Housing counselors and advocates have been insisting for years that principal reduction is the only way to sustainable loan modifications and neighborhood stabilization—and that it is better for investors too. Their points have largely fallen on deaf ears. So when Ocwen Financial, a leading, and fast-growing, servicer of subprime loans introduced an ambitious principal reduction program last year, we took notice.
Please tell me a little bit about yourself and your experience at Ocwen.
[Before Ocwen] I worked for about five years at a Wall Street company that’s no longer around, Kidder Peabody, and was owned by GE at the time. That’s where I got my introduction to the mortgage business. I joined Ocwen in 1991, and my first role was as the controller for a mortgage insurance company that Ocwen owned at the time.
What a mortgage insurance company does is, obviously, writing policies to insure losses. If a loan does go into default, the first loss is going to go to the insurer. So the insurer has a vested interest in making sure there are quality workout solutions to minimize losses.
When I joined in ’91, Ocwen basically had two businesses. We had the mortgage insurance company, which had stopped writing new policies but was still receiving premium income from existing policies and managing its claims process, and took an active role in managing and working with servicers to more effectively deal with delinquencies.
The other piece of our business was a bank the form of a Thrift, and that Thrift got involved with buying subperforming and nonperforming mortgage loans from the RTC, which again was all about how do you more effectively find workout solutions for borrowers and minimize the loss on your investment. So back then the losses were ours, whether it was on the insurance company side or on the assets that we owned in the Thrift.
We learned pretty quickly that we lost a lot more money if we ended up going all the way through to foreclosure than we did if we were able to find a way to keep the homeowner in the home and get them paying again. And that really became the basis for how we approached loss mitigation.
Our business progressed to where we were a pretty large buyer of nonperforming mortgage loans from the RTC and then from banks and others. But as we got towards 1996, 1997, 1998, the company actually went from a private company to a public company, and — although it pales in comparison to today — there was also in ’98, ’99 a credit crisis that caused some problems for smaller, mid-sized finance companies. We weathered that storm quite well, but a lot of others didn’t. [But we] changed our business model and decided we would no longer buy assets for our own account, but we would instead just service assets for other parties who either wanted to invest in loans or already had an investment and needed help with their delinquent loans.
We had a very robust platform that we were under-utilizing, and also we found that the banks, and especially the larger banks, had a much lower cost of capital and could buy assets and finance them cheaper. So we said, “Well, we’ll never beat them on the capital side, but we can probably always beat them on the servicing and special servicing side, so why don’t we just go out to them and say, ‘Look, you’re good at raising low-cost capital and we’re good at servicing loans and minimizing losses. Why don’t we combine forces?’”
Now, as it turned out, probably the place — at least in the early to mid 2000s — where that model seemed to fit best was actually as a result of the boom in the subprime market. As the amount of subprime loans increased, and as Wall Street in particular got more involved with it, there was a much larger demand for servicers who could handle pools of loans that had a lot of delinquencies in them, and so that became a prime focus of ours throughout most of the 2000s.
You must have seen the future clearly by 2004.
Well, I should really compliment people like Mark Seifert of ESOP and others in the consumer advocacy world, who saw it long before industry saw it. I can remember sitting down with various advocacy groups and them talking about the struggles families were having and how the subprime market was a big part of the problem and, in their view, not a sustainable model.
I remember — I think it actually was in Cleveland, ESOP taking me around and showing me — walking down a street and saying, well, here’s a house on one side that’s really well kept, really nice. Here’s a house on the other side that actually at one time Ocwen foreclosed on. They sold the real estate to an investor who got a subprime loan from Ameriquest and within nine months went delinquent again, and the home was back sitting on the street in foreclosure in relative disrepair. It was very clear, when you saw it firsthand, how that was affecting not just that one isolated house but the houses all around it. So I think I got a lot of my education in what was to come from some of the advocacy groups who were showing me what was really happening in the neighborhood.
For us, though … we were not an originator. We were not an investor in the loan. So there wasn’t a lot that we had to change besides just making sure that we were prepared for the increase in delinquencies that had started and was likely to continue.
By no means is it a good thing what’s happened. But for Ocwen, our business model was actually more prepared for where the world has gone than I’d say most other servicers, which obviously on the larger scale is unfortunate, but it did require greater demand for our services.
Now, there was a short period where demand dried up because there was no longer a subprime business, so there was no new business coming in. But you’ve seen over the last few years, players looking to exit that legacy business and we now have the opportunity to consolidate what’s left and grow the number of accounts that we’re managing.
You just purchased the servicing rights to a number loans, such as the Litton portfolio from Goldman Sachs and part of the Chase portfolio.
Right, as well as the entire HomEq portfolio and servicing platform that was owned by Barclays. We purchased that in 2010. And we recently announced our purchase of Saxon Mortgage from Morgan Stanley, which we anticipate closing in this quarter. These deals are available mostly because those companies — Barclays, Goldman Sachs, Morgan Stanley — are looking to exit the mortgage servicing business altogether. In the case of Chase, I think they determined that there may be certain portions of their portfolio that either were not core and were more suitable for somebody set up like we are.
You said that you figured out early on that you lost a lot more money going to foreclosure than doing a good workout. No doubt you’ve heard from Mark and other advocates how hard it’s been to convince banks and servicers that that’s the case. How do you account for the resistance in the rest of the mortgage industry?
I think it was largely because a lot of the mortgage industry was focused on the origination side of the business, was not out there seeing what was really going on in neighborhoods.
But being a subprime servicer, we serviced loans that were originated by New Century, by Ameriquest, by Option One, by Accredited, all of the originators out there. Even though some of them had their own servicing operation, we ended up with loans from all of them because they sold to Wall Street and Wall Street would hire us to do the servicing. So we had a good cross-section of what was going on throughout the industry.
And again, I don’t want to overstate that I — or anyone at Ocwen — was fully able to predict what was happening out there. The difference for us was we didn’t own any of the risk and our job was to service the loans. If they went delinquent, then that’s when we were at our best in working with customers. We just kept doing what we were doing. We were just doing more and more of it.