Matthew Iorio’s Greenwich, Connecticut-based hedge fund firm, White Elm Capital, has fully exited big bets on mortgage loan servicer Ocwen Financial Corp. and two toxic affiliated companies.
However, its hedge fund, White Elm Capital Partners, still was unable to stop the bleeding in the fourth quarter, losing about one percent for the period. As a result, the fund lost nearly 13 percent for the year.
In his fourth-quarter letter dated January 20, Iorio told clients his bets on Ocwen, Altisource Portfolio Solutions, which provides services and technologies to the mortgage market, and Altisource Asset Management, which sells portfolio management services of real estate-related assets, accounted for 1,250 basis points of the firm’s losses for the year, or nearly its entire drawdown, even though it had reduced the size of its positions in the stocks throughout the year.
In October, we reported that White Elm lost 3.2 percent or so in the third quarter and was down roughly 12 percent for the first three quarters, thanks in part to its positions in Ocwen and Altisource Portfolio Solutions, which were the firm’s two largest positions at the end of the first and second quarters.
In the letter, Iorio, who is known as a Tiger Grandcub because at one time he worked for Tiger Cub Stephen Mandel Jr.’s Lone Pine Capital, told clients he still saw “significant upside” in the stocks. At the end of the third quarter, Altisource Portfolio Solutions and Altisource Asset Management were the firm’s fourth and fifth-largest positions, respectively, according to regulatory filings, while Ocwen was the ninth largest.
Ocwen’s stock plummeted 73 percent last year, Altisource Portfolio Solutions fell 78 percent and Altisource Asset Management slipped 67 percent. In the fourth quarter letter, Iorio conceded that the commitments were a big mistake. “We made two mistakes with these investments,” he told clients. He said his team “misjudged the severity and breadth of the negative impact” from a changing regulatory environment and “underestimated” the “downside risks and correlations among the positions.” In addition, he conceded that he overestimated the firm’s ability to handicap the outcome of regulatory actions.
Last year the New York State Department of Financial Services investigated the relationship between Ocwen, a mortgage servicing company headed by William Erbey, and Luxembourg-based Altisource Portfolio Solutions, one of a number of companies created by Erbey and spun off from Ocwen, which continued to do business with the pair. Benjamin Lawsky, the top banking regulator in New York State, claimed that the two companies were engaging in questionable transactions that represented conflicts of interest.
In August, Lawsky announced he was reviewing “a troubling transaction” between the two companies “designed to funnel as much as $65 million in fees annually from already-distressed homeowners to Altisource for minimal work.”
He also said he was looking into the role that Erbey played in approving this arrangement, saying it “appears to be inconsistent with public statements Ocwen has made, as well as representations in company SEC filings.”
In December Ocwen agreed to a settlement with New York regulators that called for Erbey’s departure. The company also agreed to pay a $100 million penalty and another $50 million as restitution to current and former customers whose properties were in foreclosure.
Under the deal, Erbey also resigned as chairman of both Altisource Asset Management and Altisource Portfolio Solutions.
Looking back, Iorio said one lesson learned is to do a better job exiting winners, noting that these stocks were very profitable for the fund in 2012 and 2013. “Going forward, I will make sure that we are more pragmatic in position sizing under situations where there is a regulatory event that can fundamentally alter our investment thesis,” Iorio told clients.
