A small, run-down house in Uniondale, N.Y., may sum up why bad blood is brewing between some of the biggest players in today’s housing market â€" and why that tension may hamper the nation’s attempts to recover from years of painful foreclosures and depressed housing values.
On one side of the divide are the investment firms that funnel trillions of dollars into the housing market, helping people get mortgages. On the other is Ocwen Financial, a relatively unknown company that has come to occupy a large and crucial presence at the center of the mortgage market in recent years.
As a mortgage servicer, Ocwen collects monthly payments from borrowers and then distributes that money to the investors and banks that actually hold the loans. For struggling homeowners, Ocwen steps in and can modify the terms of loans to make them more affordable. It is that activity that is causing the big investors to find fault with Ocwen.
In short, the investment firms are concerned that they are taking unnecessary losses when Ocwen modifies loans. And one subprime mortgage, made in 2007, illustrates why they are suspicious.
That mortgage, for $382,500, was packaged with hundreds of other loans into a bond, forgettably named MSAC 07 NC4. The Wall Street giant Morgan Stanley sold that bond to investors in 2007. As the housing bust took its toll, most of the borrowers whose loans were in the bond fell behind on their payments, saddling the bond’s owners with large losses.
Despite the distressed state of the mortgage loans, Ocwen took over the right to service them after the bust, collecting a set fee each month for collecting loan payments and cutting deals for homeowners. And today the bond spits out reams of data each month that allow the investors to track closely how Ocwen is handling each loan.
By cross-referencing the bond data with property records, it appears that the $382,500 mortgage is on the house in Uniondale, which was purchased for $425,000 in 2006. The home, at 573 Northern Parkway, is not well maintained today, unlike many of the other houses on this unpretentious Long Island street. No one answered when a reporter knocked on the front door. Emails and phone calls to the person listed as owner of the house were not returned.
The bond’s data suggest the Ocwen did quite a big favor for the borrower behind this mortgage recently. The borrower listed in county records had not made a payment on the loan for over six years, according to the data. Yet in January, Ocwen modified the loan.
The amount owed on the loan is now $176,085, the bond disclosures say, less than half the mortgage’s original amount. The interest rate was also slashed. The overall monthly payment was reduced to $601.38, from $2,314.73, according to the data. The borrower has made a payment in recent weeks.
When modifying loans, the rules of the bond demand that Ocwen carry out a crucial comparison. It is supposed to calculate the value of the future cash flows from the loan after the modification being considered. If that sum is less than the cash that could be collected from foreclosing on the house and selling it, Ocwen is supposed to foreclose on the home, not modify the mortgage.
It is hard to know what Ocwen could get from selling 573 Northern Parkway right now, but an estimate on Zillow’s website says the house is worth around $260,000. That’s considerably more than the $176,085 that the borrower owes on the house after the modification. Investors in the bond might wonder whether money they could have recovered has in fact been eaten up by the modification.
Ocwen declined to comment on the borrower’s payment history or the terms of the modification, but Katarina Wenk-Bodenmiller, a spokeswoman, said Ocwen estimated that the property had a very different value than Zillow’s website had arrived at.
“Zillow valuations are not always accurate,†she said in an email, adding that Ocwen thought the property was worth around $186,000. The company believed that it would most likely recover no more than $167,000 in a foreclosure, perhaps far less if it took a long time to complete, Ms. Wenk-Bodenmiller said.
The $382,500 mortgage may be an outlier. Still, investors are scouring bond data to see if a pattern of excessive generosity exists. They wonder if Ocwen is keeping as many loans current as possible to maximize the revenue it gets from servicing loans.
And the investors point out that Ocwen often promotes the fact that it modifies more subprime mortgages than its rivals.
On Thursday, Ocwen’s chief executive, Ronald M. Faris, was asked on an investor call whether Ocwen was looking out for the interest of bond investors. “We have controls in place and have been servicing, and will continue to service, in accordance with the servicing agreements for each individual loan that we service,†he replied.
Many homeowner advocates ardently support Ocwen’s modifications. They note that the losses booked when foreclosing on a subprime loan are usually so large that modifications will nearly always lead to the best financial outcome for investors.
“When you do principal reductions, it benefits everybody long-term,†said Bruce Marks, chief executive of the Neighborhood Assistance Corporation of America, a nonprofit housing advocacy group. “You can’t get let their greed get in the way of doing the right thing for everybody,†he said, referring to the bond investors.
Regulators that have taken aim at Ocwen in recent months for its practices also face a dilemma. While they may have raised questions about the company’s practices, the firm may in fact be more efficient, and more supportive of homeowners, than its rivals. As the regulators lean on Ocwen, it may hamper its ability to grow, leaving more servicing in the hands of large banks, which were criticized for the way they handled the torrent of foreclosures after the financial crisis.
At the same time, however, the investors’ concerns cannot be ignored. They may be less likely to put money behind mortgages if they fear that companies like Ocwen won’t properly represent their interests.
The tensions would come to head if the investors sued Ocwen over generous modifications. But Mr. Marks, the consumer advocate, is skeptical that the investors will go to such lengths. “We’ve heard these empty threats for seven years,†he said.
