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Pro-Foreclosure Bondholders Square Off Against Pro-Loan Mod Ocwen

George Yacik
Apr 13, 2015

There is a nasty, public fight going on that pits struggling homeowners, many in low income and minority communities who need mortgage modifications to help them avoid foreclosure, against some big Wall Street investors who own the bonds backed by those mortgages who want speedier foreclosures.

Caught in the middle is Ocwen Financial Corp., the largest servicer of sub-prime mortgage loans and the trustee on the bond issues. Ocwen says granting loan modifications, including principal reductions, to borrowers is the best way to keep families in their homes—and paying their mortgages—as well to the benefit of all of its bondholders. It is also good public policy, it says.

On the other side, some big bondholders—including BlackRock, PIMCO, Kore Advisors, MetLife, Neuberger Berman and others—accuse Ocwen of not doing its job and granting loan modifications at their expense. They want the trustee of these bonds to alter how Ocwen services the loans.

This argument is not new from Larry Fink’s BlackRock. In an October 2010 op-ed in The Wall Street Journal titled, “Why a Foreclosure Moratorium Is a Bad Idea,” BlackRock came out against the Home Affordable Modification Program (HAMP). In June 2012, BlackRock wrote a letter to Shaun Donovan, Secretary of the U.S. Department of Housing & Urban Development (HUD), to voice its “concerns with the Home Affordable Modification Program and the AG Settlement and their resultant impact on the availability of private capital in the mortgage-backed securities markets.”

Ocwen maintains that HAMP furthers the U.S. Treasury Department's public policy to help struggling borrowers remain in their homes by encouraging and guiding servicers to pursue profitable loan modifications rather than rushing to foreclosure.

So many points are ironic about this fight, including that Ocwen has been accused multiple times over the years by regulators, politicians and consumer protection groups of preying on sub-prime borrowers. Now it’s being accused of granting overly liberal terms to those same borrowers in order to help them stay in their homes and communities. And Larry Fink has been “hoping” to be the next U.S. Treasury Secretary if Hillary Clinton wins the presidency in 2016.

In late 2013, Ocwen agreed to a $2.1 billion settlement and fine with federal and state regulators to settle charges of alleged misconduct. Last December it reached a settlement with New York State regulators that required the company to change its practices and provide $150 million to help struggling homeowners in the state.

Now it’s got bondholders angry.

On Jan. 23, 2015, the Houston law firm of Gibbs & Bruns LLP, which represents holders of 25 percent of $82 billion of residential mortgage-backed securities (RMBS), alleges Ocwen had “material failures” in complying with the covenants that govern the bond issues.

The letter claims that Ocwen engaged in “imprudent and wholly improper loan modification, advancing, and advance recovery practices.” It accuses Ocwen of improperly using trust funds to pay its borrower relief obligations in the regulatory settlements, essentially “shifting the costs of the settlement to the Trusts and enriching Ocwen unjustly.”

In a January 26 reply, Ocwen’s outside counsel, Orrick, Herrington & Sutcliffe (Orrick), said the investors’ “ultimate objective” is “to stop servicers from modifying loans and force them to foreclose on and evict as many struggling homeowners as quickly as possible. While knee-jerk foreclosures may redound to the special economic interests of your clients, they are not in the best interests of the Trusts as a whole, not consistent with industry practice, and therefore prohibited under the servicing agreements.”

Orrick also accused the bondholders of trying to “push foreclosures and stop principal reduction” as “part of their ongoing industry-wide pro-foreclosure campaign, which has been roundly criticized by numerous national housing, consumer protection and civil rights groups as anti-consumer and contrary to good public policy.”

Ocwen, which says it is a leading provider of loan modifications under HAMP, followed that up with a 30-page “rebuttal letter” dated March 23, in which it asserted that it is servicing loans “in the best interest of all investors.” It said “each modification Ocwen performs is designed to yield a higher anticipated recovery to investors than foreclosure.”

The bondholders counter that their tranches have “performed materially worse than Trusts serviced by other servicers” due to Ocwen’s alleged “imprudent and improper servicing practices.”

Ocwen pushed back by stating “these investors' pro-foreclosure, anti-modification agenda is driven by their desire to increase their own financial returns on their specific tranche-level holdings in RMBS Trusts, at the expense of long-term gains to the Trusts as a whole, through sustainable modifications.”

On Feb. 25, Morgan Stanley issued an independent report on Ocwen’s servicing operations that said the company does a better job of keeping struggling borrowers in their homes and reducing the amount of money they owe on their loans compared to other servicers.

“Since the beginning of 2011, they have been far more likely to give a borrower a principal modification than the market as a whole,” the report said. “Ocwen has been far more generous to borrowers than the overall sub-prime market.”

Morgan Stanley noted that some of Ocwen’s pro-borrower strategies could be “potentially disadvantageous” to bondholders, since they take a loss when borrowers get their principal reduced. However, it says, “there are other forces at play,” such as keeping borrowers in their homes as a matter of public policy.

It advises bondholders to stick with Ocwen. “It doesn’t appear in investors’ best interest to replace Ocwen as servicer,” it concluded.

George Yacik is a special correspondent to National Mortgage Professional Magazine. He has been covering the residential mortgage business for more than 20 years and writes frequently for industry publications. He is a former vice president of SMR Research Corporation, where he was the lead research analyst on residential and sub-prime mortgage loans.


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