Although often berated as a prime example of the "Liberal Main Stream Media" that conservative radio talk show hosts love to loathe, the latest issue of Time magazine sang the praises of a company that's often been labeled as one of the biggest of the bad boys when it comes to loan servicers who live solely to foreclose on widows, orphans, the halt and the lame: Ocwen.
Time's inamorata is praised for its aggressive loan modification program, one, surprisingly, not sprung form the fruitful loins of Mother Bair. In fact, compared to Ocwen's loan modification, the FDIC's so-called "systematic" approach is found distressingly flawed.
The big problem is that no one has figured out a systematic way to stop the rot. Federal agencies and private lenders have rolled out one loan-modification program after another--scattershot and largely timid attempts to make existing mortgages more affordable and keep neighborhoods intact.
Then there is Ocwen, which has already revised 16% of its 340,000 mortgages, in many cases cutting monthly payments 20% to 40%. Based in West Palm Beach, Fla., the company handles some of the worst loans Wall Street kicked up during the housing boom and isn't about to win any popularity contests among consumers--in the past, it's been the target of complaints about unresponsiveness and excessive fees. Nevertheless, good ideas can come from unlikely places, and as more borrowers--including a growing number with prime loans--fall behind on payments, there are lessons to be learned from the firm that has done more than almost anyone else to keep struggling homeowners in their houses.
The secret to Ocwen's success is all in the computer modeling. When home prices began dropping below the amount of the loan balance in some areas of the country, Ocwen called in its programmers.
So the company reprogrammed its computer models, which determine how to extract the most value from each loan, to allow much more substantial changes--lowering a mortgage's interest rate, docking its principal balance, converting an adjustable rate to a fixed one, stretching out the life of a loan. With many mortgages "upside down" (when the loan is larger than the home's current value) and the economy sagging, changes often have to be drastic to make the math work, but Ocwen has largely found a way, devising an affordable payment plan 90% of the time.
More importantly,however, Ocwen apparently doses itself with loan servicer Viagra.
What really sets Ocwen apart, though, is its vigor. From doing just a couple of hundred modifications a month in the first half of 2007, Ocwen was up to 4,000 a month by the beginning of 2008, with 77% involving a reduction of the interest rate and 20% including a permanent write-down of the principal balance. Is it working? Six months after receiving an Ocwen modification, 21% of homeowners have again fallen behind on their payments by 60 days or more. That compares with a 37% redefault rate nationally, according to data from federal regulators--a figure that also includes much more stable prime loans.
How is Ocwen avoiding the dreaded "loan investor lawsuit" risk? Because, unlike the Blair plan, which involves a simplified "one-size-fits-all" modification scheme, Ocwen actually has the sophistication to prove, by virtue of its computer modeling, that the loan modification (or no foreclosure) option selected for the particular borrower is likely to yield the most financial return to the investor, given the specific set of facts applicable to the specific borrower and the specific collateral.
Ocwen has also answered a key question for other would-be modifiers: whether it's possible to pass major losses to investors without getting sued. Paul Koches, Ocwen's general counsel, holds that the company is not only permitted to take such steps but obligated to--if that's what it takes to squeeze the most money out of a loan for the long term. That's the case executives make when angry investors call--and they do call, especially when a principal reduction chokes off cash flow in a particular month.
Make no mistake: Ocwen has a nearly messianic focus on the goal of maximizing returns for investors. "In most cases, that means keeping people in their homes and getting them to pay their mortgages," says Ocwen CEO Bill Erbey. In foreclosure, investors typically recoup only 60¢ on the dollar.
In a way, Ocwen was uniquely situated to jump ahead on modifications. Erbey, who used to run General Electric's mortgage-insurance operation, started buying nonperforming loans with his partners in the early 1990s. Ever since, Ocwen has been refining its computer models--we're talking sophisticated stuff, like vectors and artificial intelligence--to better whip delinquent loans into shape. When the housing slump hit and defaults started to rise, Ocwen wasn't some afterthought unit of a mortgage originator caught with its pants down; it was in its element, in a position to immediately scale up.
That's why, unlike a lot of loan-modification programs, such as those rolled out by Citigroup and IndyMac Bank, Ocwen's doesn't use broad guidelines--for instance, assuming that homeowners should be able to contribute 38% of their income to paying their mortgage. When Ocwen rewrites a loan, it starts from scratch, with an agent at one of its four call centers--two in Florida, two in India--following an adaptive script to reconstruct a borrower's financial data. (The script changes, based on not only what a borrower says but also how he says it; since hiring a director of consumer psychology last summer, Ocwen has been handling embarrassed callers differently than, say, angry ones.)
Ocwen also doesn't disrespect speculators. If it will yield more to the loan investor to modify a loan made to a home investor, then Ocwen will modify the loan. That may not be in line with the popular cant of the day by the chowder heads in Washington, but, then, Ocwen's all about dollars and cents, not hot air.
In bucking the general disdain for bailing out investment properties, Ocwen realizes that cash is cash, whether it comes from an owner-occupied mortgage payment or one fed by rent, and that a foreclosure displaces a family and blights a neighborhood whether the occupants are owners or tenants.
Which just goes to show that moneymaking and good economic policy aren't necessarily incongruous. As much as capitalism--especially in the mortgage industry--has gotten a bad rap of late, it might just prove useful yet.
Praise for capitalism? Break out my skates: Hell just froze over.
If, in fact, the loan-by-loan computer-driven analysis approach taken by Ocwen can provide evidence that it works better than the broad "systematic" approach championed by the FDIC's Sheila Bair and those who follow her lead, then will loan investors have an argument that taking the Bair approach is, in and of itself, a breach of the servicer's obligations under the relevant serving agreements? One article in a popular weekly news magazine isn't going to settle that question, but it's food for thought, especially if you're a class action litigator fishing for claims.
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