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Bill Erbey Made $2.3B Off Your Underwater Mortgage

Erbey says his net worth, which had peaked at $600 million in 1998, declined by 85%, largely as a result of the drop in Ocwen's stock when it was forced to stop buying non-performing loans. He had already had his photo taken for what was to be his first appearance on the Forbes 400 list of richest Americans, but had to be pulled from the list before the publication went to press. Ocwen's shares, which had peaked in March of that year, would take 14 years to recover. (Erbey finally made his first appearance on the Forbes list last month, at number 243.)

A few people outside the company describe the ensuing years as a difficult period for Ocwen as it searched for a new business plan.

"We had tremendous patents -- great ideas in that period of time," Erbey says. "We were unable to get the human capital in place, and we still struggle a little bit with that -- to actually execute on that. We have some really great interesting patents that we have not monetized today."

Ocwen shares fell below the $3 mark briefly in 2002 before they started to come back. Ocwen eventually got rid of its banking license in 2004, the formal end of a "de-banking" process that started in 1999.

While he acknowledges some missed opportunities, Erbey says what many see as a period of failed experiments was actually the building up of ASPS, the technology backbone of Ocwen. It was spun out of Ocwen in 2009 and Ocwen now leases its services.

ASPS's technology and the operations methods behind Ocwen were in place in time for the mortgage meltdown, and Erbey knew it would give his companies a huge opportunity.

From $50 Billion to $434 Billion In Less Than Four Years

During a Jan. 26, 2007 earnings call, Erbey predicted Ocwen would "have somewhat of an advantage as losses continue to rise simply because we have, with our technology, the ability to expand capacity very quickly. I think the industry, because of a lack of collectors, will find it very difficult if delinquencies pick up materially to actually keep pace with having a sufficient number of people to actually process the loans."

Those comments anticipated a scandal that would bring the word "robo-signing" into the lexicon more than three years later. Robo-signing -- in which mid-level bank employees signed off on foreclosure documents they hadn't properly reviewed -- was just a symptom of the larger problem of understaffing at the big banks that Erbey had identified so far in advance.

Five years after Erbey made those comments, Wells Fargo (WFC), Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C) and Ally Financial [formerly GMAC] would reach a $25 billion National Mortgage Settlement, and begin handing over what are known as mortgage servicing rights (MSRs) to non-bank servicers like Ocwen. MSRs include the responsibility for collecting the debt in return for fees paid to the servicer -- the company collecting the mortgage payments.

Big banks continue to have large servicing portfolios, but they are shrinking fast. At the end of the second quarter, Bank of America, JPMorgan, Citigroup, and Wells Fargo serviced about $4.32 trillion worth of mortgages -- roughly 44% of the market. But their share was far larger -- about 56% -- in the first quarter of 2009, according to Oppenheimer & Co. Citigroup and Ocwen are now roughly tied for the fourth-largest servicer overall.

Ocwen's growth has been astonishing as it has bought up the MSRs shed by the banks. Unpaid principal on mortgages serviced by Ocwen totaled $50 billion at the end of 2009, $74 billion at the end of 2010 and $102 billion at the end of 2011. As of the end of the third quarter of this year, it totals $434 billion. That represents nearly ninefold growth in less than four years.

Ocwen's share price has risen almost as quickly. From May 18 through Oct. 5 last year, the shares rose some 153%. They have added another 50% to that over the last 12 months. Ocwen rivals like Nationstar Mortgage Holdings (WAC) and Walter Investment Management (WAC) posted similarly dizzying returns, but Ocwen proved more agile in scaling up.

"I would have thought the demand for our services would have peaked earlier because we looked back in 2000 and said this is a train wreck ready to occur here. But no one ever thought there'd be non-performing loans," Erbey says.

$4.50 A Share

When people finally did stop paying their mortgage bills, however, Ocwen's investors nearly lost out on the opportunity to capture all the growth that would follow at the company. In early 2008, Ocwen shares tumbled as investors feared the rise in mortgage defaults would cause it to stop collecting the fee income it receives as part of the payments it collects.

Vulture investors Angelo Gordon & Co. and Oaktree Capital Management launched a bid to buy Ocwen for $7 a share in January 2008. But by March, when the offer had fallen to $4.50 per share, Erbey says he urged the independent board reviewing the proposed deal to call it off.

Erbey says his stake in Ocwen would have remained identical regardless of what price was paid.

"It wasn't changing my economics one way or another. If certain of our shareholders wanted to have a liquidity event, I was happy to facilitate that," he says. But as the buyout firms lowered their offer, Erbey decided it was no longer in the interest of "a lot of people in the company here I've known for 30 years." He adds, "I have relatives in the stock, things like that. I just didn't think it was right." Spokespeople for Oaktree and Angelo Gordon declined to comment.

'Dialogue Engines'

Even after the wreck occurred, however, many investors were slow to catch on to Ocwen's advantage over the banks: more than 20 years spent building a mortgage debt collecting machine that is the envy of the industry. The company's success lies in its superior use of technology and outsourcing, chiefly to India.

Ross, whose Homeward Residential also relied heavily on Indian call centers, was impressed by what he saw after the sale to Ocwen.

"They were getting much more productivity at much lower costs out of their people than we were, and with smaller turnover of people," Ross says. He attributes this success to superior training. "It's very tricky in any kind of service business to have the combination of high quality service and yet a low-cost delivery system. They've accomplished that," he says.

Erbey believes low-cost solutions in many instances produce better results than higher-cost ones. The Indian phone bank operators are a good example.

"They perform extraordinarily well or we wouldn't use them. I mean they're our employees. And in many cases they do a very good job because I can find people with higher empathy levels ... and they actually follow the process," he says.

The process includes "dialogue engines" developed by an in-house team of psychologists.

"We create tens of millions of dialogues on how to respond to various questions or answers, and then we use artificial intelligence to chain that together," Erbey says.

In other words, if you tell Ocwen's phone bank operator you can pay next month as soon as you get that loan from your brother-in-law, the software feeds her one response. If you say "go to hell," you get another computer-driven answer delivered by the lips and vocal chords, but not the brain, of a real person.

This may sound like your worst nightmare. As Erbey was describing the software to me, at one point, he said "unfortunately, we haven't gotten to the level where HAL is, in -- what was that movie?" While he seems to have been at least partially joking, it isn't clear whether he remembers that in the movie he was trying to recall, 2001, A Space Odyssey, the supercomputer HAL was the villain who tried to kill all the humans on the spaceship.

Addressing Criticism

Erbey acknowledges that Ocwen's use of India-based call centers may be less than ideal from the point of view of Fannie Mae (FNMA) and Freddie Mac (FMCC). Many of the mortgages Ocwen services are backed by those government-sponsored entities.

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