Ron Faris, president of the loan servicer Ocwen, tosses a foreclosure sign. The Archons, right, fell behind on their mortgage after John's paycheck — he's a manager at a roofing company — took a major hit.
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The motivation for modification isn't so much social responsibility as the pursuit of profit; when loans go delinquent, the servicer makes less money. Most of Ocwen's business is in collecting on subprime loans, so its portfolio has been hit hard. Nearly a quarter of the loans it services were behind in November, up from just 8% at the end of 2006. And while Ocwen doesn't own those loans, it still loses out when people don't pay on time, since the company has to temporarily front money to investors to make up for the shortfall. "Despite the fact that they're doing it in their own interest, you can't dismiss it," says Rod Dubitsky, head of asset-backed-securities research at Credit Suisse, whose assessments show that aggressive modifications keep people in their homes longer.
Ocwen has also answered a key question for other would-be modifiers: whether it's possible to pass major losses to investors without getting sued. Paul Koches, Ocwen's general counsel, holds that the company is not only permitted to take such steps but obligated to--if that's what it takes to squeeze the most money out of a loan for the long term. That's the case executives make when angry investors call--and they do call, especially when a principal reduction chokes off cash flow in a particular month.
Make no mistake: Ocwen has a nearly messianic focus on the goal of maximizing returns for investors. "In most cases, that means keeping people in their homes and getting them to pay their mortgages," says Ocwen CEO Bill Erbey. In foreclosure, investors typically recoup only 60ยข on the dollar.
In a way, Ocwen was uniquely situated to jump ahead on modifications. Erbey, who used to run General Electric's mortgage-insurance operation, started buying nonperforming loans with his partners in the early 1990s. Ever since, Ocwen has been refining its computer models--we're talking sophisticated stuff, like vectors and artificial intelligence--to better whip delinquent loans into shape. When the housing slump hit and defaults started to rise, Ocwen wasn't some afterthought unit of a mortgage originator caught with its pants down; it was in its element, in a position to immediately scale up.
That's why, unlike a lot of loan-modification programs, such as those rolled out by Citigroup and IndyMac Bank, Ocwen's doesn't use broad guidelines--for instance, assuming that homeowners should be able to contribute 38% of their income to paying their mortgage. When Ocwen rewrites a loan, it starts from scratch, with an agent at one of its four call centers--two in Florida, two in India--following an adaptive script to reconstruct a borrower's financial data. (The script changes, based on not only what a borrower says but also how he says it; since hiring a director of consumer psychology last summer, Ocwen has been handling embarrassed callers differently than, say, angry ones.)
"I had to show why I was making less money," says John Archon, a manager at a roofing company in Florida, whose paycheck took a major hit in the housing bust. He and his wife now share a car, are energy conscious and "eat a whole lot more hamburgers than steak." Ocwen knocked the interest rate on their 30-year fixed-rate mortgage from 9.3% to about 6.9%, saving the couple $500 a month. Getting those new terms was a stressful process, says Archon, but he "took the standpoint that they were weeding out the people who were not that serious."
Ocwen also breaks ranks with industry practice by modifying loans for people who bought houses as investments. Again, that's in Ocwen's self-interest: those loans account for 17% of its portfolio. In bucking the general disdain for bailing out investment properties, Ocwen realizes that cash is cash, whether it comes from an owner-occupied mortgage payment or one fed by rent, and that a foreclosure displaces a family and blights a neighborhood whether the occupants are owners or tenants.
Which just goes to show that moneymaking and good economic policy aren't necessarily incongruous. As much as capitalism--especially in the mortgage industry--has gotten a bad rap of late, it might just prove useful yet.