. The ratio stood at 1.7 at the beginning of 2015. Bourque expects that when the company closes on all its remaining agency sales by year-end, Ocwen’s debt-to-equity ratio will fall to 0.75 percent.

 

Getting compliance right

 

For Ocwen to fully execute its turnaround, it will have to demonstrate that it has resolved a broad and deep set of compliance issues with state and federal regulators that have left the company with three monitors working on-site.

 

As noted earlier, Goldin Associates is the monitor for the New York State Department of Financial Services. There is also Joseph A. Smith Jr., based in Raleigh, North Carolina, the monitor for the Office of Mortgage Settlement Oversight, which assesses compliance with the $25 billion National Mortgage Settlement reached in February 2012 between the largest bank servicers on one hand, and 49 state attorneys general, the District of Columbia, state mortgage regulators and federal regulators on the other hand.

 

Ocwen inherited the servicing standards and monitoring under the National Mortgage Settlement for ResCap loans when it acquired servicing assets from ResCap--but only for those assets.

 

Ocwen later consented to a separate December 2013 settlement with essentially the same parties, but it was done with the newly created Consumer Financial Protection Bureau (CFPB) rather than the federal regulators. This separate agreement requires Ocwen to provide $2 billion in principal reduction over the course of three years, as well as an immediate contribution of $125 million in cash to foreclosed homeowners. Finally, the third monitor is Fidelity Information Systems, Jacksonville, Florida, the auditor for the California Department of Business Oversight.

 

“It’s fair to say we have more monitors than any other servicer in the country--definitely more than any of the non-banks,” says Faris. “So, ensuring compliance is really important.”

 

Faris believes that the best way to comply with the array of settlements governing its operations and the best way to protect consumers is for companies to have robust internal compliance systems.

 

“The objective is not to rely on regulators to make sure the companies are complying. What regulators want is for the company to have their own system in place to make sure they are complying, so the regulators can rely on the company’s system,” Faris says.

 

Over the last two years, Faris reports, Ocwen has invested in technology and compliance, audit and testing staff. “We’ve put in place a self-contained risk management system so that the board and CEO have much better assurance that we are complying with the vast number of federal and state regulations that are out there, as well as just properly serving the customers,” says Faris.

 

In June 2014, the company hired Marcelo Cruz as its chief risk officer. Cruz, a professor of risk management at New York University, was previously deputy risk officer at E*Trade Financial Corporation, New York, and has held executive positions in risk management at Morgan Stanley, Lehman Brothers and UBS.

 

Cruz oversees a team of 1,100 employees in operational, market and credit risk analysis and management, including a team in India overseeing servicing operations there.

 

Ocwen’s risk and compliance managers have mapped all the business processes of the firm and identified more than 1,000 operational risks that can be monitored and mitigated, according to Cruz. His office is organizing the policy procedures of the firm. “Like a constitution, it tells everyone how we do things,” says Cruz. Ocwen has also set up controls to monitor how employees are following established procedures. It is a dynamic process where policies and controls “are constantly updated,” he adds.

 

Ocwen got a bit of good news about its compliance efforts in August 2015, when Smith, the monitor for the Office of Mortgage Settlement Oversight posted a report on his investigation into 2014 complaints and referrals that questioned the independence of Ocwen’s internal compliance efforts. Smith stated in his report that he now has “a measure of assurance that the issues with Ocwen’s internal review group’s independence, competency and capacity have been sufficiently addressed.”

 

Service excellence initiative

 

Ocwen is not content just to satisfy demands by regulators but wants to affirmatively establish itself as a leader in the mortgage industry in the arena of customer satisfaction with a recently launched Service Excellence Initiative. The company faces formidable competition in that regard from Detroit-based competitor Quicken Loans, which in August garnered the highest rating from Westlake Village, California-based J.D. Power and Associates for customer satisfaction in mortgage servicing for the second year in a row, after being ranked highest in customer satisfaction in mortgage originations for five consecutive years.

 

Sherri Goodman, senior vice president of call center operations, heads the Steering Committee for Ocwen’s Service Excellence Initiative. Her department employs 1,500 people to handle borrower conversations.

 

“Ocwen has gone out of the way to say this is a multiyear journey. It will take time to change the look and feel of the organization with respect to process and procedures that support excellent service,” says Goodman, who is based in Ocwen’s Coppell, Texas, office. Ocwen’s program is being modeled, she says, on the approach spelled out in Unleashing Excellence: The Complete Guide to Ultimate Customer Service, by Dennis Snow and Teri Yanovitch.

 

Ocwen is setting up a system of service accountability premised on such measures as the call-abandonment rate, call resolutions and call-handle times. Ocwen is planning to recognize employees who do outstanding work in providing excellent customer service.

 

“I can’t provide a customer excellent service without an engaged employee. And we can’t have engaged employees without a commitment to excellent service at the top of the company. You can’t do one without the other,” says Goodman.

 

Corporate governance

 

Ocwen has also moved to give its board of directors more independence as a way of improving corporate governance in ways that can improve overall operations. With three new independent directors appointed so far this year, eight of the nine directors are independent, with only Ocwen CEO Faris sitting on the board.

 

Phyllis Caldwell, former chief of the Homeownership Preservation Office at the U.S. Treasury, has been serving as one of the new directors since January 2015. She serves on the board’s Compliance Committee.

 

“We are looking at the checklist, the standards and processes that management has developed for making sure they are addressing compliance matters on time, and make sure that the compliance team has the resources it needs to get the job done,” says Caldwell.

 

Caldwell was attracted to Ocwen as a director in part because of her experience working with the company at Treasury. She was attracted to the company in part because a large share of Ocwen’s HAMP modifications involved principal reduction while virtually all the other servicers were reluctant to do principal reduction.

 

“While that doesn’t always necessarily cure everything, it certainly brings a homeowner closer to housing mobility than just payment reduction. That’s an important piece of Ocwen’s home-retention efforts,” Caldwell says.

 

Caldwell is pleased with what she’s seeing at Ocwen since she joined the board. “There’s a tremendous amount of commitment, both at the senior management level and at the board level, to getting it right and doing the right thing by the homeowner,” she says.

 

Caldwell thinks that Ocwen is right to want to help people having trouble with their loans because in the long run it will be good for everyone involved. A homeowner who has “hit a speed bump and is able to modify the mortgage to remain in the home” benefits both financially and emotionally, she notes. A successful modification is also beneficial to the community, she says, because of positive economic ripple effects of keeping people in their homes.

 

“And certainly it’s advantageous to the investors because all the modifications that Ocwen does have to be net present value-positive,” Caldwell says. “And, finally, if the modification is done well and the customer is as satisfied as one can be in a difficult financial situation, then in the long run it’s beneficial to the company.”

 

Input from community groups

 

Caldwell is also pleased that Ocwen set up a Community Advisory Council in 2014 to work with community and housing advocate groups to receive input on matters that might not be captured by the company’s internal metrics. The council is chaired by Faris.

 

One key member of the council--John Taylor, president and CEO of the National Community Reinvestment Coalition, Washington, D.C.--says he is pleased that community voices can be raised at the highest level at Ocwen. During his time with the council, Taylor has been able to offer his reaction to ideas for new products and services and provide feedback on operations.

 

One of the ideas he particularly liked is Ocwen’s shared appreciation mortgage loan-modification program, which gives borrowers a principal reduction. Later, when the house is sold, investors and the homeowner share in the appreciation in the home’s value.

 

Taylor reports that when issues were raised about back-dated letters on loan modifications that Ocwen sent to borrowers, he called then-general counsel Paul Koches to discuss the matter. Koches told Taylor, “Nobody was denied the ability to get a modification” in spite of the back-dating error, Taylor says. “I have to say I believed them. He struck me as a credible person.”

 

Growing originations

 

Ocwen hopes to become a top-10 originator while staying among the ranks of top-10 servicers. This strategy is necessary in part because regulators currently bar Ocwen from purchasing new servicing rights until they are satisfied the company significantly improved its operations and ability to service customers. However, even when Ocwen can resume the purchase of servicing rights on a large scale, the company will have a more sustainable future if it also has a strong origination arm, according to Faris.

 

“When I looked at the business and looked at the future, I’m not sure servicing acquisitions will be as robust as they were when we were buying lots of servicing rights [in the past],” says Faris. When servicing rights in the future do come up for sale, it will likely be for agency servicing for prime mortgages--“not the kind we are as interested in,” he says.

 

“So, our strategy today is to evolve the company to look more like a traditional mortgage company where we have both originations and servicing and, over time, the originations are replenishing the runoff in the servicing book,” Faris says.

 

Ocwen took its first important step into originations in October 2012 when it acquired Homeward Residential Mortgage, which had an origination arm. Later the same month, Ocwen announced it was acquiring reverse-mortgage lender Genworth Financial Home Equity Solutions, Sacramento, California, from Genworth Financial Corporation, Richmond, Virginia, for $22 million. After it was acquired, the company was renamed Liberty Home Equity Solutions.

 

In June 2013, two months after the deal closed, Ocwen asked Otto Kumbar, who had been CEO of Senior Financial Inc., the Genworth division that ran the reverse mortgage business, to become Liberty’s CEO.

 

In 2015, Ocwen will likely originate $4 billion in originations--$1 billion in correspondent, $1 billion in wholesale, $1 billion in retail (which includes HARP [Home Affordable Refinance Program] lending) and $1 billion in reverse-mortgage lending, according to Kumbar.

 

“We do want to grow that business as fast as reasonable,” says Kumbar. “We’re thinking about this for the long term. We’re not thinking of putting on a whole lot of volume in 2015 and then later in 2017 suffer the consequences of moving too fast,” he explains.

 

Ocwen is in the process of “collapsing” the four different origination platforms it acquired with Homeward and Liberty into a single origination platform, and expects to complete that in just over two years.

 

In the end, Ocwen’s senior management is undeterred by its significant challenges and positive about the company’s future. “We’re going to go through some challenging times here to get us back to where we are earning a reasonable return for our investors,” says Faris.

 

“There’s some transformation that needs to take place and is taking place, and I think we have a good plan and we’re going to carry it out,” he says. “And hopefully as time goes on, that plan will prove to be successful not only for our customers but also for our shareholders and investors.”

 

That will depend, of course, on whether the strategy works out as well in practice as envisioned in theory.  MB

 

Copyright © 2015 Mortgage Banking Magazine

 

bio: Robert Stowe England is a freelance writer based in Milton, Delaware, and author of Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance, published by Praeger and available at Amazon.com. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

 

Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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