The Full Story on Subprime Loan Servicers

Lincoln Brown
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Posted: Mar 18, 2015 12:01 AM
The Full Story on Subprime Loan Servicers

When I bought my first home, I remember being as frightened as I was excited. Don’t get me wrong, I was excited about the prospect of new digs. It was a brand new home and I would be the first one to live in it. And after years of struggling, it was a sign that I had come into my own and was ready to take my place among society. Be that as it may, my mouth went dry when I saw it had been taken off the real estate listings and as it sank in that I was now not just a homeowner, but a man who would be making 30 years of mortgage payments.

The purchase of a home is at once a source of great joy and sheer terror. When the dishwasher stopped working my first week in the house, I instinctively picked up the phone to call “the landlord” only to realize that I was “the landlord.” I relived that memory five years later, when the hot water heater went out and I had pony up $920 for a new one. I checked the roof for ice dams in the winter, and my blood ran cold whenever something stopped working. I remember my first homeowner’s insurance claim, when a severe hail storm punched holes in the vinyl siding. That having been said, I also fondly remember my first Christmas with my wife in that house, birthday celebrations for the grandchildren, Thanksgiving dinners, and playing with my grandson in the back yard. But the memory of my deceased water heater being carried out of my house like an unidentified body is just as vivid, and is also just as firmly etched into my mind.

The cliché goes that owning a home is the American Dream. But the American Dream has a price and not everyone can afford it. However, for those who want a chance at the American Dream and who do not qualify in the traditional sense of the word, there are legitimate ways to achieve that dream. But not every lender has played by the rules in helping people reach, or at least approach that goal.

The words “Housing Bubble” hang over the financial landscape like a foggy inversion. We all remember the “big banks” who cooked the books, stacked the decks, colored outside the lines, played fast and loose, or (insert your favorite aphorism here), in order to get people into homes for which they were not qualified. And we remember the aggregate effect of these practices when the housing bubble burst. Certainly, those people whose eyes were bigger than their wallets do bear some of the blame for obligating themselves payments they could not make. But, and let me be clear about this, not all subprime borrowers were people who became feverish over the thought of owning a McMansion and got in over their heads carelessly. Many subprime borrowers are honest, hardworking people who in many cases just can’t get a conventional loan but who truly do want a shot at the American Dream.

And yes, there were banks that got dollar signs in their eyes and killed the fatted cash cow by taking extreme measures to qualify people for mortgages. Data was manipulated, lies were told and facts were distorted in order to expedite mortgages that should never have existed in the first place. The results were broken hearts, broken promises and broken dreams. And, a mess that continues to be the ghost at the national financial banquet. (Read Shakespeare’s Macbeth if you don’t get the reference.)

However, Ocwen was not one of those banks. Ocwen isn’t even a bank. Ocwen is a loan servicer. Ocwen was not twirling its moustache in dastardly glee as it evicted Aunt Polly from the family home, or tied Penelope to the railroad tracks. It was not fudging numbers in a back room to process nefarious mortgages. In point of fact, Ocwen actively tried to keep subprime borrowers in their homes. Ocwen did not even originate any of the subprime loans it serviced. Those loans were originated by the “big banks” of story and song, who in 2009, realized what a mess they had created and wanted those mortgage services off their books.

So, enter Ocwen, who purchased the mortgage service rights to many of these subprime mortgages and has done as much as it could to keep as many people as possible in their homes as possible. Ocwen acquired more than $400 billion in MSR’s and tried to help people under government programs to prevent foreclosure. Ocwen actively worked with HUD approved counselors throughout the country to modify more than 500,000 mortgages.

Subprime mortgages are not easy to manage. There are issues of credit and income, and subprime borrowers frequently have to deal with life issues that do not affect the lives of conventional borrowers. This is not a story of Big Business exploiting little people, this is a story of a business trying to assist people. Not just because it is good for the market, but because it is the right thing to do. That is a narrative that is not popular in the media these days, and so Ocwen became a soft target for outrage and action.

In the quest to be perceived as dealing with the home finance issue effectively, government regulators decided to target the servicers. When it was convenient to penalize the banks, Federal regulators went after the banks. When it was expedient and dramatic to penalize the servicers, the regulators targeted the servicers. The regulators, rather than working with Ocwen, decided that the company had gotten too big too fast and some air needed to be let out of its tires.

In late 2013 the company agreed to a $2.1 billion settlement and fine with federal and state regulators to settle charges of alleged misconduct. Last December it reached a settlement with New York State that required the company to change its practices and provide $150 million to help struggling homeowners. The agreement also forced founder William Erbey to resign as chairman of Ocwen as well as four related companies. And let’s be honest, most companies understand that in his day and age, it is easier to settle than it is to fight. Did Ocwen make mistakes? Yes, but it did so during an effort to clean up a mess that it did not create.

Servicers of subprime loans provide a critical function to the U.S. economy, including homeowners, investors and the housing market in general. They do the work that many better-capitalized financial institutions, including many of the nation’s largest banks, are either unwilling or unable to do.

A recent report by Morgan Stanley,[1] titled “Understanding Ocwen Servicing,” does just that. Unfortunately, that report hasn’t gotten the widespread coverage.

Ocwen’s modification style “differs starkly from its peers,” Morgan Stanley’s research analysts found. “Since the beginning of 2011, they have been far more likely to give a borrower a principal modification than the market as a whole. Ocwen has been far more generous to borrowers than the overall subprime market.”

Modifying mortgages for struggling homeowners is clearly in the overall public interest. But this strategy has also paid off for Ocwen’s investors, those who own the securities backed by the mortgages the company services. By doing what it can to help as many borrowers as possible avoid default and eventual foreclosure, investors benefit by the avoidance of what would be even bigger losses in a liquidation. Ocwen’s performance on this score is better than any other servicer.

Since 2011 Ocwen was more likely to perform a principal modification for struggling borrowers and “far more likely to cut a borrower’s monthly P&I payment by 50% or more,” the report said. That strategy, Morgan Stanley said, “…appears to have been effective in keeping borrowers in their homes.” And “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. 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 residential mortgage-backed securities (RMBS) market, including almost 40% of the loans originated from 2004-2007, when the riskiest loans were made. 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.

Yet, Morgan Stanley found that “whether a borrower first went delinquent while being serviced by Ocwen, or fell delinquent and was then transferred to Ocwen, these borrowers are more likely to be in their home today than if the MSR (mortgage servicing right) was held elsewhere.”

Unfair, negative media coverage of mortgage servicers could have the unintended effect of destabilizing this industry, which could in turn have a negative effect on investors and homeowners. Already, many companies have chosen to leave or been driven out of this industry because of the negative publicity and overzealous regulatory scrutiny it attracts.

If the trend that affected Ocwen continues, with regulators trying to demonstrate that they are” doing something” about mortgage problems by sanctioning the very companies trying to keep people in their homes; the result will be that the pool of servicers who do this job will continue to contract. As a result, the U.S. housing and lending markets will face increased risk and reduced credit availability. Ensuring the flow of available credit to nonconforming borrowers remains a public good that needs to be supported.