In light of accusations brought by the New York Department of Financial Services (DFS) that Ocwen Loan Servicing backdated an unknown number of letters to borrowers – allegedly in an effort to deny borrowers the opportunity to contest denials on loan modifications – Moody's Investors Service has downgraded the company's servicer ratings.
Specifically, Moody's on Tuesday downgraded Ocwen's servicer quality (SQ) assessments as a primary servicer of subprime residential mortgage loans to SQ3 from SQ3+. It also downgraded the company's rating as a special servicer of residential mortgage loans to SQ3 from SQ3+. Both assessments remain on review for further downgrade.
In addition, Moody's lowered Ocwen's component assessments for loss mitigation to above ‘average’ from ‘strong,’ and the component assessment for foreclosure and real-estate-owned timeline management to ‘average’ from ‘above average.’
Ocwen's stock fell as much as 23% on the news, Bloomberg reported on Tuesday.
In a letter sent to Ocwen officials, Benjamin Lawsky, superintendent of the DFS, accused the firm of backdating what could be up to hundreds of thousands of letters sent to borrowers informing them that their request for a loan modification had been denied.
According to the DFS, an unknown number of letters to borrowers bore a date that was more than 30 days prior to the date that Ocwen actually mailed them, essentially eliminating the 30 days that those borrowers would normally have to appeal the denial.
‘In light of these serious issues and the likelihood that thousands of new, inaccurate records are created with each passing day, Ocwen has not approached this problem with the urgency it demands,’ Lawsky says in the letter. ‘Ocwen must fix its systems without delay.’
The discovery of the backdating is part of a larger investigation by the New York DFS into Ocwen's dealings that dates back to the fall of last year.
Ocwen reportedly discovered the backdating problem months ago and voluntarily reported it to the DFS. The company claims it has since resolved the problem.
‘Ocwen regrets that, due to software errors in our correspondence systems, we inadvertently sent improperly dated letters to some borrowers,’ company officials said in a statement released Tuesday. ‘As always, our goal is to avoid foreclosure. In the case of the 283 borrowers in New York who received letters with incorrect dates, 281 are currently borrowers with us. We are continuing to review the rest of the cases. We believe that we have resolved the letter dating issues that have been identified to date, and we continue our investigation as to whether there are additional letter dating issues that need to be resolved.’
In a subsequent statement issued later on Tuesday, Ocwen officials said they were unsure how many borrowers have been affected and that the 283 mentioned in the first statement was incorrect.
‘Ocwen wishes to correct its statement in a press release earlier today that 283 borrowers in New York received letters with incorrect dates,’ company officials said. ‘Ocwen is aware of additional borrowers in New York who received letters with incorrect dates but does not yet know how many such letters there were. Ocwen is continuing its investigation into these matters.’
In February, Lawsky halted the transfer of $39 billion of mortgage servicing rights to Ocwen from Wells Fargo, saying he was concerned that Ocwen didn't have the resources in place to service the loans in a compliant manner.
Then, in April, Lawsky's office announced it was investigating a case of possible ‘self-dealing’ at the company after learning that an auction services company that Ocwen works with was charging Ocwen customers nearly three times as much as it does non-Ocwen customers.
In a letter to company officials, Lawsky asked why auction services firm Hubzu, a subsidiary of Altisource Portfolio Solutions S.A., was charging Ocwen customers what appeared to be three times as much as it does others.
‘The relationship between Ocwen, Altisource Portfolio and Hubzu raises significant concerns regarding self-dealing,’ Lawsky said in the letter. ‘In particular, it creates questions about whether those companies are charging inflated fees through conflicted business relationships, and thereby negatively impacting homeowners and mortgage investors.’
In August it was revealed that Ocwen had received a subpoena from the Securities and Exchange Commission (SEC) in June for documents related to Ocwen's business dealings with several affiliates, to determine if those relationships adhere to state and federal regulations. Specifically, the subpoena from requested files related to Ocwen's dealings with Altisource Portfolio Solutions, Altisource Residential, Altisource Asset Management Corp. and Home Loan Servicing Solutions, Reuters reports.
At the time it was revealed that Ocwen and partner firm Altisource Portfolio Solutions were employing the same chief risk officer, who was reporting directly to Executive Chairman William C. Erbey.
Erbey is also chairman of related companies Home Loan Servicing Solutions, Altisource Asset Management Corp. and Altisource Residential. The SEC has also launched an investigation to determine whether Erbey's multiple overlapping roles are a potential conflict of interest.
In a separate but related action, law firm Robbins Arroyo in August filed a federal securities fraud class action suit against Ocwen on behalf of shareholders, alleging that the company and some of its officers and directors violated the Securities Exchange Act when Altisource, as a third party contractor to Ocwen, overcharged distressed homeowners for force-placed insurance to the tune of about $65 million. What's more, the suit alleges that Erbey was involved in approving the transactions.
Ocwen also got on regulators' radars in August when it announced that it would be restating its results for full year 2013 and the first quarter, citing non-GAAP compliance. At the time, the SEC was reportedly planning to issue an additional subpoena related to Ocwen's announcement that it was amending some of its financial statements.
Since halting the MSR transfer in February, Lawsky has installed an independent monitor at Ocwen to address the problems with the firm's record keeping.
Moody's says in addition to concerns about Ocwen's servicing ability, ‘these allegations also raise the risk of actions that restrict Ocwen's activities, the levying of monetary fines against Ocwen, or additional actions that negatively affect Ocwen's servicing stability.’
Moody's downgraded Ocwen's Corporate Family Rating to B2 from B1; its Senior Secured Bank Credit Facility to B2 from B1; and its Senior Unsecured Debt to B3 from B2.
In addition, Moody's downgraded Altisource Solutions' Corporate Family Rating to B2 from B1; and its Senior Secured Bank Credit Facility to B2 from B1. What's more, Moody's downgraded Home Loan Servicing Solutions' Corporate Family Rating to B2 from Ba3; and its Senior Secured Bank Credit Facility to B2 from Ba3.
In August, Moody's downgraded Ocwen's primary servicer and special servicer ratings each to SQ3+ from SQ2-, primarily as a result of the prior allegations. It similarly downgraded the company's servicer ratings in April.