When Ocwen Financial Corp. shares soared on the news that regulator Benjamin Lawsky, who’s probing the company, will step down, Bill Miller shrugged.
The next head of New York’s Department of Financial Services will probably be as aggressive as Lawsky, continuing the uncertainty for Ocwen, said Miller, who runs the $2.2 billion Legg Mason Opportunity Trust. Lawsky’s investigations of nonbank mortgage servicers such as Ocwen have caused their shares to plunge.
“Ocwen has been rallying on the view that with him gone that will lift the burden, but I would be surprised if the next person didn’t at least follow through in the way Lawsky was going to,” said Miller, whose fund, which invests in Nationstar Mortgage Holdings Inc., has gained an annual 38 percent since 2011.
In three years as New York’s financial watchdog, Lawsky extracted more than $3 billion in fines from global banks, called for the firing of executives and questioned whether the lightly regulated nonbank servicers are properly handling modifications and defaults. As the department’s first superintendent, Lawsky hired experienced lawyers from the New York Attorney General’s office, creating a strong enforcement culture that will continue after he’s gone, said Kathryn Judge, an associate professor focusing on financial institutions at Columbia University Law School.
“Similar to what we saw Eliot Spitzer doing as attorney general, being in New York allowed Lawsky to step in where federal regulators hadn’t,” Judge said. “By stepping into this role at a formative stage for the regulator, he created a footprint. That legacy will survive.”
The superintendent probably will depart next year to take a job in the private sector, a person familiar with the matter who asked not to be identified said last week. Matthew Anderson, a department spokesman, declined to comment for this story.
Lawsky, 44, started looking at Atlanta-based Ocwen in June 2011, two weeks into his new job, after the firm announced its intention to acquire Litton Loan Servicing from Goldman Sachs Group Inc. Nonbank mortgage firms were growing quickly as large banks retreated from the $9.4 trillion market for collecting loan payments because of new capital requirements.
Regulators had been inundated with complaints from borrowers about Litton, such as the improper charging of penalties in foreclosure cases, according to the Consumer Financial Protection Bureau. Ocwen agreed to improve Litton’s internal controls.
In June 2012, Lawsky sent a team of examiners to Ocwen’s offices to pore over records. Since then, he installed a monitor at the firm, blocked its purchase of some mortgage servicing rights, and sent five public letters to the company, raising issues such as possible conflicts of interest.
Last month, the New York watchdog revealed that the company had backdated thousands of loan modification denial notices. That left borrowers with no time to appeal the decisions. Ocwen apologized for backdating letters, which it blamed on a software error, and has said it’s cooperating with Lawsky’s probes.
David Millar, a spokesman for Ocwen at Sard Verbinnen & Co., declined to comment.
Shares of the firm have plummeted about 62 percent this year while Lawsky has scrutinized it. Omega Advisors Inc., founded by Leon Cooperman, sold all of its 2.6 million shares of Ocwen during the third quarter.
So when the superintendent’s plan to leave the department was reported on Nov. 10, investors cheered. The stock jumped 5 percent.
Paul Miller, a bank analyst at FBR Capital Markets Corp., wrote that the news is likely “headline positive” for an industry that’s faced delayed transfers of servicing rights and increased oversight. Big banks may resume selling servicing rights if the existing environment eases, Miller wrote on Nov. 10.
Three days later, Ocwen announced it was no longer pursuing the purchase of $39 billion in servicing rights from Wells Fargo & Co. — a deal that Lawsky had earlier blocked. A department settlement with Ocwen could include a large monetary fine and a cessation of some business for a period of time, said Ed Mills, a policy analyst at FBR.
“Lawsky wanted prudential regulatory oversight and I think he was correct that these companies have grown very, very rapidly,” said LMM LLC’s Miller, who is based in Baltimore.
In an April 2013 speech in New York, Lawsky spoke about the freedom he has had to set the regulatory agenda.
“As a newly created regulator, DFS isn’t necessarily wedded to existing ways of doing business,” he said. “Sometimes that means DFS may be out in the lead on a particular issue.”
The New York regulator has used his leverage over licensing in the country’s financial hub to dictate business practices to global banks, consulting firms and nonbank lenders. He censured Deloitte Financial Advisory Services LLP, led opposition to an insurance industry effort to allow firms to shift reserves to special purpose entities, and refused to join a group settlement over Barclays Plc’s currency-trading practices. He’s also called for senior executives to be held responsible rather than their corporations, and pushed for individuals to be dismissed from BNP Paribas SA over sanctions violations.
“With Lawsky as the first superintendent, it truly elevated the role of DFS to a national level to the point where DFS is basically another national regulator for banks and insurance companies,” said Mills at FBR.
The regulator’s go-it-alone approach could be counterproductive, said Judge, the Columbia professor. He broke ranks with other authorities by issuing a public letter in August 2012 outlining problematic transactions by Standard Chartered Plc and demanding to know why he shouldn’t revoke its license.
Officials at the Manhattan District Attorney’s office, Federal Reserve, Treasury and Justice Department fumed over the New York regulator’s action, which had upstaged and embarrassed them, according to people briefed on the matter at the time.
“Someone proceeding unilaterally can have disruptive effects,” Judge said.
Governor Andrew Cuomo appointed Lawsky, who worked as a special assistant for him in 2007 when he was attorney general. Lawsky, a Democrat, became Cuomo’s chief of staff after he became governor.
The superintendent’s work has reflected favorably on the governor, said David Reiss, a professor who specializes in real estate and consumer protection at Brooklyn Law School. That will encourage Cuomo to select a successor who’s equally dynamic, Reiss said.
Cuomo will want to build on Lawsky’s record of protecting homeowners from improper foreclosures and holding mortgage servicers accountable, said Reiss.
Chief of staff Anthony Albanese, general counsel Daniel Alter, and capital markets division head Maria Filipakis are among the top people that Lawsky brought to the department. One of them may be in a position to replace him, according to a lawyer who has had extensive dealings with the superintendent. The lawyer asked not to be named because he’s not authorized to speak publicly about the matter.
The successor will have to focus more on regulation and finding answers to the issues the department uncovered with nonbank servicers and insurers, said Eric Dinallo, who served as New York’s superintendent of insurance from 2007 to 2009.
“Each superintendent or commissioner wants to put their unique stamp on the agency,” he said.
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