Why Does Ocwen Want to Modify Loans? Answer: Because they profit by doing so.
In case you havenâ€™t noticed, over the last month or so thereâ€™s been an ongoing debate of sorts happening on Mandelman Matters as to whether mortgage servicers make more money modifying loans… or foreclosing.
Itâ€™s the same debate thatâ€™s been going on informally all over the country since 2009, when everyone was trying to explain what the Sam Hill was going on with servicers who at the time, seemed to be doing everything but modifying loans.
And, if you remember, Iâ€™ve been saying that servicers cannot possibly be making more money by foreclosing todayâ€¦ perhaps they did to a point, but not for a long time now.Â Late fees are greatâ€¦ to a point.Â Once everyoneâ€™s late, theyâ€™re not so great anymore.
It just isnâ€™t possible that servicers are making money in todayâ€™s environment for all sorts of reasons.
Bank of America, for example, hired 50,000 people to handle loan modifications and related needs since 2009.Â And from 3,500 full time employees to 50,000 in a given department, is not a contingency planâ€¦ it wasnâ€™t planned forâ€¦ wasnâ€™t foreseenâ€¦ itâ€™s a cataclysmic event.
Assuming those 50,000 people make an average annual wage of $25,000 each, which is almost certainly lowâ€¦ and thatâ€™s $1.5 billion in added payroll expense alone, which is to say nothing of the what it costs to find places for 50,000 new hires to sit and work every day.
Hereâ€™s another factor to considerâ€¦ houses donâ€™t make money, they cost money.Â In order for them to make money, you have to be able to sell them for more than you owe on them.Â Now, does that sound like something thatâ€™s happening all over town these days?
A few years ago, mortgage servicing was perhaps the most boring business on the planet. Â Almost no one ever called their servicerâ€¦ ever.Â All these companies did was send out statements, collect paymentsâ€¦ and in 1-2% of cases, foreclosed when someone stopped paying, which took a few months and often the home went up in value during the foreclosure process, so you actually made money selling the home.
Contrast that with mortgage servicing today with tens of thousands calling dailyâ€¦ no one that calls is ever happyâ€¦ and you get in billions of dollars worth of trouble no almost no matter what you do.
And today, foreclosing takes years in almost all cases.Â Years, during which no payments are being made, but servicers have to advance the payments for quite a while.Â And after all that, youâ€™re lucky to sell at a price that doesnâ€™t mean losing half or more of the loanâ€™s value.Â To say nothing of the years of legal fees that used to be weeks or months.
In microeconomics classes they teach college students that businesses make the optimal amount of profit at the point where marginal cost intersects with marginal revenueâ€¦ itâ€™s a point on a chart where the X intersects and itâ€™s referred to as â€śequilibrium.â€ťÂ ThisÂ marginal revenue–marginal cost perspective is based on the fact that total profit reaches its maximum point where marginal revenue equals marginal cost.
Now, I realize that might be a little wonky for some readers, you have to be a bit of an econ-nerd to appreciate the theory, but you donâ€™t have to over think things to realize that mortgage servicing today could NOT POSSIBLY be operating at anything near â€śequilibrium.â€ťÂ I donâ€™t know where we are on the chart, but I can tell you itâ€™s nowhere near the intersection of the X.
Look, thereâ€™s a lot more I could say, but isnâ€™t it getting kind of obvious that mortgage servicing, which was designed for a completely different set of circumstances, could not possibly be profitable today.
The thing is that no one wants to think that the horror show weâ€™ve all witnessed these last five years hasnâ€™t been part of a nefarious plot to steal homes and take over the world somehow.Â That would at least be a battle worthy of the pain.Â To think that all that has transpired has simply been the result of human inadequacy, political expediency, and in general a clusterf#@k of guesswork and mistakes caused by bad data and over-confident Harvard guysâ€¦ wellâ€¦ itâ€™s borderline intolerable.
Itâ€™s a lot like 9-11.Â I was happier when I was told that 9-11 was the result of a carefully planned plot, perpetrated by the global Al-Qaeda network of high-tech and underground â€ścellsâ€ť set up to function all over the world, and capable of destroying the planet at any moment.Â That explanation felt pretty goodâ€¦ so it was LETâ€™S ROLLâ€¦ and all that stuff.
When I later found out that there were no weapons of mass destruction and that 19 religious fanatics who had signed up for flying lessons in Florida without wanting to know how to land, had proceeded to board coast-to-coast flights with expired passports and looking more or less like the drummer for Ziggy Marleyâ€™s band, while carrying on enough cutlery to kill, carve and serve an entire moose for the in-flight mealâ€¦ wellâ€¦ it just wasnâ€™t the same.
And when we pulled Saddam out of a hole somewhere, looking like the Middle Eastâ€™s version of Fred Sanford, without his sonsâ€¦ honestly, I wasnâ€™t even paying attention anymore.Â I wanted a picture of a camel with a nuclear weapon strapped to its back, and anything less wasnâ€™t even enough to get me to watch the made for TV movies that were destined to come.
Well, the situation weâ€™re still grappling with today as related to foreclosures is turning out to be way less like the plot of the next James Bond movie, and more like something that could have been produced by Adam Sandler.
Even the king of fraudulent foreclosures, Lender Processing Services (â€śLPSâ€ť), who spawned DocX and produced millions of fakes and forgeries, only ended up with a relative slap on the wrist, but to add insult to injury, now theyâ€™ve renamed the company â€śBlack Knight Financial Services,â€ť which makes me want to act out that scene from Monty Python and the Holy Grail, which is not how Iâ€™m supposed to feel about this whole thing.
Enter O. Max Gardner IIIâ€¦
Max Gardner, in case youâ€™re not already aware, is widely considered to be the countryâ€™s top foreclosure defense and consumer bankruptcy attorneyâ€¦ heâ€™s simply won more money from financial institutions on behalf of consumers than any of his peersâ€¦ a lot more.Â And heâ€™s been battling against creditors since before any of us ever heard the acronym MERS, much less used it in sentences while at our dinner tables.
Max is a hero of mine for all sorts of reasons and Iâ€™m proud to be able to call him a close personal friend.Â Heâ€™s been reading Mandelman Matters for years now, and I know this because he emails me whenever he thinks I deserve praise, require inputâ€¦ or am about to get attacked by April Charney for being Jamie Dimonâ€™s concubine, or something close.
Well, Max has been watching the debate about servicer profitability thatâ€™s become a staple on Mandelman Matters of late, and a few days ago, he finally weighed in as only Max canâ€¦ with facts that come from his ability to read at an 8th grade level, a skill sorely lacking all over this crisis today.Â Yes, when Max wants to know something, he does what I like to call, â€ślooks it up,â€ť and this time was no exception.
What youâ€™re about to read is what Max posted on his private listserv only days ago, thus causing April Charney to lump Max in with the likes of meâ€¦ an obvious shill and sell-out to the banking elite in this country. Â Well, itâ€™s either thatâ€¦ or itâ€™s just quoting from Ocwenâ€™s most recent 10-K SEC filing.
The bottom-line?Â Servicers donâ€™t make more money foreclosing than modifying loans.
Thatâ€™s not to say that they donâ€™t make enormous numbers of mistakes, too-often take unacceptable shortcuts that could be referred to as breaking laws, and in general constantly struggle to balance the greater good with their own corporate imperatives and cultural underpinnings.Â They do all of that and often with the personality of Leona Helmsley in a Darth Vader suit.
But regardless, itâ€™s undeniable that they are continuing to improve when it comes to modifying loans, and that simply doesnâ€™t jibe with the idea that theyâ€™d prefer to foreclose for profitabilityâ€™s sake.
Yes, they do things we donâ€™t like, but itâ€™s not because theyâ€™re trying to destroy life in this country, as we know it.Â Itâ€™s because theyâ€™re banks and corporations that donâ€™t want to leave money on the table, have to work in the best interests of their shareholders as opposed to the America middle class, and have to establish rules to follow that are formulaic, even though each borrowerâ€™s situation is, like a snowflake, entirely unique.
To-date, weâ€™ve got the solution the private sector has been able to provide.Â If we donâ€™t like it, then we need to take our demands to our governmentâ€¦ to Congress, specifically, via our elected representatives.Â Thatâ€™s whoâ€™s responsible for ensuring fundamental fairness in this countryâ€¦ not bankers at Goldman Sachs or JPMorgan.
And if thatâ€™s too hard, or too much workâ€¦ well, then weâ€™ve got exactly what we deserve.
Now, hereâ€™s Max Gardner, the man whoâ€™s forgotten more about Pooling & Servicing Agreements than most could ever stay awake long enough to readâ€¦ heâ€™s wicked smart and unquestionably dedicated to the rights of consumersâ€¦ and itâ€™s my pleasure to quote him in this instance, mostly because heâ€™s now supporting what Iâ€™ve been saying for some time now about servicers.Â Yeah, they often suck, but thatâ€™s just because theyâ€™re servicers. Â Donâ€™t hate the playerâ€¦ hate the game.
From Maxâ€™s recent post on his Boot Camp Listservâ€¦
They (servicers) receive incentive paymentsâ€¦ they get to recognize deferred fees on their financials and increase the carrying value of their Mortgage Servicing Rightsâ€¦ and then theyâ€™ll maintain a stream of servicing fees when loans are returned to performing status.
Also, thereâ€™s the recouping of servicer advances that theyâ€™re buying at a discount when they pick up these subprime portfolios.Â These advances must be paid in full by the Trust-Owner with each modification.Â So, you might pay Bank of America $250 for $2,500 in servicer advances and then make a nice little profit with each loan modification.
To give you a sense of the impact of loan modifications on Ocwenâ€™s financials, what follows is an excerpt from Ocwenâ€™s 2013 10-K SEC filing:
â€śThe increase in modifications contributed to revenue growth because when we return a loan to performing status we generally recognize any deferred servicing fees and late fees on the loan. For loans modified under HAMP, we earn HAMP fees in place of late fees.
As noted above, completed modifications were up 9.0% in 2012 with Shared Appreciation Modifications accounting for 26.0% of our modifications in 2012 and HAMP accounting for 24.0% as compared to 16.0% in 2011. Of the total modifications completed during 2012, 72.0% included principal modifications.
As a result of modifications:Â
- We recognized loan servicing fees and late charges of $100.7 million and $56.1 million during 2012 and 2011, respectively, for completed modifications.
- We also earned HAMP fees of $76.7 million and $42.0 million in 2012 and 2011, respectively, which included HAMP success fees of $54.8 million and $27.1 million in 2012 and 2011, respectively, for loans that were still performing at the one-year anniversary of their modification.
Another factor contributing to the net increase in revenues was the decrease in the delinquency rates of the loans in our portfolio. Our overall delinquency rates decreased from 27.9% of total UPB at December 31, 2011 to 23.5% at December 31, 2012 largely because of modifications that drove down delinquency rates and averted foreclosures on delinquent loans and because of improvements in our early loss mitigation efforts.â€ť
And there you have itâ€¦ in all it’s boring glory. Â But, the good news is, you have a much better chance of getting your loan modified today than in past years, and there’s every reason to think that your odds will continue to improve over time.
Does that make you feel any better? Â Me either.
P.S. If you’re stuck with Ocwen or Bank of America, email me at firstname.lastname@example.org
and I’ll see if I can help… I often can.