OCN - Ocwen Financial

[Kraven]

Mortgages themselves are complicated.

They are often packaged together into securitization deals.  Things get even more complicated.

 

a- There are pools of mortgages backed by Fannie and Freddie ("agency").  These are easier to analyze (because they're less risky) and understand than b.  Fannie and Freddie impose certain rules on mortgage servicing.  Some of these rules are good (Fannie Mae for example pays the servicer for some foreclosure costs), some of the rules can be questioned.

b- There are pools of mortgages that investment banks churn out.  They may have acronyms like MBS and CDO.  In the past, they were responsible for the subprime crisis.  They're very complicated.  I'm very surprised that people thought that these were a good idea.  I would be shocked if the people buying these truly understood what they bought.

 

When I say that mortgage securitizations are complicated... I'm not kidding.

 

I don't agree that securitization caused the subprime crisis. Securitization is a vehicle, nothing more and nothing less. It didn't cause anything, but was used as a tool by those who caused it. It wasn't the only one.

[yadayada]

Mortgages themselves are complicated.

They are often packaged together into securitization deals.  Things get even more complicated.

 

a- There are pools of mortgages backed by Fannie and Freddie ("agency").  These are easier to analyze (because they're less risky) and understand than b.  Fannie and Freddie impose certain rules on mortgage servicing.  Some of these rules are good (Fannie Mae for example pays the servicer for some foreclosure costs), some of the rules can be questioned.

b- There are pools of mortgages that investment banks churn out.  They may have acronyms like MBS and CDO.  In the past, they were responsible for the subprime crisis.  They're very complicated.  I'm very surprised that people thought that these were a good idea.  I would be shocked if the people buying these truly understood what they bought.

 

When I say that mortgage securitizations are complicated... I'm not kidding.

 

I don't agree that securitization caused the subprime crisis. Securitization is a vehicle, nothing more and nothing less. It didn't cause anything, but was used as a tool by those who caused it. It wasn't the only one.

I think it became a tool to hide bad loans, and just hide how much risk was being taken. At some point more complexity was added not to create more value, but to hide risk.

 

But I dont understand these things much, so take it with a grain of salt :D

[ItsAValueTrap]

And that lowers the risk of those NINJA, ARM mortgages etc.

 

Ocwen has focused mainly on non-agency MSRs (although Ocwen does handle agency MSRs).  I think they bought MSRs on the junkiest stuff out there with very high delinquency rates.  Those mortgages are the most complicated and difficult to deal with and is where Ocwen generates the most value.  Ocwen got very good at dealing with delinquent mortgages in a cost-effective manner.  (Of course, they don't do a perfect job because they need to keep their costs down.)

 

I never quite figured out what kinds of mortgages were underlying Ocwen's MSRs.  However, given the delinquency rates on their MSRs, they have servicing rights to a lot of questionable mortgages.  Of course, price is what you pay and value is what you get.  As long as Ocwen isn't overpaying for these MSRs they will be ok.

[HJ]

The front part of the curve also matters as servicers earn float on collections.

 

Overall, I think that the servicers have negative float because they need to put up advances.

 

If a mortgage becomes delinquent, the servicer still has to pay advances to the mortgage investors.  Only after that mortgage is dealt with do they get their advances back.  These advances suck up a lot of capital.

 

Servicer advance is only on delinquent loans, which in a normalized environment, should be a small proportion of the pool.  MSR's has historically been priced with some level of float earnings.  Your mortgage is due on a month end, servicer doesn't remit proceeds to REMIC trusteee until the day before bonds are due (could be as late as the 25th of the following month).  In a higher short rate environment, it is worth something.

 

The other thing about the servicing business is that you are THE point of contact to the ultimate borrower, and therefore have intimate knowledge of borrower behavior.  In a refi friendly environment, you are the first to go to the borrower you want, to refi him out into a new loan, and book gain selling it into the GSE's.  This is what the mortgage banking revenue line represent in most regional bank's income statement.  So another potential upside of Ocwen, other than MSR acquisition and valuation,  is the option value of, "gulp", remaking Countrywide in the new mortgage financing system.  You are the  non bank financial competing with Wells.  And all the pros and cons that come with that business.

 

 

[randomep]

Mortgages themselves are complicated.

They are often packaged together into securitization deals.  Things get even more complicated.

 

a- There are pools of mortgages backed by Fannie and Freddie ("agency").  These are easier to analyze (because they're less risky) and understand than b.  Fannie and Freddie impose certain rules on mortgage servicing.  Some of these rules are good (Fannie Mae for example pays the servicer for some foreclosure costs), some of the rules can be questioned.

b- There are pools of mortgages that investment banks churn out.  They may have acronyms like MBS and CDO.  In the past, they were responsible for the subprime crisis.  They're very complicated.  I'm very surprised that people thought that these were a good idea.  I would be shocked if the people buying these truly understood what they bought.

 

When I say that mortgage securitizations are complicated... I'm not kidding.

 

I don't agree that securitization caused the subprime crisis. Securitization is a vehicle, nothing more and nothing less. It didn't cause anything, but was used as a tool by those who caused it. It wasn't the only one.

 

 

Ya just like the NRA guys who say guns don't kill people, people kill people.....

 

 

[jay21]

The front part of the curve also matters as servicers earn float on collections.

 

Overall, I think that the servicers have negative float because they need to put up advances.

 

If a mortgage becomes delinquent, the servicer still has to pay advances to the mortgage investors.  Only after that mortgage is dealt with do they get their advances back.  These advances suck up a lot of capital.

 

Servicer advance is only on delinquent loans, which in a normalized environment, should be a small proportion of the pool.  MSR's has historically been priced with some level of float earnings.  Your mortgage is due on a month end, servicer doesn't remit proceeds to REMIC trusteee until the day before bonds are due (could be as late as the 25th of the following month).  In a higher short rate environment, it is worth something.

 

The other thing about the servicing business is that you are THE point of contact to the ultimate borrower, and therefore have intimate knowledge of borrower behavior.  In a refi friendly environment, you are the first to go to the borrower you want, to refi him out into a new loan, and book gain selling it into the GSE's.  This is what the mortgage banking revenue line represent in most regional bank's income statement.  So another potential upside of Ocwen, other than MSR acquisition and valuation,  is the option value of, "gulp", remaking Countrywide in the new mortgage financing system.  You are the  non bank financial competing with Wells.  And all the pros and cons that come with that business.

 

Excellent comments.

 

I think we will see news on improved/new origination platforms in the near future.

[yadayada]

By my calculations, ASPS will do about 200 million in net income (possibly more FCF?) this year. 1st quarter 2013 was 27 million. *4 that is 108 million, but they actually did 132 million in 2013 total. So that is 22% more.

 

They did 39m $ in net income so far 1st quarter. *4 that is about 160 million$, but 22% more of that is 195 million.

 

But they did manage to grow 44% compared to only 35% in 2012-2013. So this could easily be more then 200 million. Also capex will be lower.

 

So basicly to get to valuations it looks pretty cheap at around a PE of 10-12.

 

How much better is ASPS really tho? If Ocwen can really do about 800 million+ in 2014, and are also growing rapidly in the future, you get that one for a Pe of 5-6 , which is more then twice as cheap?

 

Is ASPS really twice as good/that much less riskier to make it the better pick at more then twice the price?

 

And I guess then there is the title insurance and AAMC, I supose it would be interesting to look into those as well.

 

I supose ASPS"s superior business model could really add up over many years and make it the better long term pick.

[yadayada]

actually nevermind, number of complaints is actually lower. ALlthough for some reason it is much easier to find Ocwen haters on various forums then with other loan servicing companny's.

 

Can someone explains this to me? apparantly because of some financial trickery, true FCF is understated

Ocwen’s financials need to be adjusted to account for the fact that its sales of MSR to HLSS don’t actually qualify as technical sales. Instead, they are accounted for as financings and as a result, revenue, amortization expense and interest expense are all overstated. For MSRs to be transferred, various third parties, including ratings agencies, must approve of or consent to the transfer. If Ocwen does not obtain the necessary approvals or consents, HLSS acquires the rights to the MSR economics. HLSS books a note receivable rather than a mortgage servicing right and Ocwen retains the MSR on its balance sheet and books a financing liability. The MSR stays on OCN's balance sheet and full servicing revenue is recognized by Ocwen. HLSS' portion of the servicing fee is paid out as interest income . Upon receipt of the approvals or consents, HLSS takes legal ownership of the MSR (this has yet to happen for any of the MSR). In 2013, $316m of servicing fees were collected on behalf of HLSS. All of this was included in revenue and then deducted as interest expense ($246m) and amortization expense ($70m). My discussion of the financials is on an adjusted basis, including adding back items to “normalize” expenses.

 

Im having some trouble piecing together their real earning potential.

[yadayada]

https://www.youtube.com/watch?v=LRSDxJSo940

 

Obviously skipping parts, but it is interesting to watch.

 

The more I learn about this business, the more confident I am that Erbey has by far the superior business model here. He will fine tune it over the next years even more, which will be in the interest of home owners and mortgage originators. The problem is that he mainly has a PR problem. They do a better job then all the other servicers. But people look at their india operations and say 'well Americans could do this! your taking jobs away!' . Americans should help Americans!.

 

But the truth is, either you do it cheap and effectively offshore, and save American citizens money, or it will cost more money, and the mortgage holders are the one who bleed.

 

That lady who asks the questions basicly want to have her cake and eat it too.

[jch548]

Ocwen sinking after earnings release.

 

http://finance.yahoo.com/news/ocwen-financial-announces-operating-results-113000758.html

 

Any comments? Looks like regulatory costs are hurting.

[yadayada]

I think this is a buying opportunnity. Some of those regulation costs will come down over time, and when they optimize their MSR portfolio (which means driving delinq % down) then costs will come down. This will probably take at least another year or so.

 

I really like the 2016 options on this one. Got a small position.

 

Also note that fair value of these MSR's means that Ocwen could have a lot of down side based on book value. But fair value of these MSR's are based on competitor's cost structure, and Ocwen has a huge cost advantage.

[morningstar]

Being singled out negatively in the SIGTARP report is not good for the prospective servicing costs from here. Means headcount will be rising in the near term (b/c they need to respond quickly to the backlogs the regulator identified) while UPB and therefore revenues are declining. I think value investors can look through this (e.g. w/ LEAPS), but these special servicers have traded as momentum stocks so there is probably bumps ahead.

[yadayada]

seems to me that the market is pricing it like they will get next to no new UPB from here on. I think from the beginning the most likely scenario was costs going up a bit, regulators scoring some points, and then back to normal getting new UPB. Worst case, they would have to hire some more people then planned onshore. In that scenario this is at 60-90$ stock at least. But it seems whatever happens they will still keep their cost advantage.

 

I think the uncertainty is mispriced here and will go away within the next 12 months probably. Banks still want to offload bad loans (still plenty left imo, why else would they sell at bigger discounts long before Basel III regulations kicking in?).

 

Also they mentioned that costs would increase a bit, also some oversight costs will decrease over time as well. And I think management did not expect costs relating to regulation to go up a lot from now on. This was known, but for some reason it is only now reflected in the price  ???

 

just kicking myself i didn't wait a bit for buying those leaps.

[yadayada]

can someone explain what this is exactly?

I believe that Ocwen has substantial opportunities to leverage our strong servicing capabilities by exercising cleanup calls, call rights or investing in existing private label RMBS tranches that we service. Most of RMBS securities we service have cleanup call provisions that allows the servicer to call the deal at par, typically when it has been paid down to 10% of the original unpaid principal balance. Notwithstanding slower prepayments, we see a steady stream of deals maturing in the next several years.

 

The opportunity results from the arbitrage of the underlying loans in REO being worth more than the securities. In other words, the whole is worth less than the sum of the parts. A condition precedent to our investment is our belief that Ocwen's servicing creates strong cash flows for the securities overall. We're building out this program and expect to be in the market purchasing securities in the next few months.

[morningstar]

The servicer of an MBS transaction typically has the right to "call the deal" when the total balance of loans falls below a certain point, a feature designed to help the servicer unwind deals whose economics have become unfavorable, or where administrative costs have become unreasonable. Many pre-crisis RMBS structures have reached are will soon reach the 10-20% of original balance range that would permit the deals to be "cleaned up".

 

So when they say "purchasing securities" in the next few months, Ocwen means providing cash needed to call deals. That means purchasing all the loans out of the RMBS trust, at their par value. Now Ocwen owns a bunch of loans, performing and otherwise, and REO of various quality. Then, they would sell these assets piecemeal into various markets where they can get good prices - in particular, they'd probably like to sell them into the other Erbey Empire companies where it makes sense.

[jay21]

I can't tell for sure, but it seems like they are going to do two things:

 

1. Exercise call options - Buying >5% prime mortgages at par is definitely a good move.

 

2. Doing something with NPLs.  It's really unclear how they are going to do this.  If the pool has a significant amount of NPLs a call probably doesn't make sense as the loans are not worth par.  They were not being straight forward on the call so they might have a strategy other than calling the deals.

 

Also, on the call the BoA analyst seemed pretty heated over the increased costs and that he thinks it could lead to $.50 reduction in net income and a $5 decrease in valuation (which is close to yesterday's share drop).  I think he's missing the boat.  The monitor costs will most likely drop off after 3 years so a $5 decrease is a pretty steep projection.  Management also indicated that $9m is probably a good run rate per quarter, which is lower than the $12m this quarter.

[yadayada]

Yeah those transcripts are v informative.

 

So they can do this new thing despite that regulatro holding off their MSR deals? I am curious how much side income this will generate then

[morningstar]

Yeah those transcripts are v informative.

 

So they can do this new thing despite that regulatro holding off their MSR deals? I am curious how much side income this will generate then

 

I'd figure they should have no problem exercising the calls. Regulators will be looking more at the quality of servicing they continue to provide to the underlying loans.

 

It does seem like a lot of the value they might see in this relates to how they can use their broad array of abilities in this space to do a lot of things - e.g. have Erbey companies buy the performing loans, accelerate resolution of the NPLs, auction the REO, etc. To the extent regulators push back against the related party activities OCN's engaged in, it could make it tougher for these transactions to reach their IRR target.

[yadayada]

ok so currently they are trading below a very unlikely run off scenario. Based on information that was public already. Yet the stock is down 20% haha. So much for EMT.

 

I think this is causing the drop:

http://www.pbs.org/newshour/rundown/mortgage-servicers-create-multi-million-dollar-shell-companies-skirt-regulations/

 

But Ocwen does not have title insurance. And If I look at ASPS, 1/3 of their insurance is related party.

 

Also somehow I trust Erbey to not fk this up. So it seems the whole industry is just crashing down right now based mostly on fear (in some cases unfounded).

 

Thoughts?

[physdude]

I dipped in slightly today but it did catch my eye that OCN did make it to one of the mechanical screens for shorting on the Mechanical Investing board at the Motley Fool discussion boards for negative FCF. (http://boards.fool.com/si-rankings-2014-07-27-31343562.aspx)

[Spekulatius]

ok so currently they are trading below a very unlikely run off scenario. Based on information that was public already. Yet the stock is down 20% haha. So much for EMT.

 

I think this is causing the drop:

http://www.pbs.org/newshour/rundown/mortgage-servicers-create-multi-million-dollar-shell-companies-skirt-regulations/

 

But Ocwen does not have title insurance. And If I look at ASPS, 1/3 of their insurance is related party.

 

Also somehow I trust Erbey to not fk this up. So it seems the whole industry is just crashing down right now based mostly on fear (in some cases unfounded).

 

Thoughts?

 

The NOV of MSR depends on the cost of servicing them, I assume. If the cost to service them goes up, because of new regulations, then the NPV of MSR's will be lower.

 

My play on mortgage originators and servicers is WD, a commercial mortgage originator and servicer and owner operator company, Commercial MSR have prepayment penalties, so interest rate risk is lower. WD's MSR are worth about the current market cap, so you kind of get the origination business for free.

 

I am not sure how good of a business mortgage origination (commercial or residential) is however, The ROE is probably in the 10-15% range and the business depends on well greased financial markets, due to dependence on wholesale funding ; otherwise, things get ugly rather quickly.

[yadayada]

yeah but the origination arm will also get them new MSR's right? keeping up their UPB.

 

Also this whole thing felt like a panic reaction of some bureacrats. They want to cover their asses. Reading the concerns in that document, all those things did not apply for Ocwen. In fact Ocwen shined in them.

 

And there is too much to lose for various parties if this thing would stay blocked.

 

What looks like will happen is that complaint ratio will be required to be close to zero. But this is higher for the banks currently. Since their cost structure is worse, they will be hit worse by this, and be even more motivated to offload non performing MSR's (of which there is still plenty left on their balance sheets).

 

If complaint ratio is forced down, it looks like the bureacrats did good, and everyone can keep making money.

 

And meanwhile the market seems to be badly mispricing this.

 

Market basicly prices something that seems unlikely to happen (servicers no new UPB) like it is very likely to happen.

 

And meanwhile you get to invest cheaply along the next outsider candidate for thorndike's book.

[Spekulatius]

I think the  bureaucrats might go after the mortgage servicers after they are done with the banks. I am mot sure that this will blow over quickly. What I like about WD is that with commercial mortgages, we have don't have the populist angle that exists with residential mortgages.

[yadayada]

the capital requirements for these MSR's will start in 2015 and 2016. So I think there is a lot of pressure on regulators here. Especially since their argument is pretty weak. It will cost the banks a lot of money if they cannot offload more MSR's before 2016.

[Spekulatius]

the capital requirements for these MSR's will start in 2015 and 2016. So I think there is a lot of pressure on regulators here. Especially since their argument is pretty weak. It will cost the banks a lot of money if they cannot offload more MSR's before 2016.

 

That's the banks problem, not the regulators problem. The banks have enough capital, if they don't distribute it to shareholders.