ItsAValueTrap Posted January 30, 2015 Share Posted January 30, 2015 Ocwen contracts with ASPS to manage all of their BPOs (and other services, but BPOs is just the easiest example). Altisource using a pretty neat "dutch tender offer" system to manage its BPO work and most of their general work. The contractors bid how much they will do the work for and ASPS chooses the least expensive. ASPS contracts with the realtor to do the BPO. Altisource pays $40 per BPO, minus a $1 billing fee (I am not making this up)--and then turns around and bills Ocwen the full $80 or $105 if it is an inside BPO. In other words, Ocwen is never going to find a a rate below the fee schedule, but at the same time, it has essentially no overhead on that transaction itself. This is why they can operate at such a higher profitability than the others servicers. These are internal costs that Ocwen has outsourced to ASPS. At the same time, ASPS has marked-up those costs so high when sending them back to Ocwen that ASPS is also able to show such large margins. You understate the costs a little bit because clearly there are other costs: - Overhead - Cost of direct deposits (bank account fees and such) - Cost of soliciting agents to do BPOs, people to handle agents' questions and problems - Quality control - Software development etc. etc. But charging $105 for such a BPO would be a big markup. (I have no idea what the rate is. Does somebody have a copy of Ocwen's fee schedule?) Altisource doesn't seem to have a lot of non-Ocwen customers for its Residential property valuation line of business. Appraisals should generate most of the revenue for that segment because they cost a lot more than BPOs. 95.8% of that business is related party it seems... whereas with everything else, related party revenues are lower percentages. The lawsuit against Ocwen that talks about BPOs seems to seriously understate Altisource's costs to do the BPOs because it ignores overhead. I spent a lot of time with a former Litton/Ocwen employee working through these issues, but I discounted a lot of what he said because he advised a lot of plaintiff firms in suing Ocwen. I'm curious as to how many of those lawsuits have actually gotten somewhere. He is also the one who mentioned to me that the RMBS note holders were going to try to and claim default, and he was right on the money on that one. Haven't lawyers done that for other servicers too? One of the lawsuits against Nationstar actually got somewhere. Actually I'm surprised at how many lawsuits lose despite having some merit. So Ocwen partnered with Intersections (symbol INTX) on some stupid id theft protection product. Both of those companies were sued. Surprisingly... Ocwen and Intersections won. Link to comment Share on other sites More sharing options...
Guest roark33 Posted January 30, 2015 Share Posted January 30, 2015 FYI. Another Moody's downgrade. https://www.moodys.com/research/Moodys-downgrades-Ocwens-SQ-subprime-and-special-servicer-assessments--PR_316552?WT.mc_id= This is the key point on the book value of the MSRs... "In the event that an Ocwen servicer default is deemed, Ocwen could be terminated as servicer. Although in such an event servicing could be transferred without compensation, Moody's believes this is rare and, to keep the transfer as orderly, Ocwen and in turn HLSS would likely receive compensation." As Moody's mentions, this is highly unlikely, but I think it provides a lot of leverage in terms of negotiating a settlement with between the RMBS holders and Ocwen. Link to comment Share on other sites More sharing options...
Guest roark33 Posted January 30, 2015 Share Posted January 30, 2015 As to the BPO pricing discussion--let me preface this by saying, I think it is a brilliant move on Erbey's part, just not that ethical and that's why it is coming back to haunt him. An MSR has a fee stream of income attached to its as a percentage of the UPB. Subprime or already delinquent loans will have a higher % fee income when bought or sold based on the likelihood that costs will be higher in servicing them. However, it is not a cost + contract. Therefore, the servicer has an incentive to provide the bare bones service while still meeting ratings guidelines. What Ocwen has done it outsource their entire (or the large majority of it) cost center to ASPS. If Ocwen still had ASPS in-house, the mechanics would work like this: I am making up these numbers Monthly Fee Income for MSR: $20 Cost to arrange BPO: $10 BPO Fee: $70 (or whatever the negotiate with the realtor). Bondholders: Pay $20 to service loan (the fee income) and also pays the $70 for the BPO (sometimes the homeowner may end up responsible for the BPO if they refinance before foreclosure). The key is that the BPO fee is a pass through fee and the cost to arrange is not. Ocwen shows a gross margin here of 50%. If they didn't have to arrange the BPO, the entire $20 fee would be profit. Ocwen with ASPS: Monthly Fee Income for MSR: $20 Cost to arrange: $3 (merely the outsourced fee to ASPS) BPO Fee: $80 max fee allowed under Fannie/Freddie contract. ASPS: BPO Payment from Ocwen: $80 Cost to arrange $10 BPO fee paid to realtor $40 Profit: $30. The erbey-complex benefits in two ways, if it can get people to do the BPO for lower than the allowed fee, it up-charges this fee within ASPS. If ASPS was in-house, it couldn't up-charge, it would just have to pass along the fee as it is, whether it is 40, 50, or up to 80. The reason it can't up-charge within Ocwen is that the servicer is already getting paid "overhead" to service the loan and its function should merely be to pass along whatever rates it gets. With the ASPS relationship, Ocwen has cover to say, those are the rates that it got, from ASPS, but the rates being paid to the contractors are much lower. Furthermore, because Ocwen has effectively outsourced its entire "cost center" or overhead to ASPS, it can show much higher profitability because it doesn't have to actually arrange for the BPO. ASPS does need to charge Ocwen the full cost of overhead because they make their money going after low-bid contractors and then charging the maximum allowed under the Fannie. It really is a genius in the way that it effectively lives within the letter of the law or servicing agreement, but totally violates the purpose of the contract. Above is what I know....This is what I think...Since the above is technically legal, I think Lawsky was looking for a smoking gun that was illegal and used that as leverage to bring down the house. The backdating of the letters was that smoking gun. That was the mistake a lot of investors made. The backdated letters probably caused no actual damage, but it was illegal. Just like the robot-signing didn't actually kick someone out of their house that was current on their mortgage. But Lawsky used that as leverage because of these other issues. You have asked for evidence, search for the VA report that they did when they pulled all the servicing of VA homes from Ocwen. It's really good and detailed and shows how a lot of the "contractors" that Ocwen hires just don't do the work, and that's how they get such good rates. Sometimes, low-cost just equals low-quality, not better technology... Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted January 30, 2015 Share Posted January 30, 2015 I think you're looking at it the wrong way. 1- The PSAs say what is and isn't a reimbursable expense. If a BPO is a reimbursable expense then it should follow that most of the cost of arranging a BPO is a reimbursable expense. The cost of the software that they use to pay their contractors (or employees) and to transfer information from the contractor to the BPO company... those would be costs covered by the BPO company. The same goes for the cost of doing QC on your contractor's work. Those are all things normally provided by a BPO company. 2- There are some consumer protections available to the consumer. Ocwen should make sure it doesn't run afoul of those laws and rules. The CFPB consent order for Ocwen says that the servicer can't take certain payments on default-related services. 2. Default, foreclosure and bankruptcy-related services performed by third parties shall be at reasonable market value. 3. Servicer shall not collect any fee for default, foreclosure or bankruptcy-related services by an affiliate unless the amount of the fee does not exceed the lesser of (a) any fee limitation or allowable amount for the service under applicable state law, and (b) the market rate for the service. To determine the market rate, Servicer shall obtain annual market reviews of its affiliates’ pricing for such default and foreclosure-related services; such market reviews shall be performed by a qualified, objective, independent third-party professional using procedures and standards generally accepted in the industry to yield accurate and reliable results. The independent third-party professional shall determine in its market survey the price actually charged by third-party affiliates and by independent third party vendors. 4. Servicer shall be prohibited from collecting any unearned fee, or giving or accepting referral fees in relation to third-party default or foreclosure-related services. 5. Servicer shall not impose its own mark-ups on Servicer initiated third-party default or foreclosure-related services. --- Subprime or already delinquent loans will have a higher % fee income when bought or sold based on the likelihood that costs will be higher in servicing them. I don't think that's how it works. The servicing fee outline in the PSA is whatever it is when the mortgages were securitized. In hindsight, the servicing fees were too low on some RMBS. That's how Ocwen got some servicing rights for free. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted January 30, 2015 Share Posted January 30, 2015 Where they may actually be offloading their servicing expenses onto homeowners and mortgage investors is force-placed insurance. So... the servicer is supposed to determine whether or not each mortgage needs force-placed insurance. Lawsky's letters to Altisource talk about how somebody other than Ocwen provides the service of figuring out which homes need force-placed insurance. I think it's ultimately the insurance company that does the work. The insurance company has a vested interest in making sure as many homes as possible get force-placed insurance because that's what they sell. Mortgage contracts may be unclear about whether or not this is allowed. Consumer protection laws generally say that the servicer has to pay reasonable prices. But I haven't looked into every state's set of laws, all the consent orders (except for the 2011 ocwen consent order with the NY DFS), etc. etc. Ocwen doesn't do force-placed shenanigans in New York (that's what it seems like from Lawsky's letter). The terms of PSAs vary. I'm not sure what the legal interpretation of those are. They should say that the cost of hazard insurance is a reimbursable expense. I don't know if the cost of figuring out which homes need force-placed insurance is a reimbursable expense. I suspect that somebody could argue that it isn't. But if you're going to sue you might as well sue over all kickbacks on force-placed insurance. In the past, everybody did kickbacks and even the GSEs overlooked the practice. The GSEs have since stopped that practice on GSE-backed mortgages (rules kicked in June 2014). Link to comment Share on other sites More sharing options...
Guest roark33 Posted January 30, 2015 Share Posted January 30, 2015 As for the % fees, I should have been more clear--That fee is set when the securities are originally issued, but the fee varies based on the likelihood of default--correspondingly, higher yield on bonds will equal higher servicing fees. What OCN or NSM pay for those MSR rights is obviously determined in an bidding or a case by case basis. As for how the costs and fees are passed on, we can disagree on that point. There is, I believe, a lot of evidence pointing in the direction I described above, based on the disparate profitability of the servicers (OCN vs. NSM vs. WAC) and the regulatory actions. Mentioning lender placed insurance continues to obscure the potential underlying reality because it allows investors to think the problem has been taken care of, as opposed to thinking if that was just a symptom. If the RMBS holders actually file a suit, I think we will be able to have a better answer, until then... Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted January 30, 2015 Share Posted January 30, 2015 As for how the costs and fees are passed on, we can disagree on that point. What a servicer's affiliate can do is to simply overcharge for BPOs. Because of the Ocwen/Altisource spinoff, overpriced BPOs would not be in Ocwen's best interests. You don't want to saddle Ocwen with a high-cost structure because then it wouldn't make sense for Ocwen to buy as many MSRs. So, you'd be better off keeping the parts together as one company. So what you do is have Altisource overcharge on default-related services and to underprice its technology services. The pricing will roughly balance out. Legally, Ocwen may be in a slightly stronger position because it isn't buying default-related services from itself. I think that is going on. Link to comment Share on other sites More sharing options...
valueinvestor82 Posted February 3, 2015 Share Posted February 3, 2015 Kingstown & affiliates bought 9.9% between $5.29-$7.26 or so (after selling at $13-$15) and cite undervaluation and possible discussion with management via today's 13D that generated some after market action. Link to comment Share on other sites More sharing options...
Guest roark33 Posted February 3, 2015 Share Posted February 3, 2015 Very odd situation. They lost almost 60% on their position in 2014 when they sold on 12/23 and then started buying again after the CA issues. Waited the 30 days for wash sale rules. More interesting, in their q4 letter, they indicate that they were still buying shares on 1/16, which either means they were selling puts on or before 1/16 or they were lying. For 2014, they were down 7.3%....I guess they have never heard the phrase, you don't have to make it back the same way you lost it... Link to comment Share on other sites More sharing options...
Guest roark33 Posted February 3, 2015 Share Posted February 3, 2015 Good article on how Kingstown was big shareholder last year (2014). very interesting to come back after getting burned last year... http://www.forbes.com/sites/antoinegara/2014/12/22/big-ocwen-bet-could-burn-hedge-fund-kingstown-capital/ Link to comment Share on other sites More sharing options...
Guest roark33 Posted February 3, 2015 Share Posted February 3, 2015 http://www.nakedcapitalism.com/2015/02/tom-adams-ocwens-servicing-meltdown-proves-failure-of-obamas-mortgage-settlements.html Good article on Ocwen... Fairbanks is a good historical case study... Link to comment Share on other sites More sharing options...
mvalue Posted February 3, 2015 Share Posted February 3, 2015 http://www.nakedcapitalism.com/2015/02/tom-adams-ocwens-servicing-meltdown-proves-failure-of-obamas-mortgage-settlements.html Good article on Ocwen... Fairbanks is a good historical case study... I really commend some of your analysis on the OCN situation, but as far as nakedcapitalism I've found it to be kind of like zerohedge as far as extremely dogmatic views. Did very well ignoring their doom and gloom articles on LPS a few years back during the robosigning controversy. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted February 3, 2015 Share Posted February 3, 2015 http://www.nakedcapitalism.com/2015/02/tom-adams-ocwens-servicing-meltdown-proves-failure-of-obamas-mortgage-settlements.html Good article on Ocwen... Fairbanks is a good historical case study... Fairbanks is still around as Select Portfolio Servicing? Link to comment Share on other sites More sharing options...
Guest roark33 Posted February 3, 2015 Share Posted February 3, 2015 1. Yes Fairbanks is still around as Select Portfolio Services, but I am not sure that is the best example of a great track record. They changed their name to remove the taint. 2. As for Naked Capitalism--I am generally in agreement here, but I think shooting the messenger does not absolve you from considering the points of the article. 3. This is a good article on a NY judge dismissing a suit against Wells Fargo for violating the 2012 settlement. It is an interesting read. I am sure people will cite bias here, but you have to ask yourself, if Ocwen didn't do anything wrong, why didn't they fight it like Wells Fargo... http://www.housingwire.com/articles/32811-ny-judge-mortgage-servicing-settlement-does-not-require-absolute-perfection?utm_source=dlvr.it&utm_medium=twitter&utm_campaign=housingwire Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted February 3, 2015 Share Posted February 3, 2015 Perversely enough, some of the servicers with good employee morale and good customer service went bankrupt or were bought out by Ocwen. Homeq Rescap Homeward Litton (originally, Litton was very controversial due to the company pushing out a lot of foreclosures over loan mods. but if you look at indeed.com, they had good employee morale until Ocwen took them over) Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted February 3, 2015 Share Posted February 3, 2015 3. This is a good article on a NY judge dismissing a suit against Wells Fargo for violating the 2012 settlement. It is an interesting read. I am sure people will cite bias here, but you have to ask yourself, if Ocwen didn't do anything wrong, why didn't they fight it like Wells Fargo... http://www.housingwire.com/articles/32811-ny-judge-mortgage-servicing-settlement-does-not-require-absolute-perfection?utm_source=dlvr.it&utm_medium=twitter&utm_campaign=housingwire Ocwen was fully compliant with the CFPB metrics. This is a legal question but presumably the NY DFS has tools it can use against Ocwen such as blocking the purchase of MSRs. The NY DFS did not go after Ocwen for breaching the CFPB consent order. (Also, Ocwen entered into a consent order with the NY DFS a few years ago.) Presumably Ocwen realized that Lawsky is crazy and doesn't **** around given what he did to banks, Uber, Lyft, bitcoin, some subprime auto lender (they deserved it though), etc. Link to comment Share on other sites More sharing options...
mcmaaaaath Posted February 3, 2015 Share Posted February 3, 2015 http://www.nakedcapitalism.com/2015/02/tom-adams-ocwens-servicing-meltdown-proves-failure-of-obamas-mortgage-settlements.html Good article on Ocwen... Fairbanks is a good historical case study... The fairbanks story is a good find though. One interesting thing to note is that it got sold for near book value. Here was the timeline from what I can gather: March 2000: Partial stake bought by mortgage insurer PMI group Dec 2001: PMI buys out Nomura stake in Fairbanks, bringing PMI ownership to 45.7%, having invested $55.8m Dec 31, 2001: $36B in UPB 2002: PMI makes additional investments in Fairbanks, to bring total to $104.4m and 56.8% stake. Oct 2002: FTC informs Fairbanks it is investigating whether its practices conform to the Fair Debt Collection Act Dec 31, 2002: $49B in UPB after acquiring Credit Suisse's servicing platform. Book value of Fairbanks was $177m. March 2003: S&P changes FB's subprime adn special servicer ratings from "Strong" to "Creditwatch with neg implications". Fairbanks is no longer qualified to be named as primary servicer on RMBS transactions rated by Moody's or S&P, but may serve as subservicer under certain circumstances (from 2003 10k). Sept 2003: Fairbanks settles with FTC/HUD for $55m pre-tax Dec 2003: $41B in UPB serviced by Fairbanks. Book value of Fairbanks = $132m 2004: Fairbanks has earnings of a little less than $1m Jan 2005: signed agreement to sell Fairbanks (now SPS) to Credit Suisse for $144.4m + 40m contingency payment. http://www.bizjournals.com/eastbay/stories/2005/01/17/daily43.html https://secure.americanbanker.com/issues/170_158/-256304-1.html So while Fairbanks was extremely troubled, and had to pay a fine of about 33% of book value, it did end up getting purchased at ABOVE the pre-fine book value. No situation is the same of course, but if Ocwen could sell itself the way PMI sold Fairbanks, buying at $6-8 looks like a pretty good idea. (edited for typo) Link to comment Share on other sites More sharing options...
namo Posted February 3, 2015 Share Posted February 3, 2015 "The FHFA's proposed minimum financial requirements for nonbank servicers are likely not as strict as had been feared" http://seekingalpha.com/news/2263536-non-bank-servicers-party-after-capital-rules-unveiled (Note that the article provided in the SA newsflash seems unrelated and doesn't substantiate the claim.) Any comment from people smarter/more knowledgeable than me? I don't know what people expect(ed) the FHFA's capital requirements to be. Link to comment Share on other sites More sharing options...
davidoosnk Posted February 4, 2015 Share Posted February 4, 2015 mcmaaaaath- Brilliant comparison. Is there anything that could impair book value beyond the lawsuits and loss of servicing rights? Link to comment Share on other sites More sharing options...
Guest roark33 Posted February 5, 2015 Share Posted February 5, 2015 Update from the company. Everything seems to be looking good, as expected from a company press release. One thing that is odd, and I think bulls would agree with me, why don't companies whose stock is down, 90% buy back stock? Ocwen specifically states in this release that they are not buying back stock.... http://www.sec.gov/Archives/edgar/data/873860/000101905615000118/ex99_1.htm Link to comment Share on other sites More sharing options...
mvalue Posted February 5, 2015 Share Posted February 5, 2015 Update from the company. Everything seems to be looking good, as expected from a company press release. One thing that is odd, and I think bulls would agree with me, why don't companies whose stock is down, 90% buy back stock? Ocwen specifically states in this release that they are not buying back stock.... http://www.sec.gov/Archives/edgar/data/873860/000101905615000118/ex99_1.htm I'd think the mindset would be if they get everything settled down and build up excess capital there wouldn't be much case for servicer downgrades. Link to comment Share on other sites More sharing options...
valueinvestor82 Posted February 5, 2015 Share Posted February 5, 2015 From the seeking alpha editors and OCN directly quoted: In addition to the previously reported items, Ocwen expects in Q2 or earlier to begin closing deals selling portions of its GSE MSRs. The company anticipates sales of $5B-$20B of UPB per month through year-end. "We have received strong interest from many eligible buyers." This is unfolding as I suspected it would, which I think was the highest probability as well given all of the various stakeholders and their motivations. What's crazy is how quickly it dropped to $6 and now it'll probably take months to get back just to $15. I hope that they have really good reasons not to buy back shares as well. Link to comment Share on other sites More sharing options...
philly value Posted February 5, 2015 Share Posted February 5, 2015 My view is that if the divestiture of agency MSRs goes according to the plan of the call in December, the extreme downside case (the mkt has been essentially pricing in ocwen bankruptcy as a reasonable possibility) is very unlikely. So I think this disclosure does not necessarily boost my upside view but reduces my probability of a disaster scenario, if we assume management is being frank with shareholders. Link to comment Share on other sites More sharing options...
mcmaaaaath Posted February 5, 2015 Share Posted February 5, 2015 Update from the company. Everything seems to be looking good, as expected from a company press release. One thing that is odd, and I think bulls would agree with me, why don't companies whose stock is down, 90% buy back stock? Ocwen specifically states in this release that they are not buying back stock.... http://www.sec.gov/Archives/edgar/data/873860/000101905615000118/ex99_1.htm I agree. The lack of any mention of why they aren't buying back stock has me nervous. Link to comment Share on other sites More sharing options...
mvalue Posted February 5, 2015 Share Posted February 5, 2015 Update from the company. Everything seems to be looking good, as expected from a company press release. One thing that is odd, and I think bulls would agree with me, why don't companies whose stock is down, 90% buy back stock? Ocwen specifically states in this release that they are not buying back stock.... http://www.sec.gov/Archives/edgar/data/873860/000101905615000118/ex99_1.htm I agree. The lack of any mention of why they aren't buying back stock has me nervous. I really disagree. OCN and ASPS put themselves at huge risk going nuts on buybacks when they knew they were facing big problems they didn't take seriously. Now it's about survival, not tight balance sheet optimization. Build up capital and live to rebuild the company. They still face challenges with ratings, MSR transfers, remaining state issues, etc. I think they're taking them seriously now. Link to comment Share on other sites More sharing options...
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