OCN - Ocwen Financial

[johngu]

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.

 

On the agency has high margin and non-agency has low margin, do you mean for the industry or Ocwen specifically?  I would imagine that for Ocwen, they earn higher margins on non-agency loans as they have a comparative advantage (presumably) servicing delinquent loans, which tend to occur more often in non-agency loans.

[yadayada]

Yeah you are right actually. The total non agency MBS market was 830 billion$ in november 2013. So I don't know, maybe 700 billion$ now? That is not nearly the same size as the previous potential trillion$ + market.

[valueinvestor82]

Yadayada thanks for saying that. When it was said that "the growth story is dead," I can only conclude A) that he is biased toward the short side, or at a minimum has some desire to steal shares from those scared of the situation (I can't blame him there), or B) didn't listen to the call, where management explicitly said "we believe that we have good growth opportunities ahead" and commented on an acquisition to take place in the first 6 months of 2015. I guess from here on I'll mainly be a reader as opposed to commenting, but needless to say I think we have enough info to feel comfortable buying here. Downside is extremely limited from this point on, imho. $2 swing from the bottom today, FYI.

[philly value]

Yadayada thanks for saying that. When it was said that "the growth story is dead," I can only conclude A) that he is biased toward the short side, or at a minimum has some desire to steal shares from those scared of the situation (I can't blame him there), or B) didn't listen to the call, where management explicitly said "we believe that we have good growth opportunities ahead" and commented on an acquisition to take place in the first 6 months of 2015. I guess from here on I'll mainly be a reader as opposed to commenting, but needless to say I think we have enough info to feel comfortable buying here. Downside is extremely limited from this point on, imho. $2 swing from the bottom today, FYI.

 

Management said on the call that they see limited opportunities to acquire MSRs in the near future, and further when they discussed exiting agency servicing, suggested that the exit would have to occur in a series of small transactions because bulk deals are unlikely given the change in market conditions. From this I infer that growth opportunities are significantly less than previously thought. It's very possible that Ocwen may continue profitably as the leading servicer of non-agency, and perhaps they can increase their market share there. But the opportunity set is very clearly less than we thought it was 6 months ago, and profit margins are very likely to be lower for the UPB Ocwen does service.

 

That said I agree that the downside is fairly limited at prices we touched today, $13 or even lower. I think we have to be realistic however and recalibrate towards approaching this as a distressed, cigar butt situation versus a growth situation.

[Patmo]

Yadayada thanks for saying that. When it was said that "the growth story is dead," I can only conclude A) that he is biased toward the short side, or at a minimum has some desire to steal shares from those scared of the situation (I can't blame him there), or B) didn't listen to the call, where management explicitly said "we believe that we have good growth opportunities ahead" and commented on an acquisition to take place in the first 6 months of 2015. I guess from here on I'll mainly be a reader as opposed to commenting, but needless to say I think we have enough info to feel comfortable buying here. Downside is extremely limited from this point on, imho. $2 swing from the bottom today, FYI.

 

Management said on the call that they see limited opportunities to acquire MSRs in the near future, and further when they discussed exiting agency servicing, suggested that the exit would have to occur in a series of small transactions because bulk deals are unlikely given the change in market conditions. From this I infer that growth opportunities are significantly less than previously thought. It's very possible that Ocwen may continue profitably as the leading servicer of non-agency, and perhaps they can increase their market share there. But the opportunity set is very clearly less than we thought it was 6 months ago, and profit margins are very likely to be lower for the UPB Ocwen does service.

 

That said I agree that the downside is fairly limited at prices we touched today, $13 or even lower. I think we have to be realistic however and recalibrate towards approaching this as a distressed, cigar butt situation versus a growth situation.

 

I'm not sure downside is so limited. When I take a look at one of my pet holdings ESI and compare to OCN, I see a lot of similarities in the big picture. Both cos overreached, tons of regulatory damage, negative investor sentiment, etc. Both bought back tons of shares too early, both have had their honchos' heads roll, etc. I could go on about how similar these 2 situations are.

 

Yet OCN is about 3x as levered as ESI if you include for ESI current portion that will be cleaned out next 10Q. Furthermore, ESI is a naturally higher return business. Let's assume I'm a totally rational investor, what redeeming quality does OCN have that would force me to make space alongside ESI in my book at current price? Why should I not just buy more ESI? A worse situation requires a steeper discount imo, and if ESI can drop to .8x BV and less than .66x 10yr avg EBIT (1.2x if you exclude its 4 biggest years), I fail to see how OCN's pricing floor should be at above BV and 10x its BEST year EBIT.

[ItsAValueTrap]

I'm not sure downside is so limited. When I take a look at one of my pet holdings ESI and compare to OCN, I see a lot of similarities in the big picture. Both cos overreached, tons of regulatory damage, negative investor sentiment, etc. Both bought back tons of shares too early, both have had their honchos' heads roll, etc. I could go on about how similar these 2 situations are.

 

I don't think that the mortgage servicers' margins will get crushed.  The NY DFS settlement imposes another layer of regulation on Ocwen.  The cost is unclear to me but it seems like Ocwen will still see a lot of cash flow from its MSRs.

 

-They have to provide credit reports to borrowers since 2011 or something like that.  This is something that can be automated. 

-Altisource got out of force-placed insurance brokerage.  I believe that this hurts Ocwen in the future as the future kickbacks belong to Ocwen.  Ocwen will not be able to take kickbacks in the future.  WAC's 10-K clearly lays out how much WAC makes from kickbacks or "insurance commissions", though WAC's MSR portfolio may have different delinquency rates.

(-The NY DFS might strong arm Altisource into charging lower fees if it is overcharging.  If so, Ocwen's costs will come down by a tiny amount as it has to finance slightly smaller advances.)

[dcollon]

Some comments by Tom Brown (Bankstocks.com)

 

http://bankstocks.com/ocwens-abominable-deal-with-new-york/

 

[usdtor05]

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?

 

Yes Agency are loans purchased by Fannie / Freddie and non-agency are the ones that don't qualify. So you can think of Agency as prime and non-agency as sub-prime for the most part.

 

Ocwen has higher margins on non-agency because it uses people in India to service those rather than Fannie / Freddie require them to use people domestically. So as they sell off Agency UPB their margins should actually go up. But other posters are right that non-agency is a much smaller market and they are limited from growing in the near future until their compliance system is on track.

 

[usdtor05]

Yadayada thanks for saying that. When it was said that "the growth story is dead," I can only conclude A) that he is biased toward the short side, or at a minimum has some desire to steal shares from those scared of the situation (I can't blame him there), or B) didn't listen to the call, where management explicitly said "we believe that we have good growth opportunities ahead" and commented on an acquisition to take place in the first 6 months of 2015. I guess from here on I'll mainly be a reader as opposed to commenting, but needless to say I think we have enough info to feel comfortable buying here. Downside is extremely limited from this point on, imho. $2 swing from the bottom today, FYI.

 

Management said on the call that they see limited opportunities to acquire MSRs in the near future, and further when they discussed exiting agency servicing, suggested that the exit would have to occur in a series of small transactions because bulk deals are unlikely given the change in market conditions. From this I infer that growth opportunities are significantly less than previously thought. It's very possible that Ocwen may continue profitably as the leading servicer of non-agency, and perhaps they can increase their market share there. But the opportunity set is very clearly less than we thought it was 6 months ago, and profit margins are very likely to be lower for the UPB Ocwen does service.

 

That said I agree that the downside is fairly limited at prices we touched today, $13 or even lower. I think we have to be realistic however and recalibrate towards approaching this as a distressed, cigar butt situation versus a growth situation.

 

I'm not sure downside is so limited. When I take a look at one of my pet holdings ESI and compare to OCN, I see a lot of similarities in the big picture. Both cos overreached, tons of regulatory damage, negative investor sentiment, etc. Both bought back tons of shares too early, both have had their honchos' heads roll, etc. I could go on about how similar these 2 situations are.

 

Yet OCN is about 3x as levered as ESI if you include for ESI current portion that will be cleaned out next 10Q. Furthermore, ESI is a naturally higher return business. Let's assume I'm a totally rational investor, what redeeming quality does OCN have that would force me to make space alongside ESI in my book at current price? Why should I not just buy more ESI? A worse situation requires a steeper discount imo, and if ESI can drop to .8x BV and less than .66x 10yr avg EBIT (1.2x if you exclude its 4 biggest years), I fail to see how OCN's pricing floor should be at above BV and 10x its BEST year EBIT.

 

The balance sheet is messy here due to some of the financial engineering with HLSS. You have to net out the advance receivables and liabilities as those are effectively balance sheet gross ups. True debt is about $1.6B, with $300M of cash. So not as levered as most think.

[doc75]

Some comments by Tom Brown (Bankstocks.com)

 

http://bankstocks.com/ocwens-abominable-deal-with-new-york/

 

I tend to agree with one of the comments following this article.  The most logical explanation for Erbey signing such a seemingly outrageous consent decree is that we don't know the full story.  I imagine Lawsky had far more leverage than we think in this negotiation.  It seems very likely that there was shady business that hasn't been fully exposed (yet). 

 

I find it difficult to believe everything management says when they continue to employ Kevin Wilcox as their Chief Administration Officer.  The same Kevin Wilcox who was charged  in relation to a ponzi scheme: 

 

http://www.sec.gov/litigation/admin/2013/34-69111.pdf

http://www.ponzitracker.com/main/2012/1/5/sec-charges-three-more-in-16-million-ponzi-scheme-that-targe.html

 

On the other hand, Wilbur Ross seemed to have a good impression of Erbey:

 

http://www.thestreet.com/story/12085977/5/wilbur-ross-discusses-ocwen-chairman-bill-erbey.html

 

Apologies if these links have been posted before.

 

[yadayada]

That does not make sense. If everything will be out in the open, it means Lawsky does not have leverage? If there were such bad things happening, why didn't lawsky say so? How does not making it public gives Lawsky leverage.. Everything will be out in the open anyway...  With that banking scandal he basicly inferred they were sending money to terrorists, when there possibly wasn't even good proof of that. If something really bad is happening in OCN, why give such harsh punishment, and then keep it quiet?

 

And if such structural bad things are happening specifically to OCN, why is the complaint ratio so low? Wouldn't they generate a mountain of complaints? Both online and in the CFPB database... Law of averages.

 

Finally arent we jumping to conclusions here? They did not have to change their ways yet... They can still use the AI system.

 

I think the best thing to do here is just wait and see. It seems alwasy right after something bad happens, the market always overshoots with these things. And it is already obvious that run off value is very likely higher.

 

Honestly think that Erbey made mistakes here. I remember from some interview that he tells his employees some facts or the name of a book and then they have to figure it out. He just assumes, just because he knows his system works and he understands statistics, everyone else will just know it too.

 

If he invested like a 150 million in some department that takes care of homeowners that had bad stuff happening to them... Like those 10k complaints, what if he provided some service for them? Hired a bunch of VIP managers to exactly flesh out if OCN made a mistake.  Then this whole thing would not have happened. Seems like smart thing to do when your in a regulatory sensitive business like this. Potentially prevents huge headaches. He could have used some of his cost advantage to do this. You basicly drastically remove regulatory risk.

[ItsAValueTrap]

I find it difficult to believe everything management says when they continue to employ Kevin Wilcox as their Chief Administration Officer.  The same Kevin Wilcox who was charged  in relation to a ponzi scheme: 

 

http://www.sec.gov/litigation/admin/2013/34-69111.pdf

http://www.ponzitracker.com/main/2012/1/5/sec-charges-three-more-in-16-million-ponzi-scheme-that-targe.html

 

 

Are you sure it's the same guy?

 

The SEC link you gave talks about Ponzi Wilcox:

Wilcox was an employee of JCN, Inc., a corporation organized under the laws of Utah, from approximately May 2008 through July 2010, and served as Vice President of JCN, Inc. from approximately August 2009 through July 2010. Wilcox also served as Vice President of ProStar Capital, LLC from approximately July 2008 through July 2010. Wilcox is not and has never been registered with the Commission in any capacity.

 

Ocwen Wilcox has been working at Ocwen since 1998:

http://www.forbes.com/profile/kevin-wilcox/

Mr. Wilcox serves as Chief Administration Officer and General Counsel of Altisource. Before joining Altisource in August 2009, he served as Executive Vice President, Chief Administration Officer and Corporate Secretary for Ocwen since May 2008. Mr. Wilcox previously served as the Senior Vice President of Human Resources and Corporate Services. He joined Ocwen in March 1998 as Senior Manager, Litigation in the Law Department, where he was responsible for the management and resolution of all corporate litigation. He holds a Bachelor of Science in Business Administration from the University of Florida and a Juris Doctorate from the Florida State University College of Law.

[doc75]

I find it difficult to believe everything management says when they continue to employ Kevin Wilcox as their Chief Administration Officer.  The same Kevin Wilcox who was charged  in relation to a ponzi scheme: 

 

http://www.sec.gov/litigation/admin/2013/34-69111.pdf

http://www.ponzitracker.com/main/2012/1/5/sec-charges-three-more-in-16-million-ponzi-scheme-that-targe.html

 

 

Are you sure it's the same guy?

 

The SEC link you gave talks about Ponzi Wilcox:

Wilcox was an employee of JCN, Inc., a corporation organized under the laws of Utah, from approximately May 2008 through July 2010, and served as Vice President of JCN, Inc. from approximately August 2009 through July 2010. Wilcox also served as Vice President of ProStar Capital, LLC from approximately July 2008 through July 2010. Wilcox is not and has never been registered with the Commission in any capacity.

 

Ocwen Wilcox has been working at Ocwen since 1998:

http://www.forbes.com/profile/kevin-wilcox/

Mr. Wilcox serves as Chief Administration Officer and General Counsel of Altisource. Before joining Altisource in August 2009, he served as Executive Vice President, Chief Administration Officer and Corporate Secretary for Ocwen since May 2008. Mr. Wilcox previously served as the Senior Vice President of Human Resources and Corporate Services. He joined Ocwen in March 1998 as Senior Manager, Litigation in the Law Department, where he was responsible for the management and resolution of all corporate litigation. He holds a Bachelor of Science in Business Administration from the University of Florida and a Juris Doctorate from the Florida State University College of Law.

 

Hmm...  I did "verify" before posting, but I trusted my original source after finding a secondary confirmation, and after looking into it further I think that the secondary was simply echoing the primary. 

 

I'm thinking now that it's not the same guy.  Christmas apologies to the non-scammy Mr. Wilcox!

 

 

[valueinvestor82]

I also don't understand the criticisms of leverage when they already announced that they're in the process of generating $1.7 billion in cash through the sale of the government side of their business. Credit markets signal that they're fine and the company's own words signal the same.

 

Bring on the transformation. the "lack of visibility" fit thrown by Wall Street will be replaced by the realization that they have a path forward, including resumed growth.

 

one thing hated more than bad news by Wall Street is lack of clarity. Analysts hate it when they don't have numbers to plug into their spreadsheets  for the next 2-3 quarters. Waaaah!

[Wilson-TPC]

I read through all 27 pages after conducting DD on Ocwen.

 

Customer complaint or not, shaddy business practice or not, Erbey leaving and tons of bad sh*t happening, MSRs on the book is worth more than the company as a whole.

 

I don't care what the headline says, these MSRs are still worth something. And if I can buy it without incurring permanent loss of capital, I don't really care where Erbey goes.

 

I sold 12.5 puts for $3.2. Option chains are way overpriced. Both calls and puts are overpriced. Good luck to all.

[valueinvestor82]

Good move, Wilson. I actually bought jan. 17 calls with a $15 strike for about $4, I think that's a good deal for 2+ years. I agree that many of those that I looked at weren't trading heavily and I wasn't comfortable with the pricing but I think what I bought was fine.

[Patmo]

Yadayada thanks for saying that. When it was said that "the growth story is dead," I can only conclude A) that he is biased toward the short side, or at a minimum has some desire to steal shares from those scared of the situation (I can't blame him there), or B) didn't listen to the call, where management explicitly said "we believe that we have good growth opportunities ahead" and commented on an acquisition to take place in the first 6 months of 2015. I guess from here on I'll mainly be a reader as opposed to commenting, but needless to say I think we have enough info to feel comfortable buying here. Downside is extremely limited from this point on, imho. $2 swing from the bottom today, FYI.

 

Management said on the call that they see limited opportunities to acquire MSRs in the near future, and further when they discussed exiting agency servicing, suggested that the exit would have to occur in a series of small transactions because bulk deals are unlikely given the change in market conditions. From this I infer that growth opportunities are significantly less than previously thought. It's very possible that Ocwen may continue profitably as the leading servicer of non-agency, and perhaps they can increase their market share there. But the opportunity set is very clearly less than we thought it was 6 months ago, and profit margins are very likely to be lower for the UPB Ocwen does service.

 

That said I agree that the downside is fairly limited at prices we touched today, $13 or even lower. I think we have to be realistic however and recalibrate towards approaching this as a distressed, cigar butt situation versus a growth situation.

 

I'm not sure downside is so limited. When I take a look at one of my pet holdings ESI and compare to OCN, I see a lot of similarities in the big picture. Both cos overreached, tons of regulatory damage, negative investor sentiment, etc. Both bought back tons of shares too early, both have had their honchos' heads roll, etc. I could go on about how similar these 2 situations are.

 

Yet OCN is about 3x as levered as ESI if you include for ESI current portion that will be cleaned out next 10Q. Furthermore, ESI is a naturally higher return business. Let's assume I'm a totally rational investor, what redeeming quality does OCN have that would force me to make space alongside ESI in my book at current price? Why should I not just buy more ESI? A worse situation requires a steeper discount imo, and if ESI can drop to .8x BV and less than .66x 10yr avg EBIT (1.2x if you exclude its 4 biggest years), I fail to see how OCN's pricing floor should be at above BV and 10x its BEST year EBIT.

 

The balance sheet is messy here due to some of the financial engineering with HLSS. You have to net out the advance receivables and liabilities as those are effectively balance sheet gross ups. True debt is about $1.6B, with $300M of cash. So not as levered as most think.

 

Fair enough. Does it kill the idea that there's further potential downside though? There's probably plenty of money to be made here but there's also still room for the market to make bigger mistakes as well. Out of favor cos get skewered hard on bad news and good news don't uplift sp as hard. I will sit on sidelines for a while hoping for an entry point I am more comfortable with as I don't mind missing this boat if it sails without me, good luck to those invested.

[ScottHall]

Yadayada thanks for saying that. When it was said that "the growth story is dead," I can only conclude A) that he is biased toward the short side, or at a minimum has some desire to steal shares from those scared of the situation (I can't blame him there), or B) didn't listen to the call, where management explicitly said "we believe that we have good growth opportunities ahead" and commented on an acquisition to take place in the first 6 months of 2015. I guess from here on I'll mainly be a reader as opposed to commenting, but needless to say I think we have enough info to feel comfortable buying here. Downside is extremely limited from this point on, imho. $2 swing from the bottom today, FYI.

 

Management said on the call that they see limited opportunities to acquire MSRs in the near future, and further when they discussed exiting agency servicing, suggested that the exit would have to occur in a series of small transactions because bulk deals are unlikely given the change in market conditions. From this I infer that growth opportunities are significantly less than previously thought. It's very possible that Ocwen may continue profitably as the leading servicer of non-agency, and perhaps they can increase their market share there. But the opportunity set is very clearly less than we thought it was 6 months ago, and profit margins are very likely to be lower for the UPB Ocwen does service.

 

That said I agree that the downside is fairly limited at prices we touched today, $13 or even lower. I think we have to be realistic however and recalibrate towards approaching this as a distressed, cigar butt situation versus a growth situation.

 

I'm not sure downside is so limited. When I take a look at one of my pet holdings ESI and compare to OCN, I see a lot of similarities in the big picture. Both cos overreached, tons of regulatory damage, negative investor sentiment, etc. Both bought back tons of shares too early, both have had their honchos' heads roll, etc. I could go on about how similar these 2 situations are.

 

Yet OCN is about 3x as levered as ESI if you include for ESI current portion that will be cleaned out next 10Q. Furthermore, ESI is a naturally higher return business. Let's assume I'm a totally rational investor, what redeeming quality does OCN have that would force me to make space alongside ESI in my book at current price? Why should I not just buy more ESI? A worse situation requires a steeper discount imo, and if ESI can drop to .8x BV and less than .66x 10yr avg EBIT (1.2x if you exclude its 4 biggest years), I fail to see how OCN's pricing floor should be at above BV and 10x its BEST year EBIT.

 

The balance sheet is messy here due to some of the financial engineering with HLSS. You have to net out the advance receivables and liabilities as those are effectively balance sheet gross ups. True debt is about $1.6B, with $300M of cash. So not as levered as most think.

 

Fair enough. Does it kill the idea that there's further potential downside though? There's probably plenty of money to be made here but there's also still room for the market to make bigger mistakes as well. Out of favor cos get skewered hard on bad news and good news don't uplift sp as hard. I will sit on sidelines for a while hoping for an entry point I am more comfortable with as I don't mind missing this boat if it sails without me, good luck to those invested.

 

Of course not. Any stock you own can move downwards for any reason. What matters for long term holders is whether the moves are justified by changes in business economics (or whether the stock was actually expensive to begin with).

 

I understand a lot of folks don't have that luxury (impatient LPs), and the jury is IMO still out on Ocwen's future profitability. I tend to suspect the shares will prove to be cheap in hindsight, but I currently don't own any myself.

 

To be fair I've been bullish on them since ~$20, so wrong so far. Will probably take a very small position in the coming weeks.

 

FYI... take a look at the premiums on some of the puts. I've made decent money writing them, and so long as you're willing to take assignment, you can get a pretty good annualized return from them alone if you have a favorable outlook on the company. Just an alternative.

[Wilson-TPC]

Yadayada thanks for saying that. When it was said that "the growth story is dead," I can only conclude A) that he is biased toward the short side, or at a minimum has some desire to steal shares from those scared of the situation (I can't blame him there), or B) didn't listen to the call, where management explicitly said "we believe that we have good growth opportunities ahead" and commented on an acquisition to take place in the first 6 months of 2015. I guess from here on I'll mainly be a reader as opposed to commenting, but needless to say I think we have enough info to feel comfortable buying here. Downside is extremely limited from this point on, imho. $2 swing from the bottom today, FYI.

 

Management said on the call that they see limited opportunities to acquire MSRs in the near future, and further when they discussed exiting agency servicing, suggested that the exit would have to occur in a series of small transactions because bulk deals are unlikely given the change in market conditions. From this I infer that growth opportunities are significantly less than previously thought. It's very possible that Ocwen may continue profitably as the leading servicer of non-agency, and perhaps they can increase their market share there. But the opportunity set is very clearly less than we thought it was 6 months ago, and profit margins are very likely to be lower for the UPB Ocwen does service.

 

That said I agree that the downside is fairly limited at prices we touched today, $13 or even lower. I think we have to be realistic however and recalibrate towards approaching this as a distressed, cigar butt situation versus a growth situation.

 

I'm not sure downside is so limited. When I take a look at one of my pet holdings ESI and compare to OCN, I see a lot of similarities in the big picture. Both cos overreached, tons of regulatory damage, negative investor sentiment, etc. Both bought back tons of shares too early, both have had their honchos' heads roll, etc. I could go on about how similar these 2 situations are.

 

Yet OCN is about 3x as levered as ESI if you include for ESI current portion that will be cleaned out next 10Q. Furthermore, ESI is a naturally higher return business. Let's assume I'm a totally rational investor, what redeeming quality does OCN have that would force me to make space alongside ESI in my book at current price? Why should I not just buy more ESI? A worse situation requires a steeper discount imo, and if ESI can drop to .8x BV and less than .66x 10yr avg EBIT (1.2x if you exclude its 4 biggest years), I fail to see how OCN's pricing floor should be at above BV and 10x its BEST year EBIT.

 

The balance sheet is messy here due to some of the financial engineering with HLSS. You have to net out the advance receivables and liabilities as those are effectively balance sheet gross ups. True debt is about $1.6B, with $300M of cash. So not as levered as most think.

 

Fair enough. Does it kill the idea that there's further potential downside though? There's probably plenty of money to be made here but there's also still room for the market to make bigger mistakes as well. Out of favor cos get skewered hard on bad news and good news don't uplift sp as hard. I will sit on sidelines for a while hoping for an entry point I am more comfortable with as I don't mind missing this boat if it sails without me, good luck to those invested.

 

Of course not. Any stock you own can move downwards for any reason. What matters for long term holders is whether the moves are justified by changes in business economics (or whether the stock was actually expensive to begin with).

 

I understand a lot of folks don't have that luxury (impatient LPs), and the jury is IMO still out on Ocwen's future profitability. I tend to suspect the shares will prove to be cheap in hindsight, but I currently don't own any myself.

 

To be fair I've been bullish on them since ~$20, so wrong so far. Will probably take a very small position in the coming weeks.

 

FYI... take a look at the premiums on some of the puts. I've made decent money writing them, and so long as you're willing to take assignment, you can get a pretty good annualized return from them alone if you have a favorable outlook on the company. Just an alternative.

 

I second what you said at the end. Look at the 12.5s... LOL. Who in their right mind is on the other side of this trade?

[ZenaidaMacroura]

 

I second what you said at the end. Look at the 12.5s... LOL. Who in their right mind is on the other side of this trade?

how far out is the expiry you're looking at?

[scorpioncapital]

I'm not sure all these options going out so far are necessary. Feb $12 puts are selling for a yield of 20%+ yield on initial collateral. If you get put, you own the stock at $12 right now.

[PatientCheetah]

I sold some April 12.5 equivalent to what I want to hold. Hopefully, I will get exercised on. My cost basis would be less $11. Got to love the brownian motion assumption in the option pricing model.

[yadayada]

so you either make a 40% IRR, or you can buy OCN at little over 10$.

[Wilson-TPC]

Added today. Tax loss selling, and MSRs are worth 33% more than where it's trading. I like the odds on these.

[valueinvestor82]

Sorry if it was already mentioned, but I just noticed that Fairholmes former guys that started Goodhaven Fund (GOODX) increased their OCN position considerably (40% to 550k or so shares) since August. Add to it Bauposts recent buy and it'll  be interesting to see what changes have occurred in recent days.