If you haven’t seen the Shelterforce interview with Ocwen CEO, Ron Faris, see it here.
Faris looked early at what was happening to loan collateral on streets and in neighborhoods in 2004 and attributes Ocwen’s early progressive approach to loan modification, including principal reduction, to a recognition of realities on the ground. True, the GSEs and investors pushed back against principal reduction. Luckily, Ocwen persisted.
As those who tried to save houses with short sales, deed-in-lieu transactions or loan principal modification heard repeatedly, most servicers claimed they were prohibited by investors and Pooling and Servicing Agreements (PSAs) from acting rationally where their lien rights would not get the loan paid off. The business model of putting foreclosure ahead of an assessment of the situation on the street and in the house of the defaulting borrower ended up producing more abandoned vacant houses. These, in turn, lowered values in the other houses where servicers were collecting loan payments. By putting their customers under water with a big wave of foreclosure action, servicers seeded neighborhoods for more defaults . . . and got them.
Ocwen’s reading of the Pooling and Servicing Agreements is different than that of most other servicers. That, I think, was a crucial aspect of the company’s superior approach to defaults. Look at this answer from Faris:
It seems that every pooling and servicing agreement is written differently. Does the PSA contractually limit your ability to reduce principal?
No. In the private-label security world, trust me, I heard a lot of those same stories very early on. And yet, when we actually read our documents, we found less than 10 percent, closer to only about 5 percent of the time, was there any true restriction on how you could work out a loan. [emphasis added]
Let’s hope the GSEs see the light and let their servicers respond to the needs of borrowers and whole neighborhoods underwater with less harmful default servicing.