Pimco and BlackRock accused of subprime ‘profit gouging’
Founder of mortgage servicer Ocwen accuses asset managers of accelerating foreclosures
Pimco and BlackRock have been accused of accelerating foreclosure action against struggling American subprime borrowers in the aftermath of the financial crisis.
The allegation comes from Bill Erbey, founder of Ocwen Financial, the biggest subprime mortgage servicing company in the US, who is pursuing a legal action against the two asset management giants in the US Virgin Islands.
In an action for unspecified damages filed earlier this year in St Croix, Erbey Holding Corporation and related entities claim a “covert criminal conspiracy” was perpetrated with the “specific intent and purpose of gouging enormous profits from the forced foreclosures and confiscation of the homes of hundreds of thousands of struggling families all across the United States”.
Pimco and BlackRock, which have combined assets under management of around $8tn, are both big investors in the US mortgage-backed securities market. They are accused of a “wilful and wanton scheme . . . to cripple, if not outright destroy” Ocwen and its related companies in retaliation for Ocwen’s claimed attempts to push back against the asset managers’ “greed-driven pro-foreclosure campaign”.
Both Pimco and BlackRock have filed motions to dismiss the action. Among their arguments is the claim that the complaint should be dismissed on jurisdictional grounds and because it is time barred.
In its motion, BlackRock said: “The suit is really a misconceived attempt at reputation recovery by William Erbey… [who is] the disgraced founder and former chairman of Ocwen Financial Corporation…Erbey and [Ocwen] are the subject of countless federal and state lawsuits, investigations, and enforcement orders.”
Ocwen, a $550m New York-listed company which grew exponentially in the aftermath of the financial crisis as new capital rules in the US forced banks to offload their mortgage servicing businesses to non-banks, has itself faced intense criticism for its part in controversial home loan foreclosures. As a mortgage servicer, it is responsible for collecting payments from homeowners that are then forwarded to holders of the loans.
In 2013, the company reached a $2.1bn settlement with the Consumer Financial Protection Bureau (CFPB) over a long string of administrative errors and deceptive practices that allegedly pushed borrowers into foreclosure.
A year later, Mr Erbey was forced to step down as chairman as part of a settlement with Benjamin Lawsky, then superintendent of New York’s Department of Financial Services, who had accused Ocwen and its many affiliates of backdating foreclosure notices to distressed homeowners.
Then, in April last year, a fresh attack came from the CFPB, claiming Ocwen had subjected mortgage holders to “years of widespread errors, shortcuts and runarounds”, triggering dozens of claims at state level in the US.
For his part, Mr Erbey is now claiming his business was subject to a concerted smear campaign, led by Pimco and BlackRock, which conspired against Ocwen specifically because the firm was actually encouraging loan modifications rather than speeding foreclosures.
In his court action, Mr Erbey said Pimco and BlackRock were motivated by their position as typically senior tranche holders in the mortgage-backed securities sold to investors by Wall Street before the subprime bubble burst, whereby the asset managers would enjoy higher returns through early liquidation of these securities. In contrast, the junior tranche holders would benefit from loan modification and other help for delinquent borrowers that might see home loans repaid over a longer time span.
The Virgin Islands action focuses on abortive threats by Pimco and BlackRock to sue Ocwen, which allegedly encouraged regulatory action.
Then, in January 2015, an “event of default” notice was sent to more than 100 MBS trusts which Ocwen was servicing, alleging improper behavior and bringing the company to its knees. A year-long investigation instigated by Wells Fargo found no basis for the allegations.
The Erbey camp now claims the default notice was based on manipulated data as part of the purported smear campaign.
Pimco and BlackRock declined to comment.
*A headline has been amended to clarify that it is the founder of Ocwen and not the company itself, which is suing Pimco and BlackRock
Altisource Asset Management Corporation (SEC Filing 2019)
(Exact name of registrant as specified in its charter)
Litigation, claims and assessments
Information regarding reportable legal proceedings is contained in the “Commitments and Contingencies” note in the financial statements provided in our Annual Report on Form 10-K for the year ended December 31, 2018. We establish reserves for specific legal proceedings when we determine that the likelihood of an unfavorable outcome is probable and the amount of loss can be reasonably estimated. We do not currently have any reserves for our legal proceedings. The following updates and restates the description of the previously reported matters:
Erbey Holding Corporation et al. v. Blackrock Management Inc., et al.
On April 12, 2018, a partial stockholder derivative action was filed in the Superior Court of the Virgin Islands, Division of St. Croix under the caption Erbey Holding Corporation, et al. v. Blackrock Financial Management Inc., et al.
The action was filed by Erbey Holding Corporation (“Erbey Holding”), John R. Erbey Family Limited Partnership (“JREFLP”), by its general partner Jupiter Capital, Inc., Salt Pond Holdings, LLC (“Salt Pond”), Munus, L.P. (“Munus”), Carisma Trust (“Carisma”), by its trustee, Venia, LLC, and Tribue Limited Partnership (collectively, the “Plaintiffs”) each on its own behalf and Salt Pond and Carisma derivatively on behalf of AAMC.
The action was filed against Blackrock Financial Management, Inc., Blackrock Investment Management, LLC, Blackrock Investments, LLC, Blackrock Capital Management, Inc., Blackrock, Inc. (collectively, “Blackrock”), Pacific Investment Management Company LLC, PIMCO Investments LLC (collectively, “PIMCO”) and John and Jane Does 1-10 (collectively with Blackrock and PIMCO, the “Defendants”).
The action alleges a conspiracy by Blackrock and PIMCO to harm Ocwen and AAMC and certain of their subsidiaries, affiliates and related companies and to extract enormous profits at the expense of Ocwen and AAMC by attempting to damage their operations, business relationships and reputations.
The complaint alleges that Defendants’ conspiratorial activities, which included short-selling activities, were designed to destroy Ocwen and AAMC, and that the Plaintiffs (including AAMC) suffered significant injury, including but not limited to lost value of their stock and/or stock holdings.
The action seeks, among other things, an award of monetary damages to AAMC, including treble damages under Section 605, Title IV of the Virgin Islands Code related to the Criminally Influenced and Corrupt Organizations Act, punitive damages and an award of attorney’s and other fees and expenses.
On January 18, 2019, plaintiffs and AAMC filed a motion for leave to file a second amended verified complaint to include AAMC as a direct plaintiff, rather than as a derivative party.
On February 8, 2019, the Defendants Blackrock and PIMCO each filed an opposition to the motion for leave to amend. Plaintiffs’ filed their reply brief on March 1, 2019. On March 27, 2019, the Court held oral argument on Defendants’ motions to dismiss the first amended verified complaint and Plaintiffs’ motion for leave to file the second amended verified complaint.
At this time, we are not able to predict the ultimate outcome of this matter, nor can we estimate the range of possible damages to be awarded to AAMC, if any. We have determined that there is no contingent liability related to this matter for AAMC.
Home loan servicer Ocwen builds an empire
When distressed US homeowners call their lender to ask for a reduction on their mortgage payments, the voice on the other end of the phone may no longer be an employee from a bank. Instead, troubled borrowers are increasingly likely to be dealing with a little-known “mortgage servicer” called Ocwen Financial.
Ocwen has emerged from the financial crisis as a growing – but much criticised – presence; a non-bank “servicer” of home loans that has ridden the fallout from the housing bust to multiply its revenues fivefold over the past six years. New rules that force banks to hold more capital against so-called “mortgage servicing rights” – assets which give companies the right to collect payments on home loans in return for a small cut of the income – have proved a bonanza for Ocwen and other specialist servicers which are less constrained by the regulation.
By snapping up big portfolios of “MSRs” – especially the rights to troubled subprime loans– Ocwen has increased the amount of outstanding mortgages it services from $43bn in 2005 to more than $500bn.
Shareholders have taken note, with the stock price up more than 600 per cent since 2008.
The company’s swift growth has drawn the admiration of well-known investors, such as Steve Eisman, the money-manager famed for shorting the subprime market before its collapse, as well as the less flattering scrutiny of regulators who are concerned about Ocwen’s ability to service its rapidly expanding portfolio.
In the latest development, Ocwen has also provoked the ire of large investors which have bought billions of dollars’ worth of mortgage-backed securities (MBS) and who rely on the company to forward them the income that is owed on the bonds. Investors including Pimco and BlackRock are considering legal action against Ocwen.
At the centre of their claims, according to people familiar with the discussions, is the idea that Ocwen has caused undue losses for some bondholders thanks to loan modifications that reduce mortgage payments.
Ocwen is not alone in its expansive growth. Other non-bank servicers, such as Nationstar and Walter Investments, have grown quickly. Four of the top 10 mortgages servicers in the US are now non-banks, compared with just one non-bank servicer in the top 10 in 2011, according to Mortgagestats.com.
“Non-bank mortgage servicers have exploded on to the scene …This is an extraordinarily challenging issue that the DFS – as well as other regulators – must confront Benjamin Lawsky, New York’s Department of Financial Services To aid its growth, Ocwen has quietly built a corporate empire that extends from its headquarters in Atlanta, Georgia to offshore staffing centres in India and Uruguay, to corporate tax havens in Luxembourg and the US Virgin Islands, where Ocwen’s chairman, William Erbey, has his home.
Mr Erbey is still the biggest shareholder in the company he has helped grow since the late 80s.
The ensuing lower employment costs and smaller effective tax rate have been “critical” to Ocwen’s recent growth, according to one mortgage industry veteran.
Ocwen’s effective tax rate – at 12 per cent – is far lower than the 38 per cent paid by Nationstar, its closest competitor. The company maintains that its ability to service mortgages for about 70 per cent less than the industry average is down to its use of specialized technology. Regulators have expressed concern that the company’s focus on low costs has impacted the services it provides to borrowers.
Those concerns culminated in a run-in with the Consumer Financial Protection Bureau, which accused Ocwen of a string of failures including charging unauthorised fees and making improper foreclosures. To settle the claims, Ocwen agreed in December to forgive an extra $2bn of mortgage principal balances.
The problem, according to some MBS investors, is that the principal is not Ocwen’s to forgive; the company owns the right to service and modify the mortgages but it does not own the underlying loans themselves. Other investors said that Ocwen’s formula for determining which loans to rework for underwater borrowers remains a mystery, despite efforts by the company to communicate its decisions more effectively.
Ocwen has a more aggressive loan modification strategy than other servicers and a tendency to make deep cuts to principal – sometimes as much as 70 per cent, according to Barclays research. Mortgage servicers may be inclined to rework loans because they collect fees as long as the borrowers continue to make payments on their mortgages.
If they foreclose on mortgages servicers’ stream of income stops, while some mortgage bond investors will welcome a swift return of money after a foreclosure.
“There’s zero transparency regarding their process for determining why certain borrowers receive aggressive modifications,” said Paul Nikodem at Nomura. For Ocwen, perhaps the biggest concern is not regulatory scrutiny or legal clashes with investors, but what happens when its MSR purchasing spree ends.
While the company estimates that banks still have $1tn worth of MSRs to sell, servicing mortgages has a finite shelf life, and originations of the subprime loans in which Ocwen specialises are unlikely to recover to pre-crisis levels.