Mortgage Servicer’s Ties Raise Regulatory Concern

Mortgage servicers collect money from homeowners and distribute those payments to lenders. It’s a fairly boring business, but not to William C. Erbey.

The 64-year-old billionaire has built a servicing empire of mind-aching complexity that plays a huge role in the nation’s housing market. Mr. Erbey’s flagship company, Ocwen Financial, now services about one of every four subprime mortgages in the United States.

“He’s a very smart guy,” said Lawrence Bossidy, who worked with Mr. Erbey at the finance unit of General Electric in the late 1970s.

“Brilliant,” said Leon Cooperman, founder of the hedge fund firm Omega Advisors, which invests in one of Mr. Erbey’s companies.

Now, Mr. Erbey’s smarts â€" and his collection of companies are being tested. State and federal regulators are concerned that Ocwen is mishandling some of the mortgages it now services, citing examples of shoddy paperwork and faulty technology.

Regulators and investors, which actually own most of the loans Ocwen services, are also questioning the unusual arrangements between Ocwen â€" “new co” backward â€" and four other publicly traded companies where Mr. Erbey is chairman. The companies do things from buying up delinquent loans to renting out foreclosed houses.

In effect, Mr. Erbey’s enterprise has become a complex financial services group, but without the regulatory scrutiny that a bank must face.

“There is no question that Bill Erbey is clever, but I am not sure that is such a good thing all of the time,” said Jeffrey Lewis, a senior portfolio manager at TIG Securitized Asset Fund, which is betting on the decline of one of Mr. Erbey’s companies.

These complexities have helped increase investors’ returns on the theory that the five companies are worth more separately than if they were included in a single entity.

In an interview on Thursday, Mr. Erbey said that spinning off multiple companies made it clearer to investors what each entity did. “Investors get a much easier story to digest,” he said.

But in the view of critics, these businesses are rife with potential conflicts because some aren’t entirely separate from each other.

For example, Ocwen and a spinoff, Altisource Portfolio Solutions, were employing the same chief risk officer, who was reporting directly to Mr. Erbey in both capacities, according to New York’s top banking regulator.

Ocwen also contracts with some of Mr. Erbey’s other companies. And some of the other companies hire Ocwen.

According to executives at Ocwen, all transactions between the companies are at “arm’s length,” but to some investors, it is not clear whether the companies are overcharging for their service and whether those costs are being passed on to the mortgage bond investors. Mr. Erbey said the company disclosed these costs, and they are consistent with industry standards.

Critics say the relationships raise questions about whether shareholders in some of the companies are benefiting at the expense of shareholders in the other companies.

“A big question is why these companies are so focused on each other and yet needed to be separated,” Mr. Lewis said.

In the case of one of Mr. Erbey’s companies, Home Loan Servicing Solutions, it now works only with Ocwen. Home Loan Servicing Solutions was created to purchase mortgage servicing rights from the banks. Ocwen actually services the loans.

By providing financing for Ocwen’s servicing business, Home Loan Servicing helps bolster Ocwen’s returns. And Mr. Erbey owns about 13 percent of Ocwen, but a much smaller stake in Home Loan Servicing, which means that, in theory, he has more of a stake in Ocwen’s success.

Mr. Erbey said that investors in Home Loan Servicing were being compensated by the sizable dividend that the company pays, and that the company was working to expand its business relationships beyond Ocwen.

Investors have seemed willing to overlook any potential pitfalls in the unusual corporate structure. Helped by a flood of new servicing business, Ocwen’s shares more than tripled in value from the end of 2011 to the end of last year.

But its stock price has recently tumbled in the wake of fresh scrutiny of Ocwen from Benjamin M. Lawsky, New York’s superintendent of financial services, who sent a letter to Ocwen earlier this week demanding more details about the relationships between the companies.

Mr. Lawsky, who earlier this month halted the transfer of $39 billion of mortgage serving rights to Ocwen from Wells Fargo, said he was concerned that this tangled web “could create incentives that harm borrowers and push homeowners unduly into foreclosure.”

His office has installed an independent monitor at Ocwen who has found examples of loose record-keeping and other clerical issues.

In a conference call with analysts on Thursday, Ocwen executives said they were investing in quality control. The company is also working to originate more of its own mortgages, which it can service.

Supporters of Ocwen say the recent regulatory heat has obscured the company’s relative success at modifying mortgages.

While some state and federal regulators and housing advocates have criticized the servicing companies broadly for frustrating homeowners with sloppy paperwork, erroneous fees and inadequate customer support, others say that Ocwen does a good job in granting mortgage modifications to troubled borrowers.

“We get more principal reductions out of Ocwen than we do out of anyone else,” said Bruce Marks, who heads the Neighborhood Assistance Corporation of America, a nonprofit housing advocacy group.

Still, the question hovering over Mr. Erbey’s empire is whether the increased regulatory scrutiny will slow the growth of Ocwen’s servicing pipeline.

Analysts said the amount of mortgages that the company services has grown nearly sixfold since 2010, thanks to a shift in the mortgage industry. Large banks, weighed down with legal and regulatory problems, are selling much of their subprime servicing rights to firms like Ocwen.

On Thursday, Ocwen said its net income in the fourth quarter increased to $105 million, from $65 million in the same period a year ago.

“I am not concerned” about possible conflicts, said Mr. Cooperman, the hedge fund investor. “This guy’s life is his business.”

Friends described Mr. Erbey as “maniacal” in his efforts to keep expanding his business as the regulatory environment shifts. They say he works 80-hour weeks in a simple office on the island of St. Croix, where he lives. Investors say he moved to the Virgin Islands to help lower Ocwen’s tax bill.

In the interview on Thursday, Mr. Erbey pointed to one of his promising new ideas: a company that buys up pools of distressed mortgage loans. If the loans are foreclosed on, the company can rent out the houses.

He said there was great opportunity for growth in the single-family rental market.

At the end of last year, its first year in business, the company had leased only about a dozen homes.

“I feel good about what we do, and we make a lot of money doing it,” Mr. Erbey said. “I think more like an investor than an employee â€" that is what my investors like.”