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Ocwen Settles with California Regulators for $2.5 Million

by Kate Berry

~~Embattled mortgage servicer Ocwen Financial has agreed to pay $2.5 million to California regulators for failing to prove its compliance with state mortgage lending laws.

California's Department of Business Oversight said Friday that it will drop its effort to suspend the subsidiary Ocwen Loan Servicing's mortgage license in California. The Atlanta servicer had failed for more than a year to provide its California regulator with requested information.

As part of the settlement, Ocwen has also agreed to pay for an independent, third-party auditor, chosen by the state agency. Ocwen is prohibited from taking on any new California customers until regulators determine that it can respond to information requests in a timely manner.

The California settlement is teeny compared to the $150 million Ocwen agree to pay last month to New York regulators to settle allegations that it backdated thousands of foreclosure letters to homeowners. William Erbey, Ocwen's founder and executive chairman, stepped down after 30 years with the company as part of the New York settlement.

The weeks since have been rough for Ocwen. The dust-up with California regulators had caused its shares to plunge nearly 50% last week on fears that the company could lose its license.

The shares fell another 17% Friday after BlueMountain Capital, a New York hedge fund, said it had notified Deutsche Bank, a bond trustee, that Ocwen was in breach of certain default provisions.

"The department is committed to supporting a fair and secure financial services marketplace for all California consumers," said the agency's Commissioner, Jan Lynn Owen, in a press release announcing the settlement Friday. "This settlement allows us to move forward and ensure that Ocwen is meeting its obligations under the law."

California's formal accusation against Ocwen, which was filed in October, will now be withdrawn. Ocwen's failure to provide documents to regulators grew out of a routine regulatory exam.

"We're pleased this frustrating skirmish over what should have been a routine matter is finally resolved," Tom Dressler, a spokesman for the state agency, said Friday. The settlement will allow California regulators to determine if Ocwen has followed the law, he said.

Ocwen had no comment at press time.

From now on, California said, the third-party auditor will review the loan-file information provided by Ocwen. The auditor will submit a report on its compliance with the California Residential Mortgage Lending Act, the 2012 Homeowner Bill of Rights (a series of state laws designed to protect distressed homeowners and those in foreclosure), and other state and federal laws and regulations.

The auditor will submit a report to the state agency that assesses Ocwen's loan servicing procedures, processes and staffing levels. Ocwen will have to adopt an action plan to correct any deficiencies identified by the auditor.

The state can still pursue an enforcement action against Ocwen if there are any substantive violations of state laws designed to protect consumers.

As Founder Is Pushed Out, Ocwen's Future Is Cloudy

by Brian Collins

Editor's Note: The story has been updated with additional details from Ocwen's Dec. 22 conference call.

Investor confidence in Ocwen Financial was clearly shaken Monday after New York state regulators forced the firm's founder out as part of a $150 million settlement. William Erbey's resignation, which takes effect Jan. 16 "will surely cause some of the investor base to question whether they will continue to support the company," wrote Isaac Boltansky and Kevin Barker, analysts at Compass Point Research & Trading, Inc.

The servicer's share price plummeted more than 30% to $15.04 during trading, eventually closing down 27% at $16.01, as investors wondered about the company's future without Erbey, who served as Ocwen's executive chairman. The settlement with the New York Department of Financial Services places the Atlanta-based servicing company under the purview of an independent operations monitor for two years. It also closes the door on growth in the short-term.

"Ocwen will reportedly be prevented from making acquisitions or expanding until NYDFS is satisfied" that Ocwen "has reformed it operations to protect borrowers," wrote Boltansky and Barker in a report issued Monday. In addition, Erbey will step down from his board chairman positions at four related companies: Altisource Portfolio Solutions, Altisource Residential Corporation, Altisource Asset Management Corporation and Home Loan Servicing Solutions, according to a New York Department of Financial Services press release.

Ocwen director Barry Wish will become Ocwen's chairman after Erbey steps down. The current chief executive, Ron Faris, will run the nonbank mortgage servicer. "I'm confident about Ocwen's future under the experienced leadership of the executive team," Erbey said in a written statement Monday. "I have worked with Ron for more than 20 years, and he is uniquely qualified to lead Ocwen going forward."

Ocwen faces allegations from regulators that it hasn't properly assisted distressed homeowners and ran up the costs of its services through use of affiliated companies. The settlement saddles the company with a "number of changes that in the end, will create a more compliant (dare we say complacent) company, but cripple profitability for some time," wrote Henry Coffey, Jason Weaver and Calvin Hotrum, analysts at Sterne Agee.

They wrote that the settlement could be a boon for competitors such as Nationstar Mortgage Holdings and Walter Investment Management. "We don't want to get too breathless, but the settlement more or less makes Ocwen state-run, and one wonders if regulators will be sated or if more is in store for Nationstar or Walter," the Sterne Agee report says. All three nonbank servicers have delivered tremendous growth over the past few years as banks divested hundreds of billions of dollars of mortgage servicing rights due to new capital rules.

Last January, Wells Fargo agreed to sell Ocwen $39 billion in mortgage servicing rights but Benjamin Lawsky, the New York banking superintendent, put a hold on the deal. After months of delays, Ocwen and Wells Fargo finally terminated the deal in November. As of Sept. 30, Ocwen serviced $1.96 trillion in mortgage servicing rights. In the third quarter, the giant servicer set aside $100 million in reserves for a potential settlement with the New York regulator. Ocwen reported $75.3 million loss for the third quarter, compared to net income of $60.6 million in the same quarter a year ago. The company announced in August it would restate some of its prior financial results following an auditor's review.
In a conference call, Faris stressed the Ocwen will meet the terms of the settlement while moving ahead to make the business a well-capitalized and more profitable company.

"We will cooperate fully with the operations monitor" through the two-year period and "try to achieve the highest quality operating performance across our entire [servicing] platform," Faris said during the conference call late Monday afternoon. In terms of Ocwen's servicing portfolio, "there will be limited opportunities to acquire MSRs," Faris said, until the monitor approves Ocwen's loan boarding process and its ability to service both existing portfolio and new loans.

At the same time, Ocwen will focus its servicing business on non-agency loans. Faris noted the servicing of private-label securities has been more profitable than Fannie Mae and Freddie Mac loans, while "providing best-class servicing for homeowners." He noted there is demand for agency MSRs and Ocwen will be able to book gains on those sales. "This strategy has the potential to free up over $1.7 billion in capital to invest in new businesses or reduce leverage." Faris also noted that sales will generally be small transaction as opposed to bulk sales. "We will work closely with regulators and stakeholders like the GSEs and Ginnie Mae to ensure we continue to deliver positive outcomes to borrowers and investors," he said.

Ocwen also plans to expand its mortgage lending business, which originated $1.1 billion in loans during the third quarter. "We have learned from our challenges and look forward to restoring everyone's confidence in Ocwen," said Faris, who did not take questions after delivering his statement.


The person who perhaps made it possible for state and federal governments to collect billions from the Bank of America will apparently be amply compensated for his actions.  The New York Times is reporting that Edward O'Donnell, a former employee at Countrywide Mortgage which was purchased by the bank in 2008, will receive a whistle-blower reward of more than $57 MILLION  for his role in an August civil settlement.

Bank of America agreed to pay $16.65 billion in penalties to settle claims from federal prosecutors and several state attorneys general.  The bank was sued as successor in interest to Countrywide, one of the largest mortgage lenders in the country at the beginning of the century, has been repeated accused, along with its founder and CEO Angelo Mozilo of writing and selling shoddy mortgages.

O'Donnell is receiving the award because of a federal civil lawsuit he filed under the False Claims Act and which the federal government joined and used as the basis for pushing Bank of America into a settlement.  His reward comes from a $350 million portion of the larger penalty amount resulting from a settlement between the bank and federal prosecutors along with the states of California, Delaware, Illinois, Kentucky, Maryland, and New York.  It was ruled that O'Donnell was entitled to a 16 percent share of that portion.  He will also collect an additional and separate $1.6 million from the Bank of America.

The Times said O'Donnell may not be the only whistleblower to profit from the settlement.  Court papers mention three other similar false-claims lawsuits against the bank. Those litigants were not named in the suit but O'Donnell had not been previously identified either. 

O'Donnell was also instrumental in the October 2013 settlement of government claims against Bank of America for the so-called "hustle" program in which Countrywide loan officers were rewarded for the number of loans they produced regardless of their quality.  Bank of America was ordered to pay $1.27 billion in that case.  O'Donnell's attorney was quoted by the Times as saying his client had not yet reached a financial agreement with the federal government regarding his role in that case.

Property Tax Hikes Compound Mortgage Market's Woes

by Bonnie Sinnock

Housing counselors say they are increasingly concerned about the toll rising property taxes are taking on consumers' ability to get mortgage financing and borrowers' ability to make payments.

As it is, many loan applicants are having difficulty meeting the 43% debt-to-income limit in the Consumer Financial Protection Bureau's definition of a qualified mortgage. Higher property taxes only make it tougher. And while historical property taxes are factored into underwriting and loan terms, tax hikes that can increase the size of a monthly payment are an unknown that tends to creep up on borrowers.

"They don't go into a home thinking their property tax is going to increase," says Stephen Lewis, president and chief executive of the Mansfield, Texas, counseling agency Making Acceptable Homeowners.


Nationwide, state and local property tax collections per capita have increased each year since 2006, when they were $1,208, according to the Tax Foundation's Center for State Tax Policy, a nonpartisan research organization in Washington. By 2010 they had risen by more than $200 to $1,434.

Consumers purchasing their first home are particularly susceptible to property tax payment shock, says Lyman Stone, an economist at the center.

"I think first-time homeowners can be very surprised. It's not withheld like your income tax, or on your receipt like a sales tax. You just get a bill," he says. "So I think it can be very shocking to first-time homeowners, especially if you are in a somewhat higher tax area."

The tax burden "is a growing topic among housing counselors now that home prices are increasing and municipalities are struggling with revenue," says Douglas Robinson, a spokesman for NeighborWorks America, a Washington, D.C.-based national network of more than 240 community development and affordable housing organizations.

The 43% DTI ratio is one of the criteria loans must meet for lenders to enjoy extra protection from legal liability under the CFPB's rule requiring them to assess applicants' ability to repay mortgages. Higher taxes can help municipalities generate much-needed revenue, but they challenge borrowers' ability to get financing under the new rules, says Lewis, who has previously worked in mortgage underwriting and servicing.

"Consumers are really hitting that threshold of that 43%, and so when property values increase, or let's say the tax-assessed value increases on that property, then customers are actually exceeding that 43% threshold," he says. "That increases a level of concern about default and foreclosures for the lender that the customers are unaware of."

Defaults resulting from property tax increases could also get lenders in legal trouble, says Ari Karen, an attorney in the Bethesda, Md.-based office of law firm Offit Kurman. A borrower could later claim that failing to inform the borrower of the future risk was a deceptive act under the Truth in Lending Act, he says.

Rather than change the DTI limit or other underwriting standards, Lewis says, he would like to see counselors make more borrowers aware of the possibility that their tax bill may rise. This can be a challenge, he admits.

"Customers generally want to get more money for the house. They don't care about the educational aspect," Lewis says. "They don't necessarily care about the ramifications. It's all about, 'What can I get for the house?'"

However, those who get homeownership counseling tend to a little more open to the message, he says.

"They go into an education program if they want to be honest and transparent about their situation," he says.

Getting a national sense of property tax trends is challenging because the wide variation in how the different regional public entities in charge of them handle them, says Stone. But generally, data available to date from the Tax Foundation, and other reports of home price appreciation, suggest property taxes aren't going to stop increasing any time soon.

Whether this is increasing default risk depends on the regional taxation authorities' property tax policies, says Ben Graboske, a senior vice president in the real estate and financial services division of the Irvine, Calif.-based data provider CoreLogic. "It's absolutely the case in places like Texas and Florida," he says.

Texas' Tarrington County, for example, where the majority of Mansfield is located, had one of the higher amounts of median taxes paid in 2010, at around $3,100. The U.S. median was close to $2,000 that year.

A notable example of property tax risk has been in the federally-insured reverse mortgage market. The inability on the part of some seniors to pay taxes and insurance caused default risk to rise in the recent past, putting a dent in the FHA's finances and leading to reform in that sector.

Recent data on traditional "forward" mortgages suggests delinquencies are declining. But some have questioned whether this trend is more the product of a shift in the holders of servicing rights than an actual improvement. Also, recent data suggests an increase in loan modification activity. Property tax increases are frequently mentioned in hardship letters filed in connection with modification, says Lewis.

How credit scores impact your mortgage rate

by Sheyna Steiner

Interest paid on a mortgage can add up to hundreds of thousands of dollars over the life of the loan. The most influential determinant of your mortgage rate will be your credit score. The higher your score, the lower the interest rate. On a loan as large as a mortgage, a mere percentage point up or down can add up to a significant amount of money.

Find the best mortgage rates

Not only are credit scores more vital than ever when it comes to getting a good rate on a home loan, but they will influence whether you can even get a loan at all.

Credit is so tight and lenders are so skittish that buyers below a certain threshold, typically a FICO score of 620, have a better chance of striking oil in their bathtub than securing a mortgage. It's possible, but will require some digging.

Standards have not always been so restrictive; the industry has changed in recent years.

"It's changed twofold: First there is a minimum score that you need to have to even be considered for a mortgage regardless of compensating factors such as your income and your assets. And unless you have top-tier credit, you're not going to qualify for the best programs, terms and conditions," says Louis Spagnuolo, vice president of mortgage banking at WCS Lending in Boca Raton, Fla.

Though the tiers go up all the way to 850 on the FICO scale, a score of 740 or more should qualify for the best mortgage rates from most lenders. Depending on the lender, the mortgage rates offered to the highest and lowest credit tiers can vary as much as a full percentage point and a half, says Spagnuolo.

The Web site illustrates the variation in loan pricing across the tiers of credit. The difference in the monthly payment for a $300,000 loan between the highest and lowest scores is nearly $300, which over 30 years adds up to more than $100,000. That's money better invested in your retirement account than spent in servicing a home loan.

What lenders look for

In general, investors demand higher yields from risky investments. This applies in the mortgage lending arena. Lenders assign you a rate that matches the gamble they're taking in lending you money.

Lenders prefer borrowers with low balances, a long history of on-time payments and a mix of credit utilization -- for instance, a car loan and a couple of revolving accounts such as credit cards.

"Lenders look at several variables on the credit report: outstanding debt; the outstanding debt relative to the total available debt; the length of the credit history and the pursuit of new credit -- how many inquiries are on your report," says Matt Hackett, underwriting manager at Equity Now, a direct mortgage lender in New York.

Some types of credit may be viewed more negatively than others, particularly if there's not a healthy mix of available credit and loans on your report.

"Store cards are looked on more negatively. Lenders just don't like to see them," Hackett says.

Curtis Arnold of says that while a store card won't adversely affect your score, if a lender manually looks at your report there may be a subjective view that store cards are less desirable than a major credit card.

"The underwriting is not as strict as a major credit card so they are easier to get. They do have somewhat of a reputation of being cards with lower credit requirements," he says.

Ellie Mae: Refinances Decline Slightly in May

by Colin Robins

Ellie Mae [1] released its Origination Insight Report [2] for May, analyzing data from over 3.5 million loan applications that ran through Ellie Mae's Encompass mortgage management solution. The company found that refinances declined slightly for the month to 33 percent of all loans, down from 37 percent in the previous month.

Year-over-year, refinances declined as well from May 2013's percentage of 58 percent.

FHA loans in the month of May constituted 22 percent of all loans, with conventional loans making up 64 percent of the total amount. VA loans posted at 9 percent, with loans listed as "other" rounding out the remaining loans with 5 percent of the total share.

Ellie Mae reported that the average time to close a loan in May was 40 days, up slightly from the 39 days loans took to close in April. "VA purchase loans closed in an average of 41 days in May while carrying an average FICO score of 711 and a debt-to-income ratio of 24:39," the report said.

The average mortgage rate for a closed 30-year loan decreased to 4.53 percent, the lowest rate since November 2013. The average 30-year rate on all FHA loans in May 2014 was 4.38 percent, the lowest rate of the year thus far.

The profile of closed loans remained roughly the same—the average FICO score for successfully closed loans was 727, nearly identical to April's figure of 726. The loan-to-value ratio remained the same as it has been since the beginning of the year at 82 percent, with a debt to income ratio of 24:37.

In May 2014, 32 percent of closed loans had an average FICO score under 700, compared to 27 percent of loans in May 2013. The average credit score for denied applications was 689.

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