OCN - Ocwen Financial

[wknecht]

I think Lawsky targetted OCN here because he did not like their cost advantage, he got the most complaints from them (because they are biggest with the worst quality loans) and they are the most hated. He said he based it in CFPB complaints, and that complaint ratio is rather low. So I doubt it will be that expensive to clean the place up completely.

I don't follow closely,  but my understanding is that the tax inversion created much irritation also.

[yadayada]

Yeah good thing you say that. What will happen with tax now that Erbey is no longer chairman? A higher tax rate?

 

Also OCN is trading at 2bn$. Not 2.76 like google finance says.

 

To do the math, if they had the same costs as other servicers, their MSR's would be worth more then  book value. Book value is  about 1.2 bn$. If you think cost advantage goes to zero, then it is still  worth more then 1.2bn$. If you think cost advantage is roughly 50% then book value is 3.2bn$, and run off more then that. If cost advantage is only 20% then book value is 1.6 bn$ and run off prob close to 2bn$.

 

Current book value is the price of MSR's if they were sold to someone like nationstar. NOT THEIR RUN OFF VALUE. So it seems they are worth more then book value? Otherwhise those guys would not be able to make a profit on it? Why would they buy MSR's at those values if they could not make a profit on them... But with increased costs now this might take a hit actually.

 

Now take Nationstar, they hold MSR's at what they think is fair value, not cost basis. Their equity is 1.1 billion$. And stock trades at 2.94bn$.

 

So saying that run off value of Ocwen is 1.2 bn$ would be very very conservative. It would assume higher costs then other servicers to service those thing. So then the cost advantage has to dissapear and then some...

 

[jay21]

Lots of companies fall from grace and never climb back up the mountain.  Reading through OCN regulatory filings in the early 90s is really interesting to see how their business was booming and then all of a sudden it disappeared, almost overnight.  It took the great recession for them to find a way to create another business.  I don't think many shareholders are going to wait around for that...

 

That's because they exited their business after the S&L NPL mkt dried up and pricing was unattractive...

 

Isn't this a good thing because they would have get slaughtered in the subprime crisis if they kept that business model?

[KCLarkin]

This is one of those cases where I question whether I should even be investing my own money. I was about to invest in this. I never bit the bullet but I was on the verge. I would have never predicted this.

 

http://basehitinvesting.com/a-few-thoughts-on-reducing-unforced-errors/

[jay21]

What's frustrating for me in almost all of the recent comments is that there's a bunch of high-fiving by everyone who was so smart to avoid this, or how us longs "should have known." I've learned nothing material about the actual impact to the equity value, and I'm guessing that's because the bottom line is that you guys don't know. That said, nor can anyone know just yet, and my guess is that the market just decided to sell first and ask questions later. I see the important determining points (in part) to be:

* how many shares will be bought back at these prices?

* will Erbey actually exhibit more influence now as an "outsider" with a huge stake in the equity?

* how long until MSRs are acquired (didn't anyone else actually find relief in the fact that they'll grow again? Someone on this board projected their negativity and said "years from now" but where did they pull that from)?

* what will expenses be, and is there any plausible scenario where it justifies the current price? I did see a couple of attempts at this question.

* aren't we out of the run-off mode scenario now, given the settlements allowance of future acquisitions?

Today looked like such capitulation I don't see how it was justified to the extent that the decline occurred. Still looking for legit opinions instead of learning how smart everyone was for not buying the stock that they're spending so much time writing about.

 

I kinda agree, it's interesting to see ppl back patting themselves, but that's fine. Maybe they had some insight I didn't. But to call out some risks and act like they haven't been considered is ridiculous. I have thought about OCN a lot and was comfortable with them while knowing there is always X% probability that something goes bad (just like any investment). Just because X% happened this time doesn't make my assessment wrong.  And I think stock investments are more "fluid" than single events; it's very tough to tell when the event is over and you can finally take score.

 

There are major parts of the thesis that are still intact while the price is lower. What we should all be focusing on now is if it is a good investment today. There were material items discussed on the call yesterday but I dont think I have seen any mention of them.

[yadayada]

Since then, a large additional swath of regulatory burden has been added to the company and shareholder-friendly management has been replaced by effective regulatory control of key management functions. Assuming no growth, I think it's likely the assets are worth LESS than what they paid, not double.

 

You are basicly saying their 70% cost advantage will dissapear and then some. book value here means what they would sell for on the open market considering other servicers cost structure. Then if their cost structure becomes the same as other servicers they should still be worth more in run off then 2 billion$ on the books in last 10Q.

 

So why do you think their cost advantage will be erased and then some? This would imply like 3.5-4 billion$ of extra costs over the next 5 years or so.

[yadayada]

http://audio.viavid.com/20141222-112420-ocwenfinan.mp3

 

They will focus on originating and RMBS securities and on reverse mortgages. THey will sell their non agency MSR's.

 

So they expect to get up to 1.7bn$ in cash selling those. They are little over half their MSR's. They will not sell non agency MSR's.

 

They expect to execute about 5 billion$ of RMBS calls, and that will be 2-3 points of profit for company.

 

Thoughts?

 

I know Im way out of my dept here now.

 

So it seems they will not board on a portion of that trillion$ market, as they are all non agency right?

[thepupil]

Obviously I made a mistake buying at higher prices. I should have had more patience. But the patting themselves on the back by all the people in this thread who have not even read a few of their 10k's is rather annoying and does not add anything to the discussion. I saw that in the AAMC thread as well when i tried to discuss various upside scenario's. It seems people have a very black and white view of things here. I thought it was white, but I think it is more grey now. And not black.

 

Not sure if that's at me, but so far you are winning on AAMC in my opinion. Tons of negative news has happened and AAMC still hasn't shaken its uber premium valuation.

 

At least with OCN and ASPS, you get to start at a seemingly low valuation of supposed future earnings.

 

We are nowhere near the point of self back patting with AAMC. I won't pat myself on the back until 1) RESI fires AAMC 2) Accounting issues at RESI or something comes out that their non-cash mark to model earnigns aren't all that great 3) AAMC trades at <30% of managed AUM (which would still be a big premium to the space).

 

With respect to AAMC, so extensive was the previous Erbey induced euphoria, that even though the stock is down 60% from its highs, the market is still  giving the company the benefit of the doubt and baking in a ton of growth.

[Ross812]

In a phone call with analysts on Monday afternoon, Ocwen CEO Ronald Faris said the company will withdraw from the business of servicing mortgages backed by the U.S. government. He said that Ocwen would be selling off that servicing portfolio and instead would focus just on so-called nonagency mortgages. He said that shift and the sales would free up about $1.7 billion in capital that would be reinvested or returned to Ocwen’s shareholders.

 

Going forward, Ocwen will build its currently small business in originating new mortgages and engage in transactions in which it will acquire some residential mortgage-backed securities and repackage the underlying mortgages in new securities, which Mr. Faris said would be profitable.

 

http://www.wsj.com/articles/new-york-financial-regulator-announces-settlement-with-ocwen-1419257065

 

So no runoff... They will be selling their MSRs and pivoting to a different business.

[Ross812]

I sold btw. I am not interested in a pivot and turn around. I'm not sure where this leaves ASPS; I would assume Hubzu will be relatively worthless without OCN. ASPS has a chance to grow without OCN but I'm not interested.

 

To review what happened:

 

The NYDFS fined a company $150M, the owner stepped down from all related companies, and OCN decided to get out of their main line of business. 

[philly value]

In a phone call with analysts on Monday afternoon, Ocwen CEO Ronald Faris said the company will withdraw from the business of servicing mortgages backed by the U.S. government. He said that Ocwen would be selling off that servicing portfolio and instead would focus just on so-called nonagency mortgages. He said that shift and the sales would free up about $1.7 billion in capital that would be reinvested or returned to Ocwen’s shareholders.

 

Going forward, Ocwen will build its currently small business in originating new mortgages and engage in transactions in which it will acquire some residential mortgage-backed securities and repackage the underlying mortgages in new securities, which Mr. Faris said would be profitable.

 

http://www.wsj.com/articles/new-york-financial-regulator-announces-settlement-with-ocwen-1419257065

 

So no runoff... They will be selling their MSRs and pivoting to a different business.

 

They are exiting agency servicing, not servicing entirely.....non-agency has been a bit under half of their UPB.

[jay21]

In a phone call with analysts on Monday afternoon, Ocwen CEO Ronald Faris said the company will withdraw from the business of servicing mortgages backed by the U.S. government. He said that Ocwen would be selling off that servicing portfolio and instead would focus just on so-called nonagency mortgages. He said that shift and the sales would free up about $1.7 billion in capital that would be reinvested or returned to Ocwen’s shareholders.

 

Going forward, Ocwen will build its currently small business in originating new mortgages and engage in transactions in which it will acquire some residential mortgage-backed securities and repackage the underlying mortgages in new securities, which Mr. Faris said would be profitable.

 

http://www.wsj.com/articles/new-york-financial-regulator-announces-settlement-with-ocwen-1419257065

 

So no runoff... They will be selling their MSRs and pivoting to a different business.

 

They are exiting agency servicing, not servicing entirely.....non-agency has been a bit under half of their UPB.

 

If I heard correctly, they will subservice so kinda not even really exiting

[yadayada]

What are market opportunnities like for non agency ?

 

So they sell 1.1 billion$ worth of MSR's. That leaves a little under a billion$ of MSR's.

 

They expect to get up to 1.7bn$ for those MSR's. Let's assume 1.5bn$. Tang equity will then be about 1.4bn$. With a lot of cash.

 

But on the remaining MSR's they have a cost advantage, and according to their call this will be not significantly eroded. So let's say the cost advantage is now cut in half, and about 30%? That is another 300m$ on top of tang equity? So that leaves fair value at 1.7 bn$.

 

But they will get some new MSR's. And their other lines of business will provide some value.

 

I really wonder what this means for ASPS.

 

No longer nearly as juicy though :(.

 

Allthough if you think 60% cost advantage is roughly intact, then that makes things more attractive.

[Ross812]

True,

They are exiting agency servicing, not servicing entirely.....non-agency has been a bit under half of their UPB.

 

True, but my investment in ASPS relies on OCN at least running off their current MSRs. If they are selling over half of them then there is no run off and no fees generated to ASPS. This is fine for shareholder of OCN, but a huge negative to ASPS.

 

Considering profit from all parties are at similar margins for ASPS then this is an ~35% hit to revenues. After the insurance origination business elimination and this we are taking a 93M hit to earnings (assuming 12.2% margins ex insurance). This takes net income down to 80M and EPS somewhere around $4. This all assumes the NYDFS settlement has no further affect on ASPS margins. 

 

[jay21]

True,

They are exiting agency servicing, not servicing entirely.....non-agency has been a bit under half of their UPB.

 

True, but my investment in ASPS relies on OCN at least running off their current MSRs. If they are selling over half of them then there is no run off and no fees generated to ASPS. This is fine for shareholder of OCN, but a huge negative to ASPS.

 

Considering profit from all parties are at similar margins for ASPS then this is an ~35% hit to revenues. After the insurance origination business elimination and this we are taking a 93M hit to earnings (assuming 12.2% margins ex insurance). This takes net income down to 80M and EPS somewhere around $4. This all assumes the NYDFS settlement has no further affect on ASPS margins.

 

If they are subservicing as I believe they mentioned, then they will still probably use ASPS technology. And ASPS makes more money off the delq loans which are more likely to be non-agy.

[yadayada]

Yeah agency is basicly loans from banks. And non agency is things from the likes of rescap. Which have a v high delinq ratio.

 

Jay, where did you get they will still subservice? Doesn't OCN already subservice? Im under the impression they will exit the agency business alltogether.

[philly value]

Yeah agency is basicly loans from banks. And non agency is things from the likes of rescap. Which have a v high delinq ratio.

 

Jay, where did you get they will still subservice? Doesn't OCN already subservice? Im under the impression they will exit the agency business alltogether.

 

Listening to yesterday's call again, they do not mention anything about subservicing the agency MSRs sold. They give the impression they are exiting this business altogether, and will only service/subservice non-agency.

 

The other point worth mentioning is the discussion of large bulk transactions; in the call they state that they do not see large bulk transactions in the current environment, and thus will be selling agency MSRs in a series of small transactions. Further, they state that they do not believe they will soon be able to purchase new MSRs that meet their return thresholds, even if they are given clearance by the DFS to do so.

 

I think at this point the growth thesis is clearly dead; I'm not sure where servicing goes from here, but the idea that large non-bank servicers like Ocwen will be taking over substantial portfolios while the big banks exit doesn't look like it is going to play out in the near future. Ocwen clearly will not be the one to buy such portfolios and my guess is that its peers will not be in a position to make big splashes at this point.

 

I think if the free fall continues and I can buy solidly below book value I will reinitiate a small position in OCN. With ASPS, I have no clue at this point what their profitability looks like with OCN losing >50% of UPB. There's probably more upside w/ ASPS at this point but with OCN at least you own hard assets.

[jay21]

Yeah agency is basicly loans from banks. And non agency is things from the likes of rescap. Which have a v high delinq ratio.

 

Jay, where did you get they will still subservice? Doesn't OCN already subservice? Im under the impression they will exit the agency business alltogether.

 

Yeah agency is basicly loans from banks. And non agency is things from the likes of rescap. Which have a v high delinq ratio.

 

Jay, where did you get they will still subservice? Doesn't OCN already subservice? Im under the impression they will exit the agency business alltogether.

 

Listening to yesterday's call again, they do not mention anything about subservicing the agency MSRs sold. They give the impression they are exiting this business altogether, and will only service/subservice non-agency.

 

The other point worth mentioning is the discussion of large bulk transactions; in the call they state that they do not see large bulk transactions in the current environment, and thus will be selling agency MSRs in a series of small transactions. Further, they state that they do not believe they will soon be able to purchase new MSRs that meet their return thresholds, even if they are given clearance by the DFS to do so.

 

You guys are right, I dont hear them explicitly mention it. I thought they did when they said investors will buy the MSRs. Generally, if investors/funds buy the MSRs they don't have the servicing capabilities so they subservice.

 

I read too much into what they said, apologies.

[ItsAValueTrap]

Im under the impression they will exit the agency business alltogether.

 

They don't want to tie up their capital on agency mortgages.  That's the goal.  They will get higher returns on capital/equity from subprime non-agency servicing rights, or servicing rights where there are high delinquencies (the most challenging stuff out there).

 

Ocwen will probably end up with agency loans anyways from their originations businesses.

 

They don't want to be in agency because they'd rather be in non-agency or doing things that have higher rates of return than agency.

[jschembs]

I know this is the OCN thread, but folks have been mixing the other Erbey complex companies in this conversation, so I'm wondering folks' thoughts on ASPS.

 

Specifically, given what I've read regarding the purported technology/cost advantages ASPS provides, how likely it is ASPS maintains their service offering to those MSR portfolios offloaded by OCN? I see HSBC recently sold its REO servicing department to ASPS, a trend which I presume will continue as (a) banks want to reduce MSR and REO business and (b) ASPS wants to reduce reliance on OCN.

 

Thoughts?

[ItsAValueTrap]

I know this is the OCN thread, but folks have been mixing the other Erbey complex companies in this conversation, so I'm wondering folks' thoughts on ASPS.

 

Can we please keep some of the Altisource discussion in the Altisource thread?

 

Specifically, given what I've read regarding the purported technology/cost advantages ASPS provides, how likely it is ASPS maintains their service offering to those MSR portfolios offloaded by OCN? I see HSBC recently sold its REO servicing department to ASPS, a trend which I presume will continue as (a) banks want to reduce MSR and REO business and (b) ASPS wants to reduce reliance on OCN

 

Banks don't want to reduce their MSR business necessarily.  Most banks originate mortgages.  If you originate mortgages (without doing correspondent lending), you have to service the mortgages initially.  If you hold onto the mortgage servicing rights, then you will continue to service the mortgages.  They're already in the servicing business anyways.

 

The advantage of holding onto MSRs is that they are a natural hedge against certain other risks that the bank faces.  Ocwen thinks that the big banks will hold onto servicing rights for prime MSRs.

 

The banks might get rid of subprime MSRs because they attract regulatory scrutiny and because others can service them cheaper.  The tough part is dealing with delinquent loans.  If there are low delinquencies, then your margins on servicing will be very high and inefficiency doesn't matter much.

 

2- I think that HSBC is paying Altisource to manage its REO portfolio.  Banks are generally bad at dealing with REO because it's outside their core competencies.

[usdtor05]

Yeah agency is basicly loans from banks. And non agency is things from the likes of rescap. Which have a v high delinq ratio.

 

Jay, where did you get they will still subservice? Doesn't OCN already subservice? Im under the impression they will exit the agency business alltogether.

 

Listening to yesterday's call again, they do not mention anything about subservicing the agency MSRs sold. They give the impression they are exiting this business altogether, and will only service/subservice non-agency.

 

The other point worth mentioning is the discussion of large bulk transactions; in the call they state that they do not see large bulk transactions in the current environment, and thus will be selling agency MSRs in a series of small transactions. Further, they state that they do not believe they will soon be able to purchase new MSRs that meet their return thresholds, even if they are given clearance by the DFS to do so.

 

I think at this point the growth thesis is clearly dead; I'm not sure where servicing goes from here, but the idea that large non-bank servicers like Ocwen will be taking over substantial portfolios while the big banks exit doesn't look like it is going to play out in the near future. Ocwen clearly will not be the one to buy such portfolios and my guess is that its peers will not be in a position to make big splashes at this point.

 

I think if the free fall continues and I can buy solidly below book value I will reinitiate a small position in OCN. With ASPS, I have no clue at this point what their profitability looks like with OCN losing >50% of UPB. There's probably more upside w/ ASPS at this point but with OCN at least you own hard assets.

 

So there are a couple things going on here... they are going to sell off $250B UPB of agency MSRs which are lower margin. Then you will be left with something like $160B of non-agency UPB this is higher margin and where they have the cost advantage. They have sold almost their entire non-agency book to HLSS. So OCN subservices the non-agency for HLSS which holds the MSRs (or has rights to the rights under the complex accounting). Subservicing, including ancillary revs they get for it, after factoring in all the interest they are paying to HLSS (again have to normalize for funky accounting), we get to revenue somewhere around 31bps of UPB. This is higher ROE to use HLSS's balance sheet and subservice UPB than it is to use internal capital to buy the MSRs and straight service it. However, it is also lower margin. Going forward, if they sell all of their agency UPB and generate $1.7B of capital, they will likely use some of that to acquire non-agency MSRs and not re-sell to HLSS, which generates revs of 50-60bps of UPB. So current EBT is somewhere around 15bps on $400B+ of UPB. You increase that margin for them servicing new purchases of non-agency MSRs, decrease the margin some for increased compliance costs, and its not unreasonable to think they can do 20bps of EBT on $150B of UPB, or $300M of normalized EBT when its all said and done. Much less than the $600M+ they were doing at 15bps on $400B+ of UPB, but the stock has already reflected that. They only have about $1.6B of true debt when you offset the balance sheet grossups for the advances. So they could also use some of that $1.7B in proceeds to pay down debt and buy back a significant portion of the equity.

 

I agree the big growth scenario is off the table now, but this seems like an overreaction. $3B probably not a crazy valuation for a company that will be earning $300M of EBT and have net cash after MSR sales. That also gives no value to the lending business, but hard to know how much it is worth. Company said it was worth $1.2B in 1Q14 presentation, but that's probably way too high of an estimate. It's worth something though.

[ItsAValueTrap]

Yeah agency is basicly loans from banks. And non agency is things from the likes of rescap. Which have a v high delinq ratio.

 

Jay, where did you get they will still subservice? Doesn't OCN already subservice? Im under the impression they will exit the agency business alltogether.

 

Listening to yesterday's call again, they do not mention anything about subservicing the agency MSRs sold. They give the impression they are exiting this business altogether, and will only service/subservice non-agency.

 

The other point worth mentioning is the discussion of large bulk transactions; in the call they state that they do not see large bulk transactions in the current environment, and thus will be selling agency MSRs in a series of small transactions. Further, they state that they do not believe they will soon be able to purchase new MSRs that meet their return thresholds, even if they are given clearance by the DFS to do so.

 

I think at this point the growth thesis is clearly dead; I'm not sure where servicing goes from here, but the idea that large non-bank servicers like Ocwen will be taking over substantial portfolios while the big banks exit doesn't look like it is going to play out in the near future. Ocwen clearly will not be the one to buy such portfolios and my guess is that its peers will not be in a position to make big splashes at this point.

 

I think if the free fall continues and I can buy solidly below book value I will reinitiate a small position in OCN. With ASPS, I have no clue at this point what their profitability looks like with OCN losing >50% of UPB. There's probably more upside w/ ASPS at this point but with OCN at least you own hard assets.

 

So there are a couple things going on here... they are going to sell off $250B UPB of agency MSRs which are lower margin. Then you will be left with something like $160B of non-agency UPB this is higher margin and where they have the cost advantage. They have sold almost their entire non-agency book to HLSS. So OCN subservices the non-agency for HLSS which holds the MSRs (or has rights to the rights under the complex accounting). Subservicing, including ancillary revs they get for it, after factoring in all the interest they are paying to HLSS (again have to normalize for funky accounting), we get to revenue somewhere around 31bps of UPB. This is higher ROE to use HLSS's balance sheet and subservice UPB than it is to use internal capital to buy the MSRs and straight service it. However, it is also lower margin. Going forward, if they sell all of their agency UPB and generate $1.7B of capital, they will likely use some of that to acquire non-agency MSRs and not re-sell to HLSS, which generates revs of 50-60bps of UPB. So current EBT is somewhere around 15bps on $400B+ of UPB. You increase that margin for them servicing new purchases of non-agency MSRs, decrease the margin some for increased compliance costs, and its not unreasonable to think they can do 20bps of EBT on $150B of UPB, or $300M of normalized EBT when its all said and done. Much less than the $600M+ they were doing at 15bps on $400B+ of UPB, but the stock has already reflected that. They only have about $1.6B of true debt when you offset the balance sheet grossups for the advances. So they could also use some of that $1.7B in proceeds to pay down debt and buy back a significant portion of the equity.

 

I agree the big growth scenario is off the table now, but this seems like an overreaction. $3B probably not a crazy valuation for a company that will be earning $300M of EBT and have net cash after MSR sales. That also gives no value to the lending business, but hard to know how much it is worth. Company said it was worth $1.2B in 1Q14 presentation, but that's probably way too high of an estimate. It's worth something though.

 

By margin I mean gross margin:  revenue - expenses (excluding the amortization of the MSRs).

To me...

Agency has high margins

Non-agency has low margins

 

Ocwen can generate higher returns on capital on non-agency than agency MSRs.

[yadayada]

I got confused, non agency is banks. So a large part of those MSR's that banks are selling is still on the table if the NY DFS gives permission for it. So that means growth is still on the table.

[johngu]

I got confused, non agency is banks. So a large part of those MSR's that banks are selling is still on the table if the NY DFS gives permission for it. So that means growth is still on the table.

 

Forgive my ignorance here, but I thought agency refers to those loans purchased by Fannie / Freddie.  These can be originated by banks or non-banks alike.  Non-agency are the ones that don't qualify for the Fannie / Freddie standards.  Is my understanding wrong?