World () - Many companies that collect mortgage payments hire outside firms to train employees and develop scripts for them to use when talking to borrowers. But Ocwen Financial Corp., which specializes in risky loans, has its own team of social psychologists.
"We have tried to think about this business as a science," says Ocwen Chairman William Erbey, noting Ocwen has employed psychologists for more than a decade.
Ocwen says that formula is one reason the Atlanta-based company has emerged as a leader in a shrinking niche—the servicing of loans made to borrowers with less-than-pristine credit histories.
In October, Ocwen agreed to buy Saxon Mortgage Services from Morgan Stanley for a base price of $59 million. The move followed Ocwen's September purchase of Litton Loan Servicing from Goldman Sachs Group Inc. for $264 million, and its 2010 acquisition of HomEq Servicing from Barclays PLC for $1.2 billion.
The recent deals will make Ocwen the largest subprime servicer, responsible for roughly one in five subprime mortgages, according to industry newsletter Inside Mortgage Finance. Ocwen will be the ninth-largest servicer overall, with $150.6 billion in loans. The company will have more than tripled in size since the end of 2009, when it serviced $48.8 billion in mortgages and ranked seventh in subprime servicing.
Ocwen's purchases are part of a broader reshuffling of the mortgage industry. Bank of America Corp. recently said it would exit from correspondent lending. Correspondent businesses fund loans and sell them to larger lenders. Investment banks such as Goldman Sachs and Morgan Stanley are shedding ancillary businesses such as servicing to focus on core brokerage and banking operations.
Mortgage servicers receive a fee for collecting loan payments on behalf of investors who own the loans. They also rework troubled loans and foreclose on properties when borrowers can't make their payments.
Though the business of collecting loan payments from risky borrowers sounds humdrum, Ocwen's approach incorporates high-tech methods. The company employs a team of 16 social psychologists who craft scripts for call-center employees. As they talk to borrowers, workers are fed bits of dialogue by a computer program that tracks homeowner responses.
As part of a current project, psychologists are parsing the words borrowers use for clues to their emotional and intellectual states. That information could help Ocwen determine whether someone will respond better to a brief recitation of facts or a more detailed discussion.
Armed with these types of insights, employees stress that Ocwen has "helped thousands of distressed homeowners" and ask whether borrowers would "like to work with us." Ocwen says its wording aims to move borrowers to take steps to work out their financial situation and to steer clear of defeatism—a risk, it says, of comments like "we are sorry" or "you are having a difficult time." Three-quarters of employees are based in India and Uruguay, keeping costs down.
"Having a psychologist can be a benefit if gets the consumer to open up, but I don't believe it will materially enhance the likelihood that a borrower will get back on track," says Ed Delgado, chief executive of the Five Star Institute, which provides mortgage-industry training, noting that the most important factor in getting a borrower back on track is whether the borrower has the capacity to make loan payments.
Mr. Delgado said he brought in a psychologist to coach employees in collections on how to communicate with financially troubled consumers when he worked at a bank in the early 1990s, but the effort had little influence on repayments.
Ocwen reported net income of $20.2 million in the third quarter, compared with a net loss of $8.8 million in the same period a year ago. Its shares are up 43% this year, while most financial-services stocks have tumbled.
Still, Ocwen faces challenges. Servicers need new loans as the dollar amount of loans they service declines due to borrowers paying down their mortgages, refinancing or losing their homes to foreclosure. Since the financial crisis, lenders have stopped originating subprime mortgages, Ocwen's bread and butter.
"There's obviously uncertainty about what their business model looks like five years from now," says Keefe, Bruyette & Woods analyst Bose George. "But currently there's a good opportunity, and the company is capitalizing on it."
Ocwen still has a pipeline of potential transactions involving more than $300 billion in mortgages, Mr. Erbey told investors in October. Besides buying whole businesses, Ocwen also is looking to scoop up loans that are currently serviced by large financial institutions that are seeking to prune their operations or need help handling troubled loans.
Ocwen also is working on a pilot project that could result in it servicing loans backed by the Federal Housing Administration.
Ocwen has embraced writing down loan balances more than most servicers. In April, the company rolled out "shared appreciation" modifications. They reduce borrowers' loan balances to 95% of the home's current value; investors who own the mortgage receive 25% of any appreciation when the borrower sells the home or refinances.
Like other servicers, Ocwen has had problems with missing paperwork and timely follow-ups, "but when it comes to the resolution [of a borrower's problem] they are ahead of the pack," says Lou Tisler, executive director of Neighborhood Housing Services of Greater Cleveland.
Rosemarie and William Lucas say they ran into trouble with Ocwen in 2004 when their first mortgage payment apparently went to the wrong address. The Burlington, Conn., couple struggled for years to untangle the problems, but Ocwen initiated a foreclosure action this spring, even though the couple had receipts for seven years of mortgage payments, says their attorney, Jeff Gentes. Ocwen recently agreed to a loan modification that will drop the couple's interest rate to 4% from 7.19%.
"It's a good resolution, but it encapsulates the Ocwen experience," says Mr. Gentes, an attorney with Connecticut Fair Housing center. "You can go through years of document loss, extra charges and the failure to recognize agreements. At the same time, they can be extremely willing to modify loans."
Ocwen General Counsel Paul Koches declined to comment on specifics for privacy reasons but says the company has "worked hard for seven years to assist this family" and provided "multiple" offers of help. "We do not believe there have been any lost or unrecognized documents, nor do we have any information about extra charges," he says.
Reductions in the principal owed and other loan modifications help Ocwen by getting delinquent borrowers back on track, allowing it to recover cash outlays made to investors and others when a borrower falls behind.
Financing these payments, or "advances," is particularly costly for Ocwen because it isn't affiliated with a bank, unlike many servicers. The company says it only modifies loans when the modification is in the long-term interests of investors.
Ocwen has modified 63% of the subprime loans it handles, well above the industry average of 50%, according to a Citigroup analysis. Of loans modified by Ocwen in 2010, 21.6% were seriously delinquent 12 months later, versus 24.8% for other subprime servicers.
Because it isn't a bank, Ocwen wasn't subject to the consent orders issued to mortgage servicers by federal banking regulators earlier this year. The firm also isn't a party to the talks among state and federal officials and the five largest mortgage servicers regarding questionable foreclosure practices.
But as it expands, the company is likely to face more scrutiny. In September, Ocwen agreed to follow servicing practices laid out by New York State financial regulators in order to win their approval of its Litton acquisition.
In March, the company disclosed it was being investigated by the Federal Trade Commission. This summer, Ocwen agreed to pay $5.1 million to settle a class-action lawsuit alleging it overcharged delinquent borrowers.
The FTC hasn't alleged any wrongdoing, says Ocwen general counsel Paul Koches. The legal settlement was made "in the interest of finality and cost containment," he adds.