WASHINGTON (AP) — New York's top financial regulator said Monday he will investigate whether the nation's largest overseer of subprime mortgages, Ocwen Financial Corp., overcharged struggling homeowners on insurance.
In a letter Monday, New York Financial Superintendent Benjamin Lawsky said Ocwen created complex business arrangements apparently to funnel as much as $65 million to Altisource Portfolio Solutions S.A., a publicly traded company led by former Ocwen executives and partially owned by Ocwen's executive chairman, William Erbey.
Altisource's total income last year was $130 million, according to its financial filings.
As the chairman of both Ocwen and Altisource, Erbey said in Securities and Exchange Commission filings that he recuses himself from any transactions between the companies. But Erbey oversaw the business deal New York is scrutinizing, Lawsky wrote, which "appears to be a gross violation of this supposed recusal policy."
The stock market's response to those allegations was dramatic. Altisource, which began the day with a total stock market value of $2.3 billion, began falling within minutes, ending the day down nearly 15 percent. Altisource did not respond to requests for comment. Ocwen issued a single-sentence statement declaring that it "will continue to cooperate" with New York regulators.
At the root of New York's allegations is a product called force-placed insurance, which servicers like Ocwen force struggling mortgage borrowers to buy if they don't maintain voluntary homeowners' insurance. If mortgage borrowers don't pay up for the newly purchased insurance, Ocwen forecloses on their homes. Lawsky said the extra expense of some policies "can push already struggling families over the foreclosure cliff."
Regulators including New York's Department of Financial Services and the Federal Housing Finance Agency have sought to stop big banks and other mortgage servicing companies from profiting by saddling homeowners with allegedly overpriced force-placed insurance. But some mortgage servicers appear to be skirting those rules by selling off nearly non-existent insurance agencies, the AP reported in a story last week.
That story described how Ocwen sold Beltline Road Insurance Agency Inc. as part of an $86 million deal last year with Altisource, where Erbey is chairman and its largest shareholder. The deal occurred in the same month that the Federal Housing Finance Agency formally proposed banning direct insurance commissions from subsidiaries.
Ocwen did not respond Monday to phone calls and emails from the AP. Last week in a statement to the AP, Ocwen noted that it had owned Beltline for only a short period after acquiring it along with the assets of a smaller mortgage servicer. Ocwen said it no longer collects any commissions from Beltline and sold the agency to Altisource solely because the agency didn't fit in with Ocwen's business model.
Lawsky, however, alleges that Ocwen used another insurance agency, Southwest Business Corp., as an intermediary for payments to Altisource. That business arrangement will allow Altisource to "generate significant revenue from Ocwen's new force-placed arrangement while apparently doing very little work," Lawsky wrote, adding that Altisource's intent was to "use this opportunity to steer profits to itself."
New York acknowledged Monday it had already intervened in recent weeks to stop another major mortgage company from selling an affiliated insurance company. It did not provide details, but AP reported last week that, after the AP raised questions about the deal, the Department of Financial Services raised objections about the $100 million by Nationstar Mortgage Holdings Inc. of its insurance agency, Harwood Service Co., which has no website, no independent offices and only a single registered insurance agent.