Corporate America has long known the public relations power of putting a big dollar number on a deal.
Regulators, it seems, do the same thing.
Ocwen Financial is a behind-the-scenes firm whose business is to gather mortgage payments from millions of borrowers and pass them on to the banks and investors that own the mortgages. But last week, Ocwen moved into the foreground after a federal regulator, the Consumer Financial Protection Bureau, ordered it to enter into a $2 billion settlement over allegations that it had mistreated struggling borrowers.
There were two parts to the settlement. First, the consumer agency required Ocwen to provide $125 million in refunds to borrowers who entered foreclosure. Second, Ocwen was also required to write down the outstanding amount owed on mortgages by $2 billion, to make the loans more affordable for the borrowers.
Anyone reading the news release would be forgiven for thinking that Ocwen had to pay out $125 million in refunds and then take a bruising $2 billion hit on the mortgages it services.
But a deeper look at the terms of the settlement tells a different story.
Ocwen’s refund payment is actually only $66 million, according to a filing by the company. The firms that handled the mortgages before Ocwen are paying the remainder.
The $2 billion number is easy to misunderstand. Ocwen is not going to have to bear any of that $2 billion write-down itself, though the consumer agency’s news release never makes that clear. Ocwen does not own the mortgages that it collects payments on. Bondholders own most of them, since banks packaged the loans into securities and sold those bonds into the markets. Indeed, a $2 billion write-down would probably wipe out most of Ocwen’s $1.8 billion in capital.
“There is not a hit to Ocwen when the loans are written down,” said Roelof Slump, a managing director at Fitch Ratings. “The $2 billion is coming from the bondholders.”
The public expects the regulators to pursue mortgage misdeeds. Mortgage servicers, after all, mishandled foreclosures on a large scale and they failed to provide borrowers with loan modifications they qualified for. Ocwen engaged in illegal foreclosure practices, among other abuses, the Consumer Financial Protection Bureau asserted. “Ocwen took advantage of borrowers at every stage of the process,” Richard Cordray, the bureau’s director, said in a statement last week.
But there is nothing new about how the consumer bureau constructed this deal — or described it. The standard practice in big mortgage settlements has been to place a burden on bondholders in this way. That was the case in the consumer-relief portion of the Justice Department’s $13 billion settlement with JPMorgan Chase in November. And though the $26 billion national mortgage settlement that was struck in early 2012 was aimed at a few big banks, it ultimately included many mortgages owned by bondholders.
The Justice Department is expected to reach sizable mortgage settlements with other financial firms in the coming months. These, too, will most likely involve writing down mortgages that belong to bondholders.
When loan servicers like Ocwen modify mortgages, they are theoretically obliged to do it in a way that does not harm the economic interests of bondholders. While write-downs reduce the value of the loans in a bond, bondholders may prefer that to foreclosures. With their extra expenses like maintaining repossessed properties, foreclosures often end up being more costly to bondholders than principal reductions.
Still, none of this changes the fact that the loans belong to the bondholders — not Ocwen.
On a conference call with reporters after the settlement was announced, Mr. Cordray was asked whether Ocwen was passing on the costs of the principal reductions to other parties. In response, he said that Ocwen would incur costs itself in processing the write-downs. He added that Ocwen would be subject to penalties if the reductions did not take place.
“They have every financial incentive to see to it the entire $2 billion is delivered to consumers,” Mr. Cordray said.
The important question, however, is whether Ocwen was always going to do $2 billion of write-downs — even before the settlement.
Ocwen regularly reduces the principal on thousands of mortgages as part of its business.
When asked if Ocwen might have done these principal reductions anyway, Paul A. Koches, who oversees corporate affairs at Ocwen, said, “We’ve been doing these for a long time — that’s all I’ll say.”