ASPS - Altisource

[Fat Pitch]

Some jaded msdos platform? Is it that bad? That is like 1995 stuff.

 

I was exaggerating, but the monitors pointed out that Ocwen had some archaic systems that got them in trouble with the back dating letters and those systems were developed by Altisource. Ellie Mae is investing 15mm/yr on R&D so I really doubt they are that far ahead of what Altisource is capable of.

 

The market is saying Altisource can't compete without Ocwen, but non party related revenues doubled in the last 2 years so there are customers willing to try their platform.

[physdude]

Puts on ASPS are trading really rich right now. I sold some 25 strike Feb puts at 2.7 which gives either a buy price of 22.3 or a 12% return in 6 weeks. Admittedly, this is still catching a falling knife with my earlier average price being 60 but an entry price of 22.3 does look very cheap here unless everything goes to hell.

[Guest roark33]

For the ASPS longs, I have a question.  What fact would change your mind?  It seems like this entire year (2014) has been one full year of bad news, and I still can't figure out what is the final straw that would convince certain people who have been arguing for ASPS that they were wrong.  I think it is helpful to understand what facts or events would force you to change your mind before hand.  For example, if you had decided in advance that if OCN's MSR portfolio were to decrease substantially in 2014/2015 instead of remain the same or increase, then you could conclude it was time to sell, or if Erbey weren't there or some other thesis surrounding the business.  But I feel like perma-bulls are merely changing their investment thesis to fit the current facts. 

 

 

 

 

[jschembs]

For the ASPS longs, I have a question.  What fact would change your mind?  It seems like this entire year (2014) has been one full year of bad news, and I still can't figure out what is the final straw that would convince certain people who have been arguing for ASPS that they were wrong.  I think it is helpful to understand what facts or events would force you to change your mind before hand.  For example, if you had decided in advance that if OCN's MSR portfolio were to decrease substantially in 2014/2015 instead of remain the same or increase, then you could conclude it was time to sell, or if Erbey weren't there or some other thesis surrounding the business.  But I feel like perma-bulls are merely changing their investment thesis to fit the current facts.

 

I'm new to the ASPS trade (cost around 30), and for me the primary interest was that this business already has made strides in diversifying away from OCN.

[yadayada]

Well with current info, if the stock was at 90$, i would sell for sure. But it makes no sense to sell at 27$. Just because people are not selling when the price is cut by more then 2/3, doesn't mean they are perma bulls.

 

Also it is never a good idea when all the bad news is behind us, and a lot of uncertainty is still priced in. If price target moved from 250$ too let's say 120$ (quite an adjustment), then selling at 28$ would be really dumb.

 

They still keep their worst performing MSR;s that require the most services from ASPS. They still have fast growing non OCN revenue. And their tech business is in investment phase, so contracted margins. And likely FCF this year will be around 140m$ or so. On a 600m market cap.

 

Basically the bull thesis has to be significantly adjusted, but the price adjusted even more.

[Patmo]

For the ASPS longs, I have a question.  What fact would change your mind?  It seems like this entire year (2014) has been one full year of bad news, and I still can't figure out what is the final straw that would convince certain people who have been arguing for ASPS that they were wrong.  I think it is helpful to understand what facts or events would force you to change your mind before hand.  For example, if you had decided in advance that if OCN's MSR portfolio were to decrease substantially in 2014/2015 instead of remain the same or increase, then you could conclude it was time to sell, or if Erbey weren't there or some other thesis surrounding the business.  But I feel like perma-bulls are merely changing their investment thesis to fit the current facts.

 

You said in OCN thread you would post ASPS numbers in this thread. I'm curious on your take of what is going on. These companies are too complex for me to grasp so I would need stupid cheap to consider going in, like half BV or less. But I heard the bulls, I'm curious what the bear argument is at this price point. I would be grateful if you expanded on your argument.

[jay21]

For the ASPS longs, I have a question.  What fact would change your mind?  It seems like this entire year (2014) has been one full year of bad news, and I still can't figure out what is the final straw that would convince certain people who have been arguing for ASPS that they were wrong.  I think it is helpful to understand what facts or events would force you to change your mind before hand.  For example, if you had decided in advance that if OCN's MSR portfolio were to decrease substantially in 2014/2015 instead of remain the same or increase, then you could conclude it was time to sell, or if Erbey weren't there or some other thesis surrounding the business.  But I feel like perma-bulls are merely changing their investment thesis to fit the current facts.

 

Ive been asking myself this question a lot over the past few months and still dont have a good answer (besides absurd scenarios).

 

Some things havent changed though: Hubzu can be undervalued, origination revenue can still pick up, etc.

[physdude]

Well with current info, if the stock was at 90$, i would sell for sure. But it makes no sense to sell at 27$. Just because people are not selling when the price is cut by more then 2/3, doesn't mean they are perma bulls.

 

Also it is never a good idea when all the bad news is behind us, and a lot of uncertainty is still priced in. If price target moved from 250$ too let's say 120$ (quite an adjustment), then selling at 28$ would be really dumb.

 

They still keep their worst performing MSR;s that require the most services from ASPS. They still have fast growing non OCN revenue. And their tech business is in investment phase, so contracted margins. And likely FCF this year will be around 140m$ or so. On a 600m market cap.

 

Basically the bull thesis has to be significantly adjusted, but the price adjusted even more.

 

I perfectly agree with this. One has to continuously re-evaluate investments both with respect to the facts and the price. The current question is whether ASPS is worth buying at 27. I think it is on a risk/reward basis. Would I buy at my original price of 60? Probably not. I would probably sell at somewhere around there (60-70) given the current facts. I think the earnings call will make the current situation clearer and enable a better valuation as there is still a lot of uncertainty following the agreement.

[Ross812]

Well with current info, if the stock was at 90$, i would sell for sure. But it makes no sense to sell at 27$. Just because people are not selling when the price is cut by more then 2/3, doesn't mean they are perma bulls.

 

Also it is never a good idea when all the bad news is behind us, and a lot of uncertainty is still priced in. If price target moved from 250$ too let's say 120$ (quite an adjustment), then selling at 28$ would be really dumb.

 

They still keep their worst performing MSR;s that require the most services from ASPS. They still have fast growing non OCN revenue. And their tech business is in investment phase, so contracted margins. And likely FCF this year will be around 140m$ or so. On a 600m market cap.

 

Basically the bull thesis has to be significantly adjusted, but the price adjusted even more.

 

I responded to a question about this today actually. I sold after OCN decided to exit the agency backed MSR business.

 

My reasons:

 

1- OCNs MSR business is basically in run off. ASPS main revenue source of non performing loans is drying up. How many non-agency sub-prime loans are being originated right now? I suspect non-agency mortgages will be even harder to come by with the expansion of FHA announced by the President.

 

2- ASPS lost ~30% of their earnings when they exited the force placed insurance business. Do they have anything else that generates extremely high margins that doesn't pass the smell test?

 

3- Hubzu is not as valuable if with OCN selling their agency MSR portfolio. Less MSRs means less listings means smaller network.  There have also been questions raised about Hubzu's business practices.

 

4- How will new management/regulators treat the OCN-ASPS relationship? ASPS has contracts protecting them to a certain extent, but will they contest some charges? Will the relationship be the same without Erbey?

 

ASPS earnings have been but from $6.5 to 4.5 with the insurance initiation exit. I suspect another $1 from the OCN exiting the agency backed MSR business. Now I'm down to $3.5 (8x earnings) and Erbey is no longer steering the OCN-ASPS ship together. Out of the $3.50 in earnings, about $2 are in run off and should be gone over 5 years. The other $1.50 is growing at 25%.

 

So I see a scenario of the OCN business declining at 40c per year while non OCN business is growing at 25%.

Modeling this I see earnings at:

 

2015-  $3.5

2016-  $3.48 

2017-  $3.54

2018-  $3.72

2019-  $4.06

2020-  $4.57

 

This is predicated on them growing non-core earnings by 25% in the future. I would say looking at this earnings stream a PE of 8 is not a huge margin of safety.

 

I bought ASPS because their business was to operate a toll road on OCN's portfolio on non-performing loans. This business plan has been slashed already, doesn't look to be growing, and is under regulatory scrutiny. ASPS a year ago is not the same company as ASPS today; and ASPS five years from now will look far different. I wanted the ASPS of a year ago and am not interested in a melting ice cube evolving into a turnaround. 

[ItsAValueTrap]

For the ASPS longs, I have a question.  What fact would change your mind?  It seems like this entire year (2014) has been one full year of bad news, and I still can't figure out what is the final straw that would convince certain people who have been arguing for ASPS that they were wrong.  I think it is helpful to understand what facts or events would force you to change your mind before hand.  For example, if you had decided in advance that if OCN's MSR portfolio were to decrease substantially in 2014/2015 instead of remain the same or increase, then you could conclude it was time to sell, or if Erbey weren't there or some other thesis surrounding the business.  But I feel like perma-bulls are merely changing their investment thesis to fit the current facts.

 

If it looks like their earnings will shrink a few years from now then I would re-consider.  On one hand, it is likely that the Ocwen revenues will shrink because it may take at least a year from Ocwen starts buying subprime MSRs.  The timeline for that is:

1- NY DFS chooses a monitor.

2- 120 days after #1, the monitor has to give an interim report.

3- 90 days later the monitor will provide a quarterly report.

4- After successfully passing all of the benchmarks after #2 or #3, Ocwen should be able to go out and bid on MSRs.  MSR sellers might (or might not) be hesitant to sell unless there are a lot of buyers to bid on their portfolios.  Anyways, the whole process of buying MSRs will take a while since there are a number of approvals required.

 

It might take 2 years to see if Ocwen starts growing its subprime MSR portfolio again.

 

The other thing to look at is Altisource's profits and revenues from non-Ocwen customers.  Declining revenues would be a very bad sign.  I suppose that could happen if the CFPB gets super anal about stuff like servicers colluding with their vendors to offload costs onto mortgage investors and (to a lesser extent) the borrower.  One of Lawsky's letter talked about how Ocwen would charge Altisource fees for accessing its records for force-placed insurance.  (The fee was less than a dollar or something.)

 

Taken to an extreme, this type of fee takes money away from mortgage investors and borrowers because they pay slightly more in the end.

 

---

So far, Altisource has grown its earnings and cash flow like crazy.  Over 30% a year.

[ItsAValueTrap]

I sold after OCN decided to exit the agency backed MSR business.

 

They've always been trying to avoid tying up their capital in that business, e.g. with the OASIS notes.  I don't think that the conference call indicated a change of strategy.  If anything, they said that they want to eventually buy more subprime MSRs and be even more exposed to regulatory risk.

[mvalue]

They also said there was little chance in the foreseeable future that they would be able to do subprime MSR deals on terms that would work for them. That's the problem and why they're pushing more into origination which will be a tough slog.

 

I sold after OCN decided to exit the agency backed MSR business.

 

They've always been trying to avoid tying up their capital in that business, e.g. with the OASIS notes.  I don't think that the conference call indicated a change of strategy.  If anything, they said that they want to eventually buy more subprime MSRs and be even more exposed to regulatory risk.

[Guest roark33]

Would OCN's inability to service loans in California change anyone's mind on ASPS?

 

http://www.latimes.com/business/la-fi-ocwen-mortgage-license-20150113-story.html

 

OCN settling with NY DFS was not the end, it is merely the beginning....

 

 

[jay21]

Would OCN's inability to service loans in California change anyone's mind on ASPS?

 

http://www.latimes.com/business/la-fi-ocwen-mortgage-license-20150113-story.html

 

OCN settling with NY DFS was not the end, it is merely the beginning....

 

Probably the most concerning news out of the complex for me in awhile.

 

The nightmare scenario is forced divestitures into a market with declining prices due to increased regulatory costs. For ASPS, the divestitures arent good no matter what.

 

EDIT: Also, the amount of complaints vs loans serviced over the referenced time frame is absurd to me. Like, I have a hard time believing any other servicer would be significantly better.

[Guest roark33]

Agreed.  OCN talks frequently about how their book value is lower than the market value of their MSRs, but when they are forced sellers and everyone knows this, those MSRs could be valued much lower than the book value.  For ASPS, it is a nightmare....

[jay21]

Agreed.  OCN talks frequently about how their book value is lower than the market value of their MSRs, but when they are forced sellers and everyone knows this, those MSRs could be valued much lower than the book value.  For ASPS, it is a nightmare....

 

It's not that they are forced sellers (altho this would place stress on the mkt). It's more regulatory burden making MSRs more costly to service. B/C revenue is fixed, in order to hit ROEs, prices need to fall.

[Guest roark33]

Yes, that's correct in general, but if California revokes license, then they are forced sellers, regulations haven't changed specifically, but Ocwen just hasn't followed ones in place.  I see the likelihood of California revoking the license as low, but OCN becoming a shell of the company it once hoped to become a most likely outcome now. 

[yadayada]

In that article they got 263 complaints, over a laon portfolio of probably at least 50k. That number is going to be a lot higher if they are forced sellers... So if california is even a little bit rational, these issues will likely be fixed, and this is an empty threat. But i guess anything can happen. But I dont think this will be a most likely outcome. I think what will happen is, they will get their complaint ratio down close to zero, and their problems will go away. Costs will go up a bit though.

 

Susan L. Formaker, a presiding administrative law judge in Los Angeles, has scheduled settlement conferences beginning next month. If those fail, a hearing in July could lead to a license suspension late this year. If that occurs, the department would require Ocwen to sell off its rights to service loans in California, Dresslar said.

So basicly there is going to be a conference and a hearing, and if both of those fail, then they will lose their license.

[Guest roark33]

Yadayada, This is the type of response I am questioning on ASPS/OCN.  It seems like no news will force some people to change your mind on these companies.  That's was my original question a few posts back, what news would force you to change your mind?  No snark intended, I am just curious. 

[jschembs]

The thing I'm still struggling to handicap is if OCN is forced to unload MSRs, how easy/likely is it the buyer would shift services away from ASPS?

[Guest roark33]

Really?  ASPS is basically the problem with how the MSRs are being handled.  Any new company would sever the ties with ASPS before the ink drys on the contract...

[yadayada]

Untill events happen that will significantly change their value to at least to current market price. I certainly not be a buyer at 40$ now though.

 

A lot of people are implying that those government MSR's have to be force sold because the regulator made them do it. But I think they bought them when banks were offloading these things at a discount. OCN's thinking was, they are not very juicy to service, but even if we dont decide to service them any further, we can sell them for more later on. If they really have to be force sold, then you would have seen a deadline. I think that with rising costs those would not be worht it to them, given interest rate risks, and given what they could do with the capital if they sold them.

 

It seems a lot of people who want to be negative about this company, or prove some point, are jumping to conclusions. I think that when they are talking to california regulators, they will show them the progress they made, and will also show them that losing their license would do more damage to homeowners, and this will not happen. Unless regulators here are irrational idiots...

 

Also it was a mistake to botehr with this one. It has given me too much head aches already. I should have demanded a much larger MOS, just because of regulator uncertainty. But if I had no position , I would take a smallish one in ASPS now. I still think they are not bad guys, but I think regulators here have been very aggressive. Companies like this always get complaints, but I think the government is simply jumping them because of their negative image. They want to use this to get complaints to zero, even though they are already better for homeowners then banks. Also a lot of people seem to be really aweful at reading statistics. And having the highest margins, and taking jobs offshore probably rubbed people the wrong way. This is something that Erbey should have foreseen. I guess it is a good learning experience though.

 

I think Erbey thought regulators would be more rational, and would look at the statistics and conclude that they were doing a pretty good job. But regulators just thought 'wow thousands of complaints!' . Even though the complaint ratio was higher for other servicers.

[Guest roark33]

Will any OCN/ASPS bull consider the possibility that Erbey and company are acting in a fraudulent manner?  Lots of value investors, myself included, see regulatory action as a time for good buys, because price is driven down on concerns that are typically overblown.  However, I think one should seriously consider the possibility that these concerns are actually valid and real in the case of OCN/ASPS.  The complaint numbers and ratios are not evidence of lack of fraud.  Most people getting foreclosed do not have the wherewithal to make an actual complaint, or at least a well-reasoned and articulated one.  In fact, that is the reason most sketchy companies are able to persist in these markets for so long. 

 

I just don't think people should always assume the regulators are idiots and/or out to score political points.  Sometimes businesses do stupid, greedy things that they should be punished for.  For example, marriot recently blocked guests usage of mobile wi-fi spots.  Google assisted in the lawsuits and Marriot got smacked down for this practice.  This wasn't some political point-scoring case, it was merely one business over-reaching. 

[jschembs]

Will any OCN/ASPS bull consider the possibility that Erbey and company are acting in a fraudulent manner?  Lots of value investors, myself included, see regulatory action as a time for good buys, because price is driven down on concerns that are typically overblown.  However, I think one should seriously consider the possibility that these concerns are actually valid and real in the case of OCN/ASPS.  The complaint numbers and ratios are not evidence of lack of fraud.  Most people getting foreclosed do not have the wherewithal to make an actual complaint, or at least a well-reasoned and articulated one.  In fact, that is the reason most sketchy companies are able to persist in these markets for so long. 

 

I just don't think people should always assume the regulators are idiots and/or out to score political points.  Sometimes businesses do stupid, greedy things that they should be punished for.  For example, marriot recently blocked guests usage of mobile wi-fi spots.  Google assisted in the lawsuits and Marriot got smacked down for this practice.  This wasn't some political point-scoring case, it was merely one business over-reaching.

 

I'm not a long-term bull (acquired position in the last week or two), but have a long bias at this point. I certainly give the fraud thesis a non-zero probability, but given Erbey's equity stakes in these businesses, what would his motivation be to push the envelope into fraudulent activities that would risk wiping out his net worth?

 

 

[Guest roark33]

I think that assumes the Erbey complex wasn't involved in fraudulent activities to begin with.  In the 90s when OCN got big, the regulator took away its ability to bid on defaulted loans because of bad acts.  Basically, in my opinion, Erbey's entities have always been doing shady things, but when they are small they fly under the radar of regulators.  When he gets big, the regulators take notice.  It's like a small time pot dealer, no one bothers him, but when he bigs growing acres of pot, then the regulators take notice.  The actions were always illegal, so the idea that he wouldn't push the envelope isn't appropriate.