Under fire from New York's top banking regulator, Ocwen Financial took a $100 million charge for a potential settlement for servicing violations and posted a third-quarter loss.

On an Oct. 30 conference call with analysts, William Erbey, Ocwen's executive chairman, said the $100 million charge was the company's "best estimate of the exposure" for backdating thousands of foreclosure letters to borrowers. Erbey deflected most questions about the potential settlement, essentially leaving open the possibility that litigation expenses or the cost of an actual settlement could be higher.

The mounting regulatory problems are likely to prevent Ocwen from completing its purchase of $39 billion in mortgage-servicing rights from Wells Fargo, analysts and servicing experts have said.

"We need to deal with this, we need to deal with it effectively and do it quickly," Erbey said, at one point stating the charge could be "materially different" from an actual settlement.

"We reached a point where we were far enough (along) in discussions with the regulator, that our best estimate of the exposure was $100 million at the end of the quarter," Erbey said. "We're trying to be clear that they could be materially different but we really don't know."

Michael Bourque, Ocwen's executive vice president and chief financial officer, left open the possibility that a settlement could be higher.

"As Bill said, that doesn't mean that's where we'll settle, it could be materially different from that," Bourque said. "The point we were at in the discussion, we thought it was appropriate to take the reserves."

Ocwen, the country's largest nonbank mortgage servicer, has been under intense regulatory scrutiny over the past year from Benjamin Lawsky, the superintendent of New York's Department of Financial Services.

Lawsky sent a warning letter to Erbey on Oct. 21, identifying 6,100 borrowers who received backdated loan modification denial letters. Ocwen initially blamed the backdated letters on computer system failures, at one point calling them "isolated." The issue surfaced more than a year ago, when an employee first told executives and an internal monitor about the backdated letters.

Ocwen said nearly 70% of the borrowers who received backdated letters were subsequently approved for a loan modification and fewer than 5% went through a foreclosure.

Ocwen's stock price has fallen 17% since the back-dating allegations first surfaced. Following the earnings release, shares of Ocwen initially spiked, then sold off in early morning trading. The stock price was up 8.5% to $22.57 a share mid-day following the conference call.

The company has hired an independent firm to investigate the issue and make changes. Ocwen also said it will conduct a complete file review for any borrowers who received a backdated letter and believes they were harmed. Ocwen said in a presentation to analysts that it historically dated letters when "the decision was made to create the letter versus when the letter was actually created," and the different in those dates was three days or less.

"In certain instances, however, there was a significant gap between the date on the letter and the date it was actually generated," Ocwen wrote in the presentation. "We continue to investigate all correspondence to determine whether any of it has been inadvertently misdated, how this happened in the first place and why it took us so long to fix it."

Ocwen posted a third quarter loss of $73.5 million, or 58 cents a share, compared with net income of $60.6 million, or 39 cents a share, a year ago. Revenue fell 3% to $513.7 million. The Atlanta servicer set aside $120 million of reserves for "various regulatory and legal matters" including the $100 million for a potential settlement.

Ocwen's servicing revenue fell 7% in the third quarter to $485 million due primarily to fewer loan modifications and longer foreclosure timelines. Ocwen also has struggled to grow loan originations, which dipped to $1.1 billion in the quarter.


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