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 - Get Report) 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. 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 - Get Report) 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 - Get Report). 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. 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--" 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."
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."
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.
"I think in the government areas, people would rather have us hire everyone on-shore but they also like us more because we keep people in their homes. So it's a prioritization: you can't keep people in your homes if you're losing money," Erbey says. Erbey continually comes back to this issue whenever he is asked to address criticism of Ocwen's practices. "I would argue that the primary criteria for whether you should be happy as a delinquent borrower is whether or not you're able to maintain your house. As that objective standard of quality of service, we're better than anybody at that. And we strive to get better every day. Because you know why? Over time it's a better societal thing, people might think you're a good guy if you try to help people stay in their homes. B) we generate more cash flow off those securities than anyone else. And C) it makes money for my shareholders. If we're good at it, we get more business, we're more efficient at it, et cetera. So we try to make a business model that's aligned to all those constituencies that we have out there."
Ocwen has had its share of run-ins with regulators. An examination last year by the New York State Department of Financial Services found instances where Ocwen foreclosed upon borrowers without giving proper notice, or without properly establishing its standing to foreclose. Still, community groups regularly make statements that suggest Ocwen is a considerable improvement over the big banks when it comes to dealing with delinquent mortgages. "There's been a lot of servicing companies that have really contributed to the problem by wanting to head in the direction more of foreclosure rather than by working through problems and getting people into new loans. If there's a company in the mortgage servicing industry that has stepped out of the mainstream to do it differently it's Ocwen," says John Taylor, President and CEO of the National Community Reinvestment Coalition, a nonprofit organization dedicated to getting businesses to invest in poor communities. Ocwen's fundamental belief, according to Taylor, is that modifying mortgages gives creditors a better result than foreclosure in many instances. "At first I didn't really believe them, but they're the real deal in doing that. It's by far not perfect or anything like that, but they really have I think turned the industry in a direction where there's been a lot more cooperation as a result," Taylor says.
David Lerner, a portfolio manager at Omega Advisors, says Erbey, "combines great vision with tremendous depth and detail of knowledge and so is able to really direct these companies in a way that is probably irreplaceable, so you lose some of that future value creation -- you know, What's Bill's next great idea? but if something were to happen to him the companies as they are today would be able to operate and are on nice trajectories."