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."
Undaunted by Complexity
Erbey has a knack for diving into complex tax or accounting issues and, through a kind of alchemy, finding untapped reservoirs of value. More than 20 years ago, he developed a product called a NERD (non-economic residual) used to absorb phantom income created in certain types of mortgage securitizations. The fact that the Internal Revenue Service wrote a rule specifically dealing with the tax treatment of NERDs demonstrates their importance, says Viva Hammer, a Brandeis University professor who was previously responsible for law and policy in the taxation of financial products at the Treasury Department. "The IRS hardly ever writes regulations on financial products," Hammer says. Creating five different companies out of Ocwen rather than keeping all the businesses together was a decision Erbey says he did not take lightly. "There is an infrastructure cost and a friction cost of having independent public companies," he says. However, he believes having separate CEOs better incentivizes management. "I want them to feel that it's true that they own those companies. It's their company -- that they're really invested in making that company succeed, and I think that provides financial rewards, but also psychic rewards for being able to do that." But Erbey also believes breaking the companies up allows investors to see value they might otherwise miss. "Some of our businesses are reasonably complex, and when you keep them all in one bundle, it's hard for shareholders to really understand and also to properly value the various cash flow streams. For example, we spun out Altisource (ASPS), which I firmly believed at the time we spun it out we had zero value for it when it was embedded within Ocwen and now people see it's a process-driven business and it's a couple billion dollar market cap." Splitting up the businesses doesn't necessarily make them simpler, however. Erbey says creating HLSS allows Ocwen to fund itself less expensively than it would be able to do on its own. The key lies in the fact that HLSS pays a dividend. "When stocks pay dividends people require lower returns. You can argue about whether that's right or wrong but it is a fact," says one investor in a few of Erbey's companies. The investor acknowledges, however, that creating HLSS merely to buy MSRs from Ocwen is "just splitting up the pie in different ways." (He says he doesn't want to discuss this on the record because he doesn't want the hassle of having other investors calling him up to argue about this point.) If you are still not sold on the reason for HLSS's existence, you are not alone. Kramer, the hedge fund investor who is also former chairman of the New Jersey Investment Council, says a few pension funds he introduced to Erbey declined an opportunity to invest in HLSS ahead of the IPO. "It was so exotic, understanding it went beyond most people's skill sets. You've got a lot of that going on right now in financial services. Financial services is changing big time and so the people who have these new 'show me' stories where it's never been done this way before, you can imagine that when you walk into a room and say 'I'm going to develop a different model than what has existed previously' -- that people don't sort of naturally latch onto it." That said, Kramer points out that many of those same skeptics will "be comfortable investing in a bank even though the bank is now subject to a totally different rulebook which hasn't even mostly been written yet. So since the rulebook is totally different and the externalities are totally different, what's the difference what the historic multiples of earnings were? That was a totally different world with totally different rules, but people think they know what a bank is and how to value it. They don't know that about the things that Bill does."
A Grim Future for Homeownership
Erbey is one of many experts on housing and the economy who expects homeownership to decline in the U.S. in the years to come. Part of the reason as he sees it is that many Americans lack the education to qualify for middle class jobs in the post-industrial economy. Making things more difficult, he believes, will be an aspect of the 2010 Dodd-Frank legislation that will make it harder for many Americans to qualify for a mortgage. Erbey cites a February study by a consultant called CoreLogic which found that only half of the mortgage loans being originated today will qualify under new rules structured around something called a Qualifying Mortgage that go into effect at the start of 2014. Erbey created RESI to capitalize on what he believes will be rising demand for renters by turning foreclosed homes into rentals. While private equity firms including The Blackstone Group ( BX) and Colony Capital as well as a company called Silver Bay Realty Trust Corp. ( SBY) are also looking to take advantage of this trend, hedge fund manager Kramer believes RESI is better-positioned because its national infrastructure and low cost of capital enable it to acquire the foreclosed homes more cheaply than competitors. That's because they buy the underlying loans rather than the homes themselves, which allows them to acquire the properties at a 17% discount, while facing less competition from other buyers, Kramer says. Kramer, a major Democratic fundraiser and a former domestic policy adviser in the Carter White House, has made a couple of efforts to get Erbey to lend his expertise to the debate over housing reform. The investor brought Erbey along to a group meeting with Austin Goolsbee when Goolsbee was chairman of President Obama's Council of Economic Advisers, because "I didn't want to just have all Democrats in the room and Bill was in New York." He asked Erbey to deliver a speech on housing at the Robert F. Kennedy Center for Justice and Human Rights to discuss "the dynamics in the housing market -- what it's going to look like and how challenging it is." Erbey was reluctant to give the speech, but Kramer says it was "basically as good as anything I've ever seen." Erbey says he doesn't like to get involved in politics, and while this is the kind of preference for which no explanation is usually required, it is easy to see how his resume might make him a liability in that arena. He is, after all, an offshore billionaire who profited from the financial crisis, relies on cheap labor from India, creates complex financial entities and left the banking business because he doesn't want to cede authority to government bureaucrats. "I hope this doesn't come across the wrong way, because I really do like him, but this is a guy who has no kids, who worked all his life to become a billionaire and now he's a billionaire. That's just a fact, and that's a big part of who he is," says one business associate. But in addition to his success at keeping people in their homes, Erbey has a low-key manner that is difficult not to like. He was unusually generous with his time in interviews for this article, and one of the first things his investors mention about him is how readily he makes himself available to answer their questions. He has been married to the same woman for 40 years and is clearly protective of her. He seems genuinely to believe his business plays a positive role in society, but he is either decent enough or smart enough not to push it too far. "Would every mother want their son to go out and become a mortgage collector? I don't think so. And I understand that," Erbey says. "I started off in my career. In one of the jobs I was President of GE Insurance and I kind of liked it and was pretty good at it and decided, well, maybe I can do more with this. Even though I had career goals, sometimes you decide this is an area that's productive and you're pretty good at it and people will pay you to do it. That's what I decided to do. Was it the smartest career move in the world? I probably could've picked better than the financial services industry, which has been a rather up and down industry over time." -- Written by Dan Freed in New York. Follow @dan_freed