NEW YORK (
Wilbur Ross, one of the world's top investors, discusses Bill Erbey, a little-known but wildly successful mortgage industry pioneer. Excerpts from this interview appear in TheStreet's exclusive profile of Erbey. Ross sits on the Board of Directors of Ocwen Financial (OCN) - Get Report one of five companies at which Erbey serves as chairman.
The interview has been condensed and edited for clarity.
How long have you known Bill Erbey?
Well for quite a while. I live in Palm Beach, and until he recently moved to the Virgin Islands, he had lived in that area as well. So I've known him for quite a few years socially, and we also, for quite a while, were competitors when we had the old American Home Mortgage, subsequently known as Homeward Residential.
What is it that you think people ought to know about him? I mean sort of his contribution to business, or society, or both?
Well I think it's a number of things. He has a very unusual combination of capabilities. 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. As you probably know he's traded a number of subsidiaries, spun them out, they kind of all interact with each other, and he's created a huge amount of market value through the combination of great strategic calls, very, very good day-to-day operating management, and then some brilliant capital markets initiatives. So I think he has now created himself in a position where he's not only the largest player in his space, he's also the lowest cost, both in terms of capital cost and in terms of operating expense. So I think he's created quite an extraordinary business.
Is there a good anecdote that you can think of? He seems to have a fairly acerbic sense of humor. He refers to himself as a nerd.
Well in some ways he is a nerd, a good nerd. When I went on the board they put me on the compensation committee, which is unusual for a company to have a sort of true outsider do that. So the first meeting I went to, it was one to set the criteria for people's bonuses for the next year, always sort of the most sensitive thing that you can imagine to be done. I was quite amazed to see the level of detail at which they were making people have targets. For example a big important part of Ocwen's business is servicing delinquent mortgages, and part of that is a call center that makes and receives calls to delinquent borrowers. So the guy who's in charge of that thing overall, they looked at what you call the KPIs, mainly the key performance indicators, for that fellow for his bonus, and they were remarkably specific. Like
reduce waiting time of the average caller from 12 seconds to 10 seconds
, that kind of thing. I've never seen a company that had as precise criteria for bonuses as this company does. I mean these are really button down people.
Homeward, I had thought, had done a very good job at cost control. And like Ocwen, we did a lot of our routine functions in India, so does Ocwen, but when I looked at the comparison they were getting much more productivity at much lower costs out of their people than we were, and with smaller turnover of people. And India nowadays is such competition for people to do the call centers, to do back office things, that there's an enormous amount of job hopping. They do not have as much job hopping away from them as other companies out there, and I think it's because they do a better job training the people. There are things at training new people. There are things at weeding out the new people that don't work out for them, and as a result they've built, what to my mind, is quite an amazing corporate culture because 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. So it's not so much an anecdote, it's just the achievements that they've made may sound small to you reducing call waiting time by a couple of seconds is a really big deal, and it's really hard to do.
If you've ever tried to get your local phone company or utility company on the line you'll know what I mean.
Yeah. Yeah. No, that's very helpful. Thank you. All right. There are other people you can think of who would be important to speak to about Bill?
I would call some of the other directors. I'm relatively new. We've been involved with them for less than a year. So I've known him socially for quite a while, but I haven't seen him, at one point maybe 15 years ago the company was not in all that good shape. There are probably more anecdotes about how he got it turned around, and so the people who've been on the board in particularly for a long time might very well be a very rich source of that. I can only talk about the company in a more contemporary form because that's all that I've been directly exposed to.
In terms of explaining the industry where Erbey has made his fortune, and where he still seems to have most of his attention and money tied up, it seems like its mortgage servicing. What other businesses, aside from mortgage servicing, do you think are key to understanding Erbey?
Well I think it's a couple of things. Number one is a hundred percent dedicated to making this company better every year than it was the year before, not just better in terms of stock, but better in terms of being a business. For example he recently decided that it would be in the company's interest to move it to the Virgin Islands. There are tax reasons, and such, for that. Well in order to make that really work, and not just be a phony bologna gimmick, it became necessary for him to move there. I don't know if you spend a lot of time in St. Thomas, and I certainly don't mean to disparage it, but there not a lot of people, who are wealthy people, who live in Palm Beach, who would welcome moving to St. Thomas. He did that simply to make his company better. And when you think about how wealthy he's become, it's really quite amazing.
I didn't realize that. I've never been to St. Thomas. Why is it?
Not that there's anything horrible about it, it's just that it's certainly isn't Palm Beach.
One of the opportunities that I think is sort potentially interesting about, I guess it's
Altisource Portfolio Solutions
, I don't know if by virtue of your investment in Ocwen you would benefit from this. But you know if you look at the multiples attached to
, you know online buying and selling of homes, it seems like a potentially interesting business. You know the market obviously feels that way, but they seem to ignore the fact that Altisource is conducting online, you know is actually doing these transactions already. Something that Zillow and Trulia are not. I mean is that a business that you could see, you know, where you could see Altisource becoming a major player, and would you, again, would you be able to participate in that by virtue of your stake in Ocwen?
So we are investors in Ocwen because what happened we sold them Homeward Residential. They took over $2.25 billion of debt of mostly debt funding advances, and then they gave us, the deal was $750 million of equity, of which $160 million was a convertible preferred in Ocwen, which has worked out very well. It had a $35 strike price, and the stocks are now in the 50s. So we really don't have any direct participation in anything but Ocwen itself.
I see. And the
was just shortly after the day the deal was announced with Homeward. You were very bullish on Ocwen.
Yeah. That's right.
Yeah. What's your biggest concern that could sort of derail the bull case for Ocwen?
Well I think it's very, very hard to see anything that could totally derail the case. It's one of the few, and mortgage Servicing is one of the few businesses that benefits from rising interest rates, and it's especially one of the few mortgage-related businesses that related from it. I don't know if you understand that aspect of it or not, but if not I'll be glad to explain it to you.
Well, I think I do just in the sense that, you know, as rates rise people aren't going to refinance. So you hold on to the value of the MSRs
mortgage servicing rights.
Yeah. So anything that extends the life of the MSR adds value. So whereas many parts of the mortgage business, say the origination part, may be somewhat vulnerable to an increase in rates. In fact, Ocwen, and companies like it, are pretty good hedge against increasing rates. So the whole money market phenomenon, which as you know has become a big deal in terms of people looking at the stocks nowadays, it's really not relevant as the problem. Indeed it's the benefit because it's obviously not much room for rates to go down, and I don't think there's anybody, even at the Federal Reserve, who sees rates going down from where they are now. So the only real question is, "When will they go up? How much will they go up?" Whatever is the answer to those two questions will be beneficial to Ocwen. So that big macro phenomenon, I think, is fine.
I guess the one thing you might worry about would be over regulation. As you know the consumer protection people are becoming very aggressive in regulating everything that has to do with consumer's finance. And as you know, there have been plenty of state attorneys general who brought all kinds of litigations, and have gotten all kinds of settlements. So over regulation is one potential problem.
The second potential problem, although they're dealing with it, is part of the reason they bought our business. Historically their big growth has been acquiring MSRs on a wholesale basis, quite large blocks at a time. Well even with higher rates there's a certain amount of runoff that will occur in the portfolio. So there are really two ways to try to keep the growth going. One is by continuing to buy more and more MSRs, and I believe that will go on for a while because of the capital treatment that they now get in the banks. So I think that you're going to continue seeing banks selling MSRs. But there is the problem, as your portfolio of MSRs gets big, you have to run harder and harder to make up for the runoff and then get enough more to grow.
So part of what he's done, and he did it with us and he's doing it elsewhere, is Homeward was originating quite a lot of mortgages, something like a billion dollars a month. And so he was aware that it would be a good idea to supplement the wholesale acquisition of MSRs. So he's creating his own MSRs by originating mortgages. Very few of the other players in this space have the foresight to do that in any kind of meaningful scale. So there's a potential vulnerability, but it's one that's he been doing.
Plus because he's so large, and has such a low cost of capital, he can be very, very competitive in terms of the bidding on the MSRs. And on occasion a seller who, for whatever reason, doesn't want to have a big quasi-public auction, because they don't want to press coverage, on a number of times, since everybody knows they can make a quick decision and he has no problem funding it, on a couple of times they've been able to buy stuff on a one off basis, and whenever you can avoid an auction you usually get things a little bit cheaper than you might in an auction. So while that's a theoretical vulnerability, the runoff, I think he's positioned himself pretty well to cope with it. And that's the kind of strategic thinking that he does.
You mentioned some of his earlier, you know, difficulties with the company and said that you're not as familiar with what went on there, but do you have a sense, I mean I guess I'm trying to get a sense of this is a guy who, you know, he was head of GE Mortgage insurance. You know he spent decades building this mouse trap, which works so well now. I mean do you think it's sort of that the industry, the mortgage servicing industry kind of evolved to the point where it was, you know, kind of his moment, or do you think that it's something that he did to turn his fortunes around? I mean his net worth, I think, has roughly quintupled in the last two years to about 2.3 billion.
So, you know, quite a dramatic thing for somebody who has been doing the same thing more or less for, you know, 20 or 30 years.
Well, I think it's a combination of the two. It is certainly true that there was an unprecedented amount of MSRs coming up for sale. So the environment for building a big business certainly was there. On the other hand it's not easy to onboard huge amounts of MSRs, get them off of someone else's system, get them on to your system and not have all sorts of interruptions, and service problems, and all that. So it is certainly true that in the last couple of years he has been faced with an enormous opportunity.
So has everyone else in the mortgage servicing business, and yet how many of them have achieved what he has achieved? There are very few companies in any kind of mass consumer debt processing that could absorb the amount of inflow, just the number of transactions, the number of systems conversions, the number of staff people that you have to inculcate with a new corporate culture. That's a really hard thing to do because remember the mortgage servicing business is not mainly kind of
partners, it's mainly clerical people. And it's very difficult to get clerical people to, a large mass of them, to be the most efficient people over and over and over and yet maintain the service. So I think what has happened is, yes, he was faced with a probably unparalleled opportunity, but you notice not a lot of people were able to grab it.
Written by Dan Freed in New York
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