Monday, December 29, 2014

Ocwen Would Do Well to Follow the Lessons of Berkshire’s Clayton Homes

from nytimes 

James L. Clayton, right, the founder of Clayton Homes, with his son Kevin, in 2003. CreditWade Payne/Associated Press
Another View
Lawrence A. Cunningham, a professor at George Washington University and former corporate lawyer at Cravath, Swaine & Moore, has written numerous books including, most recently, “Berkshire Beyond Buffett: The Enduring Value of Values.” This post is adapted from that book.
The cultural detritus of the financial crisis still plagues some corporations, as the abrupt resignation of the chairman of the mortgage servicing firm Ocwen Financial Corporation shows. But New York State’s sharp rebuke of the company indicates that today’s overseers are committed to purging the flotsam.
Ocwen grew rapidly since 2009 by acquiring mortgage servicing rights from large banks and rivals exiting that business. Today, it services $430 billion in loans, making it one of the largest servicers in the United States and the largest servicer of subprime mortgages.
Yet it lacked the leadership and culture necessary to absorb such rapid growth through amalgamations with disparate firms. According to Benjamin M. Lawsky, the New York State superintendent of financial services, Ocwen’s personnel failed to maintain proper records and wrongfully foreclosed on the homes of many customers. Its board condoned deals between the company and affiliates of its chairman, William C. Erbey, despite conflicts of interest.
Mr. Lawsky and Ocwen settled the case in exchange for Mr. Erbey’s resignation and the appointment of two new outside directors to Ocwen’s board. Mr. Lawsky thus correctly perceives defects in the tone at the top at Ocwen and resulting culture, one skewed to favor top executives, not customers or shareholders.
A manufactured home from Clayton Homes, a home builder and housing lender that was acquired by Berkshire Hathaway in 2003. CreditNancy Pierce for The New York Times
Imposing such a change at the top is bold, but may succeed as long as the successors and continuing executives focus on the importance of leadership and culture. In doing so, they would do well to heed lessons from the business case of Clayton Homes, another servicer of mortgages and a large housing lender.
Though Clayton also concentrates in subprime loans, it has had an entirely different track record, prospering throughout the financial crisis. It had no increase in customer foreclosure rates. It met all its obligations as a lender, borrower and servicer. And it even acquired several failed competitors to move to No. 1 in its segment from No. 4.
Clayton’s exceptional experience is a result of the corporate culture instilled by its eponymous founder, James L. Clayton. Born in 1934 on a Tennessee sharecropper’s farm in a log cabin with no electricity or plumbing, he won the Horatio Alger Award in 1991.
As a child laborer, Mr. Clayton earned 25 cents a day driving farm mules that pulled logs to make rows in the cotton fields. After working his way through college and law school at the University of Tennessee, Mr. Clayton went into business with his brother, first selling cars and later mobile homes. The success in selling mobile homes motivated Mr. Clayton to begin manufacturing homes and eventually financing them.
Never forgetting his roots and deeply believing in the Golden Rule, Mr. Clayton concentrated on his customers’ circumstances. He figured that his typical customer — blue-collar workers and retirees — could afford to pay at most $200 a month. Mr. Clayton worked backward to build and finance homes priced for that budget.
In every year from 1989 through 1992, Forbes named Clayton Homes one of the best small companies in America. It had 10 manufacturing plants and 550 dealerships operating in half the states. Prosperity continued through the 1990s as the company grew in all ways, including by adding manufacturing plants and dealerships and increasing sales and financing revenue.
In the early 2000s, as the economy sagged, the manufactured housing industry went into a tailspin, which worsened as the decade progressed. While peers downsized aggressively and closed plants extensively, Clayton minimized both. Thanks to the vertical integration of the business that generated multiple revenue streams, the company even managed to maintain profitability throughout the decade.
The company has always been scrupulous in dealing with home buyers and financiers who invested in the pools of mortgages it underwrote. Mr. Clayton criticized unsavory industry practices that make it too easy for customers to borrow, such as manipulating the terms of down payments or allowances, contrasting the culture at Clayton Homes:
At Clayton Homes, we can’t ever compromise our credibility by participating in such schemes. Unethical behavior is not and will not be tolerated. We now sell over a billion dollars of mortgages every year, and investors who buy those mortgages never meet the customers, or see the collateral. The trust and faith enjoyed by our company from so many shareholders, investors and suppliers, and our 8,000 team members is so very important. We must always take our credibility and integrity seriously.
By the mid-2000s, promoters of manufactured homes spurred business by siphoning money to buyers who should not have purchased homes with loans that lenders should never have made.
What distinguished Clayton Homes was that its financing division, unlike that of competitors, did not engage in predatory lending or exploit its customers’ naiveté. Mr. Clayton attributed the difference to his company’s maintenance of a “sacred wall” between sales and credit that competitors failed to maintain.
In ensuing years, the industry’s problems crystallized and, during the 2008 financial crisis, Clayton Homes was in a position to benefit. Before 2008, it increased business by applying prudent lending criteria that resulted in a well-performing portfolio of loans. It adopted the same customer-centric focus in servicing loans as it did underwriting them.
After 2008, as Clayton continued its sensible business practices, the company prospered while its chief rivals faltered. Amid the crisis, Clayton was an exception: No purchaser of the loans it originated or had repackaged for sale ever lost a dime of principal or interest.
The results were astounding for the industry. In 1999, the three largest manufacturers were Champion, Fleetwood and Oakwood,
which together commanded nearly half the output. Clayton was fourth. By 2009, those three had all disintegrated and Clayton Homes, which had acquired many of its rivals, was on top.
Clayton’s creed and corporate culture were key reasons it attracted the interest of Warren E. Buffett’s Berkshire Hathaway, which acquired Clayton in 2003. Clayton Homes, an industry leader now run by Mr. Clayton’s son Kevin, shows that integrity is not only a moral virtue but a business value.
Mr. Lawsky should encourage those assuming the leadership at Ocwen to take a page from Clayton’s book. They should set a tone at the top to foster a corporate culture based on the Golden Rule: Do unto others as you would have them do unto you.

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