New York regulator Benjamin Lawsky raised fresh concerns about potential "self-dealing" by Ocwen Financial (OCN) with affiliated businesses that critics say try to capture real estate commissions and charge additional fees to homebuyers.
Lawsky sent a letter Monday to Timothy Hayes, Ocwen's general counsel in West Palm Beach, Fla., questioning the servicer's relationship with Altisource Portfolio Solutions (ASPS), a Luxembourg-based distressed property manager, and its online auction site Hubzu.
Altisource has an eight-year agreement to manage distressed and repossessed homes in Ocwen's $435 billion servicing portfolio. It requires that properties be listed and marketed through Hubzu, even if a distressed borrower has already signed a contract for a short sale. William Erbey, Ocwen's executive chairman, owns or controls 26% of Altisource's stock and 13% of Ocwen's.
Lawsky, the superintendent of New York's Department of Financial Services, says he is concerned that Hubzu charges inflated fees "through conflicted business relationships" at the expense of mortgage investors and strapped homeowners. Altisource says that is not true, though it recently changed its fee structure in February and now charges a homebuyer's "premium" instead of taking a cut of real estate agent commissions.
"These higher fees, of course, ultimately get passed on to the investors and struggling borrowers," Lawsky wrote in the letter to Ocwen.
Ocwen said it received Lawsky's letter, and plans to "fully address the questions raised" by April 28.
Last month, Lawsky created havoc in the mortgage servicing industry when Ocwen put an indefinite hold on a $2.7 billion purchase of a mortgage servicing portfolio from Wells Fargo (WFC). Ocwen did so at Lawsky's request, because he feared the nonbank servicer has grown too quickly.
Lawsky has said previously that Erbey's stake in Altisource "raises the possibility that management has the opportunity and incentive to make decisions concerning Ocwen that are intended to benefit the share price of affiliated companies, resulting in harm to borrowers, mortgage investors or Ocwen shareholders."
The dispute over Altisource's role in sales of distressed properties has been going on for a few years. Real estate agents have long grumbled online at Ocwen for intruding in the short sale process and trying to take a piece of their commissions.
"Ocwen is trying to turn the distressed short sale business into a profit center for itself, above and beyond the servicing fees it is getting," says Phillip Querin, a lawyer who represents the Portland Metropolitan Association of Realtors in Oregon.
Rob Bridges, an Altisource associate general counsel, says another affiliate, known as RHSS, used to share in real estate agent commissions when it required 1.5% of agents' commissions on properties sold through Hubzu. But the company changed its policies in February after "the brokerage community felt it was interfering with [agents'] listings," he says.
If the Hubzu site gets a higher offer on a property, it charges the homebuyer a premium ranging from $625 to 4.5% of the bid price for the home, plus a $299 technology fee. (The buyer's premium is 3.5% in California and Nevada.)That buyer's premium comes on top of the traditional 6% commissions paid to agents, which are negotiable.
"We aren't taking anything unless we improve the offer and bring value," Bridges says, though he acknowledges that agents viewed the splitting of commissions "as nefarious."
"The buyer's premium does not go to the investor or Ocwen. It is paid by the buyer at closing and kept by Altisource," says Bridges.
Agents say Ocwen and its affiliates are interfering with bona fide short sale contracts and are trying to extract additional commissions from homebuyers.
"They want me to have my client sign an agreement allowing Altisource to step in and negotiate the short sale, even though we already have a signed contract," says Paula Bachman, a debt negotiator, real estate agent and owner of Property Choices in Trumbull, Conn.
In December, Altisource stated that its objective is to expand operating margins in its default-related businesses, which includes Hubzu and RHSS, to 47% by the end of the first quarter.
Ken Trepeta, director of real estate services at the National Association of Realtors, says the buyer's premiums charged by auction sites "often look fishy to real estate agents," and that regulators should make sure that "consumers are not being harmed." But he maintains that mortgage servicers can act as the "agent of a seller," and the real estate agents can agree to split their fees or not.
"The structure of commissions is negotiable," Trepeta says. "If a real estate agent doesn't want to take the agreement, they don't have to."
The issue has become such a concern that the California Association of Realtors has backed state legislation that would make auction companies like Hubzu or auction.com liable for any harm to consumers if they take over negotiations in a home sale.
"It's simply a fairness thing," says Alex Creel, an attorney and lobbyist with the California Association of Realtors. "Realtors spend months of work on a short sale so if an auction company is going to take over the deal, the auction company should be liable" if a deal falls through and a buyer or seller tries to sue an agent.
Marketing and selling homes online is theoretically supposed to reduce the cost of buying a home. In practice, these affiliated businesses have done the opposite. Homes purchased through sites like Hubzu or auction.com can include total commissions of 9% to 11%.
Thom Colby, a real estate broker in Irvine, Calif., says he will not do business with Ocwen, Altisource or Hubzu, because he believes the companies are trying to take real estate agents' commissions.
"They own real estate brokerages, they service these loans and they really don't want agents involved, they want to use their own agents and keep the commission themselves," says Colby, who often posts comments on a site called shortsalesuperstars.com about his difficulties selling short sales and real estate-owned properties.