ASPS - Altisource

[ItsAValueTrap]

If Hubzu takes off, that's a *huge* market.  Hubzu alone could be worth more than Altisource's market cap.

[Fat Pitch]

If Hubzu takes off, that's a *huge* market.  Hubzu alone could be worth more than Altisource's market cap.

 

That’s right; Hubzu is a free call option that you are not paying for.

[ItsAValueTrap]

This article is a little biased but has an interesting tidbit from an anonymous Altisource employee:

http://foreclosurepedia.org/ocwen-the-cuomo-lawsky-shakedown/

 

An Altisource – Hubzu Source, speaking on condition of anonymity, spoke fairly candidly.

 

Lawsky is definitely out trying to grind an axe – and not sure why.  The letter is a complete and total lie.  Hubzu charges 3.5%-4.5% for all sellers on Hubzu. Auction.com charges 5% – Williams & Williams – 5% – JP King 10% …. We charge less than anyone – and we have sold more assets that the other auction companies ([Redacted] in 2 years).

 

I think the bigger picture is he is trying for more money out of the settlement and Ocwen has said ‘NO’.  And now he is attacking them.  At least that’s my best guess / opinion.  And Ocwen is an easy target because they are a non-bank servicer than made money through the financial crash and they use a lot of overseas labor.  Pretty easy target….  But, no investors or banks are complaining about Ocwen’s use of Altisource or Hubzu….. they see the value and enjoy the interrelated business relationships which save them money.  In fact, banks are still trying to sell their servicing rights to Ocwen but Lawsky has essentially frozen the market.  Government is interfering and trying to tell a corporation how best to run their business.

[ItsAValueTrap]

HSBC offloaded the management of their REO portfolio to Altisource.  This may explain how they got a bank to list its REO properties on Hubzu.

 

http://www.housingwire.com/articles/31223-market-shift-hsbc-offloads-huge-reo-portfolio-to-altisource

[portfolio14]

Have you seen this scuttlebutt from short sale agents?

 

http://shortsalesuperstars.com/forum/topics/altisource-acquires-equator-just-in

 

They are not impressed.

[Ross812]

Have you seen this scuttlebutt from short sale agents?

 

http://shortsalesuperstars.com/forum/topics/altisource-acquires-equator-just-in

 

They are not impressed.

 

It should be expected that real estate agents are upset with Hubzu is taking over their short sales.

 

The days of the 6% real estate "tax" are numbered. It is absolutely ridiculous what agents can make with a certificate that takes 60-90 days of school to earn.

 

I am thrilled Altisource bought owners.com to work with Hubzu at cutting out the middle men.

 

As a side note, I thought it was interesting that Buffet bought into a real estate brokerage. Everyone wants a piece of the real estate tax!

 

http://www.berkshirehathawayhs.com 

[philly value]

Any news/developments over the past week? I'm unaware of anything notable but stock has been getting hammered...new low today.

[yitech]

Servicers are all down today, but IMO lack of liquidity drove ASPS down much more, almost twice how much OCN dropped. This may be good place to pick up a few more shares for anyone who hasn't gotten a full position already.

[investor-man]

Any news/developments over the past week? I'm unaware of anything notable but stock has been getting hammered...new low today.

 

All my losers are down today. Dec. 1st = tax loss selling day

[ItsAValueTrap]

Fat Pitch, who do you think the best and worst mortgage servicers are?

 

I had good experiences dealing with Nationstar and Wells Fargo. What I mean by that is they are very well organized and competent. I've dealt with Homeward and they were okay until 2012 when Ocwen bought them.

 

Then out of the blue everything went to shit and they released guidelines that no one in the industry uses... people complain about Wells for being extremely picky when they purchase loans, but the new Homeward took it to another level. It's not like they were being extra conservative, but wanted new forms that no one else used. We stopped selling to them soon after.

 

Ok to clarify... Ocwen has an origination business and a mortgage servicing business (among other businesses).

 

Are you saying that the origination business went to shit?

Is this for forward mortgages?

[Patmo]

Be careful boys, a fantastic business that greedily overreaches doing not-so-pretty things can get hit HARD by all sides. Consider the ongoing possibility of irrational downward movement on any news that aren't 100% rosy, with the possibility of chopping in half on any actual bad news. In my short time investing I have learned that when the market mob is angry, there is no stopping it.

 

I enjoy your discussions and will definitely keep this company on my radar, but I will sit patiently for a valuation that clearly disconnects from reality, as merely cheap is not good enough for me anymore.

[Fat Pitch]

Fat Pitch, who do you think the best and worst mortgage servicers are?

 

I had good experiences dealing with Nationstar and Wells Fargo. What I mean by that is they are very well organized and competent. I've dealt with Homeward and they were okay until 2012 when Ocwen bought them.

 

Then out of the blue everything went to shit and they released guidelines that no one in the industry uses... people complain about Wells for being extremely picky when they purchase loans, but the new Homeward took it to another level. It's not like they were being extra conservative, but wanted new forms that no one else used. We stopped selling to them soon after.

 

Ok to clarify... Ocwen has an origination business and a mortgage servicing business (among other businesses).

 

Are you saying that the origination business went to shit?

Is this for forward mortgages?

 

I’m only talking about Homeward. I sell residential loans to them and after they got bought out there were transition issues. They were also requiring new forms to be submitted for loans to be purchased that no one else in the industry were using. There pricing was also horrible so we just dropped them as an investor and haven’t looked back.

 

Be careful boys, a fantastic business that greedily overreaches doing not-so-pretty things can get hit HARD by all sides. Consider the ongoing possibility of irrational downward movement on any news that aren't 100% rosy, with the possibility of chopping in half on any actual bad news. In my short time investing I have learned that when the market mob is angry, there is no stopping it.

 

I enjoy your discussions and will definitely keep this company on my radar, but I will sit patiently for a valuation that clearly disconnects from reality, as merely cheap is not good enough for me anymore.

 

I agree about businesses being greedy and overreaching, but this storm will dissipate and life will go on. There will probably be restrictions placed on Ocwen, but the market is pricing in a run off of the business.

 

Altisource is printing tons of cash with a liquid balance sheet. Also you got a founder that despite getting a colonoscopy for over a year is buying back shares aggressively. We are a lot closer to a resolution. This is an industry where we are in the early innings of technological disruption.

 

Of course I could be wrong and they get shut down  :P

[ItsAValueTrap]

I’m only talking about Homeward. I sell residential loans to them and after they got bought out there were transition issues. They were also requiring new forms to be submitted for loans to be purchased that no one else in the industry were using. There pricing was also horrible so we just dropped them as an investor and haven’t looked back.

Got it, thanks a lot for the detail!

 

Of course I could be wrong and they get shut down  :P

That scenario seems unlikely to me.  If you stop Ocwen from servicing mortgages, then the mortgages have to be transferred to somebody else.  A lot of loan modifications will get lost in the process, hurting homeowners.

 

Also, I don't see Ocwen committing suicide by agreeing to a settlement that is horrible for them.  A settlement suggests an outcome that's not horrible.  I think the worst-case scenario would be no settlement and Ocwen getting reamed in a court battle.

 

I don't see regulators raising the cost of mortgage servicing that much.  If the regulations are too onerous, then servicers will exit the business.  This will cause a lot of servicing transfers, hurting the consumer.  The way you help the consumer (and your political career) is to force the servicers into increasing their servicing quality without pushing them out of business.

 

Though in practice, I think a lot of players will sell their MSRs to Ocwen or whoever the low-cost player is.  To some degree, the NY DFS kind of dug itself into a hole because its extortion-style regulation is causing fear and uncertainty over the future costs of servicing MSRs.  It has been creating an environment that encourages the high-cost guys to sell their high-delinquency MSRs to the low-cost guys.  (The high-cost guys will probably hang onto the prime MSRs.)  So maybe the NY DFS will do something to discourage that, e.g. by scrutinizing big transfers of MSRs and blocking deals like the Ocwen/Wells Fargo deal.

Or, if the NY DFS realize that they dug themselves into a hole, maybe they will dig deeper anyways.  In theory, they could extort large settlements from all of the servicers and push people out of the business and cause chaos.

 

2- Altisource is exiting force-placed insurance "brokerage".  Presumably this means that Ocwen will no longer receive kickbacks on force-placed insurance ever.  I am not sure what caused this- the CFPB, NY DFS, SEC, or class-action lawsuits.  The NY DFS did leak some information about Ocwen/Altisource's practices so they gave ammo to the CFPB, SEC, and class-action lawsuits.

 

Suppose that the regulatory environment changes and everybody figures out that they should stop taking kickbacks on force-placed insurance.  This will hurt everyone's cost structure.  WAC discloses their kickbacks in the 10-K under "insurance revenues" so it's easy to figure out how much they will be hurt. 

 

Getting rid of the kickbacks doesn't help homeowners much.  The small amount of money isn't going to make much of a difference in the outcome of their mortgage.  It will likely get modified or end up in foreclosure anyways.

 

I think that the consumer (and communities) would benefit the most by pushing the servicers into modifying more loans.  I really think the CFPB had the right idea in allowing kickbacks but protecting the consumer from abuse by saying that force-placed insurance had to be at "commercially reasonable" prices.  Then they made a number of other rules that helped to ensure that more mortgages would be modified.  They did a number of things that are win-win-win for the consumer, the CFPB politically, and for the servicers.

 

On the other hand, the NY DFS looks like a bull in a china shop.  They may do things that don't exactly make sense.

[Fat Pitch]

Residential Corporation just added another mortgage servicer. Regulators are probably forcing Erbey to diversify who his companies do business with or Ocwen growth is capped?

[ItsAValueTrap]

Ocwen's UPB is running off so I would assume that Ocwen may have extra capacity.

 

AAMC also accounts for a very low number of loans.

 

I don't believe that RESI has major regulatory oversight at the moment.  I think that their business model would be more consumer-friendly than mortgage servicing and therefore attract less regulation.  Because RESI is the investor and gets to choose its servicer, it doesn't have conflicts of interest between the servicer and the investor.  Normally those conflicts hurt the borrower, e.g. not enough loan mods, kickbacks on force-placed insurance, etc.

 

So I really don't know why RESI is looking at somebody other than Ocwen.

[mvalue]

Altisource needs shareholder approval to expand its buyback authorization. They had 1.6m authorized as of the last earnings call and stated on the call that they would seek shareholder approval for more during Q4. No motions towards that so far.

[jay21]

Altisource needs shareholder approval to expand its buyback authorization. They had 1.6m authorized as of the last earnings call and stated on the call that they would seek shareholder approval for more during Q4. No motions towards that so far.

 

I was wondering about this as well. I am not sure if they had a blackout period that has slowed them down?  I should really know the blackout period rules.

[morningstar]

 

I don't see regulators raising the cost of mortgage servicing that much.  If the regulations are too onerous, then servicers will exit the business.  This will cause a lot of servicing transfers, hurting the consumer.  The way you help the consumer (and your political career) is to force the servicers into increasing their servicing quality without pushing them out of business.

 

 

I think the regulator has a ton of room to raise costs with no real systemic consequences, just because the margins for servicers are currently so gargantuan. Ocwen's MSRs were still worth ~2.4bn at market price as of last quarter (i.e., taking no account of a supposed cost advantage over peers). That's pretty representative of how much additional cost can be absorbed without changing the servicing incentive. I think this is pretty much true for all the servicers, certainly the big special servicers.

 

Short of pushing people out of the business, one might also be worried about keeping the big servicers out of bankruptcy - bankruptcy for OCN, NSM and co. would probably not have big consumer impact but might be damaging to the market. There's still a ton of room to raise costs while keeping these companies solvent, however.

[ItsAValueTrap]

 

I don't see regulators raising the cost of mortgage servicing that much.  If the regulations are too onerous, then servicers will exit the business.  This will cause a lot of servicing transfers, hurting the consumer.  The way you help the consumer (and your political career) is to force the servicers into increasing their servicing quality without pushing them out of business.

 

 

I think the regulator has a ton of room to raise costs with no real systemic consequences, just because the margins for servicers are currently so gargantuan. Ocwen's MSRs were still worth ~2.4bn at market price as of last quarter (i.e., taking no account of a supposed cost advantage over peers). That's pretty representative of how much additional cost can be absorbed without changing the servicing incentive. I think this is pretty much true for all the servicers, certainly the big special servicers.

 

Short of pushing people out of the business, one might also be worried about keeping the big servicers out of bankruptcy - bankruptcy for OCN, NSM and co. would probably not have big consumer impact but might be damaging to the market. There's still a ton of room to raise costs while keeping these companies solvent, however.

 

The margins depend on the MSR.  A subprime MSR with very high delinquency rates and a low servicing fee (they usually range from 25 to 65 basis points) will be very low or no margin.  In one case, I think Ocwen got a MSR for free from one of their subservicing clients.

 

Big servicers have gone bankrupt in the past, e.g. Rescap.

[netnet]

The explicit question is which of all of Erbey's companies is the best to buy?  Or buy a basket of all? What ratio?  Buy ASPS because he is buying back shares?  To be honest I have not looked at any of his companies other than reading the threads here on Corner.

[ItsAValueTrap]

Altisource needs shareholder approval to expand its buyback authorization. They had 1.6m authorized as of the last earnings call and stated on the call that they would seek shareholder approval for more during Q4. No motions towards that so far.

 

Hmm you could be on to something there.

 

Earlier this year on February 28, 2014 they held a special meeting to approve more share repurchases.

http://www.sec.gov/Archives/edgar/data/1462418/000104746914000881/a2218244zdef14a.htm

The PRE 14A was filed about a month earlier on 2014-02-03.

 

Three months later they held their AGM on Wednesday, May 21, 2014, at 9:00 a.m., Central European Time.

http://www.sec.gov/Archives/edgar/data/1462418/000104746914003495/a2219478zdef14a.htm

PRE 14A filed 2014-03-27.

 

On the conference call they said that they would seek shareholder approval in the fourth/current quarter:

On August 1, 2014, we increased our debt by $200 million, which carries the same interest rate as our existing debt. We used cash during the quarter to repurchase $128.1 million of Altisource's common stock, representing 1.3 million shares at an average purchase price of $102.45 per share, invested $17.6 million in facilities and technology to support our growth, and $14.9 million to acquire Mortgage Builder. We ended the quarter with $176.6 million of cash and an unused accordion feature of our senior secured term loan of $200 million. With regard to share repurchases, we believe the purchase of our shares provides a tax efficient way to return value to our shareholders when the stock is attractively priced.

 

Slide 7 provides a summary of our share buyback restrictions, including the senior secured term loan agreement and shareholder authorization. In the fourth quarter of 2014, we intend to seek shareholder approval to increase the buyback authorization.

http://seekingalpha.com/article/2589395-altisource-portfolio-solutions-s-a-s-asps-ceo-william-shepro-on-q3-2014-results-earnings-call-transcript

 

So their current limiting factor is 1.6M shares remaining on their authorization.  If they pay $50/share (current closing price is $50.35), that'll cost $130M.  They have enough cash on hand to buy that.  On top of that they can tap into their debt. 

 

In the last quarter they bought back $129.1M in stock.  If they buy at the same rate in the current quarter, then they should do another early shareholder meeting to refresh the buyback authorization.  It doesn't look like they're doing that, which might suggest that the buyback has slowed down.

[Fat Pitch]

The explicit question is which of all of Erbey's companies is the best to buy?  Or buy a basket of all? What ratio?  Buy ASPS because he is buying back shares?  To be honest I have not looked at any of his companies other than reading the threads here on Corner.

 

That is the million dollar question here.

 

AAMC is a royalty on the AUM growth of RESI. The strategy here is to buy non performing loans/scratch n dent at  .70 and flip them at 1. Eventually this market is going to dry up and RESI will be forced into renting out residential homes for stable income until the next cycle.

 

ASPS is being subsidized by OCN which they are branching into other areas of the home market (Loan origination systems, buying/selling real estate online, etc). I think ASPS has the best chances of becoming independent and providing technology services to the real estate industry. Right now they are heavily dependent on OCN for most of their revenue. Looking out 10yrs, I see OCN just being another customer in a giant list of them.

 

There are others, but the economics of them aren't so good and they face the risk of higher costs due to regulation. Basket approach will do okay, but I'm really leaning towards ASPS due to valuation and the large market they can grab.

 

[rayfinkle]

From 3Q 10-Q:

 

Stock Repurchase Plan

 

On February 28, 2014, our shareholders approved a new stock repurchase program, which replaced the previous stock repurchase program. Under the new program, we are authorized to purchase up to 3.4 million shares of our common stock, based on a limit of 15% of the outstanding shares of common stock on the date of approval, in the open market, at a minimum price of $1.00 per share and a maximum price of $500.00 per share.  This is in addition to amounts previously purchased under the prior programs. From authorization of the previous programs through September 30, 2014, we have purchased approximately 5.7 million shares of our common stock in the open market at an average price of $77.55 per share.  We purchased 2.0 million shares of common stock at an average price of $104.88 per share during the nine months ended September 30, 2014 and 0.8 million shares at an average price of $103.45 per share during the nine months ended September 30, 2013 (1.3 million shares at an average price of $102.45 per share for the third quarter of 2014 and 0.3 million shares at an average price of $134.86 per share for the third quarter of 2013). As of September 30, 2014, approximately 1.6 million shares of common stock remain available for repurchase under the new program. Our senior secured term loan limits the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances. As of September 30, 2014, approximately $220 million was available to repurchase our common stock under our senior secured term loan. Luxembourg law also limits share repurchases to approximately the balance of Altisource Portfolio Solutions S.A. (unconsolidated parent company) retained earnings, less the value of shares repurchased. As the result of a restructuring of our Luxembourg holding companies in the third quarter of 2014, as of September 30, 2014, approximately $1,950 million was available to repurchase our common stock under Luxembourg law.

[Fat Pitch]

In the last quarter they bought back $129.1M in stock.  If they buy at the same rate in the current quarter, then they should do another early shareholder meeting to refresh the buyback authorization.  It doesn't look like they're doing that, which might suggest that the buyback has slowed down.

 

Don't you think it's prudent they reinvest cash into growing out their 3rd party revenue? Giving up another source of revenue to appease regulators might trip their debt covenants since the leverage ratio to cash flow goes up? I remember reading that being above a certain level a significant portion of cash flows must go to paying down the debt.

[rayfinkle]

Altisource needs shareholder approval to expand its buyback authorization. They had 1.6m authorized as of the last earnings call and stated on the call that they would seek shareholder approval for more during Q4. No motions towards that so far.

 

Hmm you could be on to something there.

 

Earlier this year on February 28, 2014 they held a special meeting to approve more share repurchases.

http://www.sec.gov/Archives/edgar/data/1462418/000104746914000881/a2218244zdef14a.htm

The PRE 14A was filed about a month earlier on 2014-02-03.

 

Three months later they held their AGM on Wednesday, May 21, 2014, at 9:00 a.m., Central European Time.

http://www.sec.gov/Archives/edgar/data/1462418/000104746914003495/a2219478zdef14a.htm

PRE 14A filed 2014-03-27.

 

On the conference call they said that they would seek shareholder approval in the fourth/current quarter:

On August 1, 2014, we increased our debt by $200 million, which carries the same interest rate as our existing debt. We used cash during the quarter to repurchase $128.1 million of Altisource's common stock, representing 1.3 million shares at an average purchase price of $102.45 per share, invested $17.6 million in facilities and technology to support our growth, and $14.9 million to acquire Mortgage Builder. We ended the quarter with $176.6 million of cash and an unused accordion feature of our senior secured term loan of $200 million. With regard to share repurchases, we believe the purchase of our shares provides a tax efficient way to return value to our shareholders when the stock is attractively priced.

 

Slide 7 provides a summary of our share buyback restrictions, including the senior secured term loan agreement and shareholder authorization. In the fourth quarter of 2014, we intend to seek shareholder approval to increase the buyback authorization.

http://seekingalpha.com/article/2589395-altisource-portfolio-solutions-s-a-s-asps-ceo-william-shepro-on-q3-2014-results-earnings-call-transcript

 

So their current limiting factor is 2.6M shares remaining on their authorization.  If they pay $50/share (current closing price is $50.35), that'll cost $130M.  They have enough cash on hand to buy that.  On top of that they can tap into their debt. 

 

In the last quarter they bought back $129.1M in stock.  If they buy at the same rate in the current quarter, then they should do another early shareholder meeting to refresh the buyback authorization.  It doesn't look like they're doing that, which might suggest that the buyback has slowed down.

 

So I'm not sure about this, but do they need to call a special meeting to get the approval? According to the proxy (http://www.sec.gov/Archives/edgar/data/1462418/000104746914003495/a2219478zdef14a.htm) named execs control 7.963M shares out of ~20M outstanding (~22M diluted). So insiders have 36-39% of shares assuming they haven't sold any thing significant.

 

This means they'd need to gather support for another ~2-2.5M shares (probably from major holders listed here http://finance.yahoo.com/q/mh?s=ASPS+Major+Holders)...which they could theoretically do back channel without calling a meeting.

 

Might be a stretch...but majority vote seems very achievable.