As president of General Electric's mortgage insurance subsidiary in the early 1980s, William Erbey saw firsthand just how high-tech the industry wasn't. As he told U.S. Banker magazine in 1996, "A lot of the mortgage business was carried on like a dozen people sitting around a campfire and comparing how they did things." Erbey, a Harvard MBA, figured that an entrepreneur who could harness technology to automate the boring business of loan servicing would hit it big. And he has - until recently.

Ten years ago, Erbey founded Ocwen Financial Corp. to buy failing thrifts and whip their loan portfolios into shape. The West Palm Beach-based Ocwen (Newco spelled backwards) is now the biggest buyer of the nation's bad loans. It's also the envy of competitors for its ability to wring profits from mortgages that banks already have declared delinquent. Earnings have ballooned from $25.5 million in 1995 to $78.9 million last year; its average loan portfolio from $781 million to $1.86 billion. The company is confident enough of its future that it plans a 1,000-employee branch operation in Orlando.

But after years when tough economic times created a steady supply of bad loans for it to buy, Ocwen is struggling to cope with what, for almost everyone else, has been a period of prosperity. Loan delinquencies - Ocwen's lifeblood - have dwindled. Thriving bond markets also have wrecked Ocwen's ability to raise capital by repackaging its restructured loans into pools and selling them to investors. What's more, a misguided investment in arcane mortgage-related securities resulted in a hefty second-quarter loss and a freefall in the stock price - Erbey's 31% stake in Ocwen has lost $391 million of its value since July. Scrambling for new ways to make money, Ocwen is in the middle of a major restructuring that will determine whether the company can continue to grow. The success of that effort may come down to whether the technology on which Erbey built the company can now rescue it.

Technology always has been Ocwen's secret weapon. Erbey, who spent five post-GE years at an arbitrage outfit that specialized in reviving moribund manufacturers, applies an assembly-line model to restructuring defaulted loans: Set up a work-flow process, fix bottlenecks quickly and look constantly for ways to speed up production. Ocwen started simply, with PCs and spreadsheets. Today, its data center occupies the entire third floor of its headquarters building. In a windowless, tightly monitored fortress - only 15 people in the entire company have access to the room - banks of network servers, phone wires and 3,000 gigabytes of harddrive space store millions of data bits about each loan Ocwen services.

All the computer power enables Ocwen to evaluate loans in half the typical time and to avoid expensive foreclosure proceedings at twice the rate of its competitors. With a click of the mouse, Ocwen employees - "loan resolution consultants" - have instant access to copies of mortgages, appraisal information and payment histories. Another click, and they can evaluate in minutes whether it's more profitable to foreclose or work out a payment plan. And if the company must foreclose, it can produce the necessary paperwork in minutes, compared to the 30- to 45-day industry average. Ocwen sticks religiously to its timetables; one missed deadline throws off the entire profit model.

Computer prowess

The system isn't always a hit with borrowers. The owner of three apartment complexes in the mid-Atlantic region, for example, was so furious at Ocwen's handling of his loans that he not only sued the company, but also complained to his congressman and to the Nasdaq. But Ocwen's technological muscle has wowed Wall Street, and even competitors are awed by the company's computer prowess and the workaholic tone set by Erbey, 49. Drive by Ocwen at 7 a.m. on a Sunday, and you'll most likely see his car. "The guy works seven days a week and he drives his people hard," says Marc Geredes, president of Ocwen rival First Franklin Financial Corp. in San Jose, Calif.

But all the hardware on Ocwen's third floor hasn't immunized it from the outside forces that have put distressed loans on the endangered list. There are no more failed thrifts to buy, and the real estate recession of the early '90s is long over. Ocwen thought it had found a gold mine when the U.S. Department of Housing and Urban Development (HUD) in 1995 began auctioning off to private investors government-insured loans whose borrowers had defaulted. Ocwen, by itself and through a joint venture with Wall Street investment firm BlackRock Capital Finance, bid successfully on $2.7 billion in defaulted HUD loans in 1996 and 1997. Then, in 1997 HUD's inspector general and the Justice Department began a criminal probe into allegations of bid-rigging and corruption involving the auction program's outside financial advisor; last October HUD dumped the financial advisor and halted the auctions. The investigations, which have spawned a congressional inquiry and a General Accounting Office audit, concern allegations that BlackRock and partners such as Ocwen won so much of the HUD business not because they were smart bidders, but because BlackRock had inside information.

So far there's no suggestion that Ocwen did anything wrong. But the halt of HUD auctions eliminated Ocwen's primary source for public sector loans, which comprised 42% of the overall discount loan business in 1997. According to Ocwen President Christine A. Reich, the investigations don't concern the company, except for the loss of the business. "We are sensitive to having to replace that source of revenue," she says.

Analyst Jonathan Adams, who follows Ocwen for Prudential Securities, calls the HUD situation "a big loss" for Ocwen and says it contributed to his downgrade of Ocwen's stock from a buy to a hold for three months earlier this year. Now he agrees with Erbey that a slowing economy and increased consumer debt will lead to "turmoil in portfolios of many mortgage lenders," who in turn will be anxious to dump their losing loans onto someone else, namely Ocwen. But Adams, who once again downgraded Ocwen's stock on Sept. 18, has another worry: Investors are increasingly shying away from commercial mortgage-backed securities, the loan bundles Ocwen sells on Wall Street to raise cash for more acquisitions. Adams fears this spells future cash flow problems or another write-down in the value of Ocwen's own securities portfolio.

To counter these problems, Ocwen has launched a major reconfiguration of its business. Instead of buying bad loans from other institutions, it wants to simply service them. Fees from servicing other institutions' bad loans have nearly tripled in the last 18 months, and a rating agency has just designated Ocwen as a "special servicer" for $8.7 billion in mortgage-backed securities, meaning that it will take over servicing for any loans in that pool that become 60 days past due. The company expects between $1 billion and $2 billion in new loans to be serviced from that group over the next three years.

Indeed, Ocwen is so confident of growth in the servicing business that it says the Orlando servicing center, slated to open in late 1999, could be followed by a second with 800 more employees. The shift to servicing "is a major initiative for us," says Reich. Ocwen also has ventured into the business of making loans in the so-called subprime arena, and has expanded that business into the United Kingdom. Finally, Ocwen is pursuing ways to leverage its technological smarts; it has bought two technology companies in the past year and plans to license its proprietary loan resolution software to other lenders.

Even with the diversification, however, much of Ocwen's business still will depend on a supply of bad loans, and analysts remain concerned whether the still-buoyant housing economy will generate enough bad loans for Ocwen to grow at its past pace. "Ocwen basically built its franchise during what was considered a real estate recession," says Orest Mandzy, managing editor of trade publication Real Estate Alert. "If things turn south, they have the expertise and the capital to buy everyone's problems. But whether that will happen remains to be seen."