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TheStreet Open House

Bill Erbey Made $2.3B Off Your Underwater Mortgage

Editor's note: Excerpts from TheStreet's interviews with Bill Erbey and billionaire investor Wilbur Ross are available as separate stories.

NEW YORK ( TheStreet) -- Soon after Bill Erbey and his wife Elaine moved last year to St. Croix, in the U.S. Virgin Islands, they ran up a $2,000 electric bill. They turned down the air conditioning in an effort to cut costs and Erbey, who is 64 and overweight, sat around sweating.

"He lives a lifestyle that, if he lived for 2,000 years he couldn't spend his net worth," says Orin Kramer, general partner of hedge fund Boston Provident. "It's one of the things that makes someone comfortable as an investor, because he's always focused on the dark side."

Focusing on the dark side was, of course, a good thing to be doing ahead of the subprime housing crisis. It's one reason Erbey, who is the chairman of Ocwen Financial (OCN) and four other publicly-traded companies, has managed to quintuple his net worth to $2.3 billion over the past two years.

Hedge fund manager John Paulson and economist Nouriel Roubini have probably gained more recognition than anyone else for having predicted the U.S. housing crisis, but when it comes to building businesses positioned to clean up the mess, Erbey may be the biggest success so far. He is arguably the leading figure in the rise of an industry known as non-bank mortgage servicing, which an Oppenheimer research report last month called "the next evolutionary step in mortgage finance," as big banks sharply scale back their involvement in the mortgage market.

"If we look back to the 80s, mortgage finance was largely dominated by the Savings and Loans , from there it shifted to the large banks where it has concentrated until the last few years. It seems to make sense that capital needs to step up as the shift takes place to non-bank entities," states the report from analysts Ben Chittenden and Chris Kotowski.

A considerable amount of capital has already stepped up and thrown its weight behind Erbey's businesses.

"He has a very unusual combination of capabilities," says billionaire investor Wilbur Ross, who joined Erbey on the board of Ocwen after it bought a company called Homeward Residential for $750 million in cash and stock from him last year. "You find some executives who are good strategists but not so good at the details of operation. He's good at both. And then in addition he has been totally brilliant at capital markets activities."

You probably haven't heard of Erbey, and even the companies he oversees aren't familiar to most people. But if you're behind on your mortgage payments, you are more likely to be dealing with Ocwen and one of its 5,097 India-based call center operators than you are with any other company. A mortgage servicer is essentially a debt collector. Ocwen, which specializes in nonperforming loans, services $130 billion of the $1 trillion in delinquent mortgage loans in the U.S.

If you lose your home to foreclosure, Ocwen may refer it to Altisource Portfolio Solutions (ASPS) to be listed through a Web site called Hubzu.com. Hubzu.com sold about 25,000 homes in 2012, generating more than $53 million in revenue. That would make it one of the top 10 or 11 realtors in the country, according to Steve Murray, president of Real Trends, which tracks the realty industry. Other foreclosed homes in Ocwen's inventory are converted to rental property and leased out by Altisource Residential Corp. (RESI).

That sounds relatively simple, but the corporate structures that support these and other business activities in the Erbey portfolio are not simple. Three of the companies Erbey oversees, including Altisource Residential, Home Loan Servicing Solutions (HLSS)and Altisource Asset Management (AAMC), do not conform to the man-on-the-street notion of a company. Legal structures might be a better way to describe them. (Because the five Erbey companies have bland and overlapping names, I will refer to all of them except Ocwen by their ticker symbols in an attempt to simplify.)

AAMC, for example, has just five full-time employees. It owns a title insurance company and a reinsurer called NewSource, which has no employees. It manages assets for RESI, the separate, publicly listed residential leasing company, which also has no employees. HLSS, which has just 14 employees, exists at this point merely to buy assets from Ocwen.

What the five companies have in common is share price appreciation that ranges from market-crushing to difficult-to-fathom. This last description refers to AAMC, which is up 3980% since it was spun out of ASPS in December. No, that wasn't a typo. Shares opened at $15 Dec. 13, and were worth $612 at the close of trading Tuesday.

Still, Ocwen has the largest profits, the most employees and the highest public profile of the five companies Erbey oversees. It also accounts for the largest portion of Erbey's net worth, at roughly $983 million.

'I Don't Ever Want to Be a Bank or a Thrift Again'

Ocwen was created out of the Oxford Financial Group, a company founded by Barry Wish in 1983. Wish lured Erbey away from General Electric's (GE) GE Insurance unit to run the leveraged buyout business. One of Oxford's biggest acquisitions was a 1986 deal for Revere Copper & Brass, shortly after its emergence from bankruptcy.

Oxford split up, however, and Erbey and Wish were left with a group of assets, the most promising of which were First Federal Savings Bank of Delaware and Investors Mortgage Insurance Co. These became the core of Ocwen. Its name, which comes from "Newco" spelled backwards, is a bit like Erbey: boring and clever at the same time.

Erbey says he and Wish, "commenced building a business to try to work out non-performing loans."

Such assets were plentiful as a result of the U.S. Savings and Loan crisis, which flared up periodically from the 1970s until the early 1990s. For a period of time in the '90s, Ocwen became the largest purchaser of residential non-performing loans in the industry and the second-largest buyer of non-performing commercial mortgage loans, Erbey says.

"He was better at servicing them than everybody else," says an executive at another company who has done business regularly with Erbey. "If the loan pool traded at 55 cents on the dollar he could pay 58 cents and make more money than the guy who paid 55 because servicing -- the art of collecting the loans -- is such an important component of the value."

Servicing is Ocwen's principal business today and its growth, mainly through acquisitions, is the reason Ocwen's shares have nearly quadrupled since May 18, 2012. Servicing was also a big part of Ocwen's success in the late 1980s and most of the 1990s. During that time, however, Ocwen was one of a small number of thrifts that bought non-performing loans. A competitor ran into trouble and Erbey says that caused the Office of Thrift Supervision (OTS) to tighten the screws on Ocwen.

"The guy at the agency said 'I'm not going to lose my pension over having somebody that does that kind of work,'" Erbey says. He is still clearly annoyed by the recollection.

"That's why I don't ever want to be a bank or a thrift again because someone can come in who's basically a bureaucrat" and force him out of a key business. "This guy only cared about his pension plan. The fact that you'd even say that shows you're a ret-- you know, not the exactly the brightest guy on the--"

Erbey declined to name the official, and Ellen Seidman, director of the OTS from 1997-2001 declined to comment through a spokesman for the Urban Institute, where she is now a fellow.

At roughly the same time as its regulatory troubles, Ocwen had problems of its own making. After a bet on interest-only securities went bad, Erbey and Wish bought the securities for $14 million above market value to make investors whole, according to a regulatory filing.

Sterne Agee analyst Henry Coffey cites the transaction as an example of Erbey's dedication to his shareholders.

"Most of us don't have that kind of capacity or integrity," he says.

Erbey singles out the bad bet as "the one transaction that I really regret." He adds, "it's something that wasn't our core business and I didn't think it was right to do it."

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