OCN - Ocwen Financial

[Picasso]

Does anyone know the kind of impairment we will see on the value of OCN's MSR's as interest rates continue to plummet?  I am trying to nail down some kind of liquidation value.  I don't quite understand how they calculate an adverse event to the fair value of the MSR's during a shift in the yield curve.

 

You really have everything working against the long thesis on this one.  But at some point is it not cheaper for someone to buy OCN instead of MSR's on the open market?

[jay21]

Does anyone know the kind of impairment we will see on the value of OCN's MSR's as interest rates continue to plummet?  I am trying to nail down some kind of liquidation value.  I don't quite understand how they calculate an adverse event to the fair value of the MSR's during a shift in the yield curve.

 

You really have everything working against the long thesis on this one.  But at some point is it not cheaper for someone to buy OCN instead of MSR's on the open market?

 

Inside Mortgage Finance said at a conservative valuation of 50bps their 400b UPB is worth 2b...So yes I think you can easily find ppl that agree. But one of the extreme downsides is what if they have to pay fines/settlements with the proceeds...

 

It's easy to see bad scenarios here. But if they just "survive" its worth more than the current price imo.

[ItsAValueTrap]

You should look at the net present value of their MSRs.  Unfortunately it's hard to figure that out without knowing the details of the MSRs, especially with nonagency MSRs where the terms vary.

 

Some MSRs pay 25 basis points (of UPB) for the servicing fee.  Others pay 65 basis points.  So, you may not be able to get close to the NPV by multiplying the UPB by some number.

 

The cost of servicing the MSRs depends on delinquency rates, future compliance/regulatory costs, etc. etc.  The MSRs' value is also affected by repayment speeds (which depend on interest rates, HAMP, HARP, availability of credit / how tight the underwriting environment is, etc.).

[ItsAValueTrap]

The DBO doesn't seem happy with Ocwen and more or less rebuts Ocwen's latest press release.

http://www.wsj.com/articles/ocwen-financials-shares-tumble-on-california-concerns-1421178252

 

Mr. Dresslar rejected the statement. “Wrong,” he said when asked if indeed Ocwen had provided all the records. “No.”

[Wilson-TPC]

You should look at the net present value of their MSRs.  Unfortunately it's hard to figure that out without knowing the details of the MSRs, especially with nonagency MSRs where the terms vary.

 

Some MSRs pay 25 basis points (of UPB) for the servicing fee.  Others pay 65 basis points.  So, you may not be able to get close to the NPV by multiplying the UPB by some number.

 

The cost of servicing the MSRs depends on delinquency rates, future compliance/regulatory costs, etc. etc.  The MSRs' value is also affected by repayment speeds (which depend on interest rates, HAMP, HARP, availability of credit / how tight the underwriting environment is, etc.).

 

All of those assumptions are in the 10Q.

[ItsAValueTrap]

http://www.ifrasia.com/ocwen-serviced-bonds-hold-up-despite-california-woes/21180718.article

 

One source briefed on the matter told IFR the possibility of a full-on suspension in California was “far-fetched”, but acknowledged it would be devastating for the company.

[ItsAValueTrap]

You should look at the net present value of their MSRs.  Unfortunately it's hard to figure that out without knowing the details of the MSRs, especially with nonagency MSRs where the terms vary.

 

Some MSRs pay 25 basis points (of UPB) for the servicing fee.  Others pay 65 basis points.  So, you may not be able to get close to the NPV by multiplying the UPB by some number.

 

The cost of servicing the MSRs depends on delinquency rates, future compliance/regulatory costs, etc. etc.  The MSRs' value is also affected by repayment speeds (which depend on interest rates, HAMP, HARP, availability of credit / how tight the underwriting environment is, etc.).

 

All of those assumptions are in the 10Q.

 

Yeah.  The easiest thing to do is to look at the market value of the MSRs and at the information provided in Ocwen's investor presentations.  Then ask yourself if Ocwen is or isn't fudging those numbers.

[guowei58]

There seems to be a lot of concerns regarding potential state regulatory actions at the other 49 states.  Below is some info that I gathered.  My conclusion is that it won't be that bad.

 

1) the state AGs and CFPB settlement in 2013 released Ocwen from lots of errors and omissions related to mortgage servicing.  here is the exhibit where this is outlined.  https://d9klfgibkcquc.cloudfront.net/Ocwen-Consent-Judgment-Ex-F.pdf. It seems to me that the release is solid.

 

I think the most like remedy that the AGs have is thru the cure process outlined by the settlement.  you can read the enforcement rules here.  https://d9klfgibkcquc.cloudfront.net/Ocwen-Consent-Judgment-Ex-D.pdf.  I think the process is fair and that Ocwen should meet the requirements. 

 

however, it doesn't preclude other state agencies besides the AGs to go after Ocwen.  I personally think most other state agencies are lightweights.  But you never know...

 

2) As an example of weak regulatory power at these state agencies, you should look at the enforcement actions that the CA DBO has done.  Here's a link.  http://www.dbo.ca.gov/ENF/AdminDecisions/Default.asp.  Ocwen should be able to keep its license unless it's a complete fraud...

 

3) one piece of bad news for ASPS holders.  ASPS is not released under the CFPB settlement.  This could be an window for the state AGs to go after them...

 

 

[Picasso]

Bonds are finally trading down.  Priced at 80 to yield 12% to 2019.

[morningstar]

Bonds are finally trading down.  Priced at 80 to yield 12% to 2019.

 

In that context, worth pointing out that despite those bonds being subordinated to secured debt, they are still trading better than Altisource term loan which is offered at 72 to yield about the same.

[Picasso]

Maybe it's just me but I think those bonds at $80 are a pretty good deal.  As much as we argue about the margin of safety I don't think anyone is saying OCN is a zero. 

 

Those bonds were done as part of a private placement so it was not trading much until the past couple days.  I'd rather be one layer above all the OCN bag holders and earn my 12% with some potential for a trade up in the price before maturity for some total return.

 

I'll be purchasing those bonds if I can get an offer under $80.

[jschembs]

http://nypost.com/2015/01/15/beleaguered-bill-erbey-exiting-ocwen-financial-after-27-years/

 

“We view the settlement as an opportunity for a fresh start for Ocwen,” Lawsky told The Post on Thursday. “We want to see the company improve and are committed to working constructively with its new leadership to help make that happen.”

 

Perhaps Lawsky had a deep-seated animosity strictly for Erbey? Those words seem fairly encouraging for the company itself.

[jay21]

http://nypost.com/2015/01/15/beleaguered-bill-erbey-exiting-ocwen-financial-after-27-years/

 

“We view the settlement as an opportunity for a fresh start for Ocwen,” Lawsky told The Post on Thursday. “We want to see the company improve and are committed to working constructively with its new leadership to help make that happen.”

 

Perhaps Lawsky had a deep-seated animosity strictly for Erbey? Those words seem fairly encouraging for the company itself.

 

Lawsky has been quoted many times saying that it's not the corporations themselves that do bad, it's the people there. He tries to go after the bad people.

[johngu]

I'm curious if anyone has a read into the timing of the LA Times article, as well as how public the DBO is with respect to the enforcement action.  It seems like despite the lawsuit having been filed since October of 2014, the news only broke recently, after the NYDFS settlement.  Of course, why Ocwen didn't disclose the lawsuit earlier is a big question.

 

Some quotes from Tom Dresslar (DBO spokesman):

 

"Like any enforcement action, settlement is always a possibility, but at this point we are focused on suspension."

 

"We’ve never laid odds on the outcome of this case, and we’re not gonna start now.  Ocwen’s conduct, we believe, warrants a license suspension, and we believe we have a strong case. We wouldn’t have filed the accusation otherwise."

 

What's interesting to me is how public the DBO is about the whole thing, taking interviews with Bloomberg, Reuters, and other news agencies.  Is this normal?  And if not, what is the motivation for bringing this into the public domain (political points, leverage in settlement negotiations)?

 

Also, does anyone have knowledge about the suspension process?  It seems like it's not a unilateral decision by the DBO, but requires the participation in some capacity of an administrative law judge.  From a Forbes article: http://www.forbes.com/sites/antoinegara/2015/01/13/california-regulator-in-process-of-suspending-ocwen-financials-mortgage-license/

 

"In October, Jan Lynn Owen, Commissioner of Business Oversight, filed a formal complaint against Ocwen. According to the L.A. Times, an administrative law judge will preside over settlement conferences in February. Nonetheless, a hearing on the suspension of Ocwen’s California licence is scheduled for July."

 

So, we have settlement conference in February, and a hearing in July, both of which are potential catalysts (to the positive and negative side).  Is the hearing in July presided over by a judge, or a panel of DBO people?  What would be the judge's considerations in this case?  Would they judge care about the potential for disruption in servicing in the case of a forced transfer?  Would be great if someone familiar with how these things go can help educate the rest of us.

 

[valueinvestor82]

Great points/questions, john. I would like to hear the same. Also, any further thoughts about a minimum liquidation value? It seems that Lawsky is sounding conciliatory, and that agency sale is still a huge liquidity event, and CA is only 23%, albeit the largest concentration compared to other states. I appreciate hearing everyone's opinion and thoughts on the matter. CS and others seem to be comfortable pitching the $12-$14 range, but if the agency side being sold for $1.7 billion is actually less than half of revenue (and $100 million more than the total debt owed), I have a hard time believing that more than half of the remaining revenue is worth less than $1.7 billion additionally. Is that logic incorrect? I know that subprime vs agency will have different marketability and liquidity, but it would seem to point in the direction of $20+ in my view. 

[johngu]

Looking through the list of press releases by California's DBO:

 

http://www.dbo.ca.gov/press/press_releases/default.asp

http://www.dbo.ca.gov/Press/press_releases/2013.asp

 

Here are some examples of announced settlements.  Seems like the amounts were generally pretty small:

 

http://www.dbo.ca.gov/Press/press_releases/2014/pr1402.asp

http://www.dbo.ca.gov/Press/press_releases/2014/pr1403.asp

http://www.dbo.ca.gov/Press/press_releases/DBO_UBS_Consent_Order_Press_Release_111913.pdf

 

The $2.1B settlement between OCN and 49 states were also mentioned here:

 

http://www.dbo.ca.gov/Press/press_releases/2014/pr1404.asp

 

In this press release, DBO claims that the CA share of the $2.1B settlement is $268M. 

 

One theory (and this is only a theory) is that OCN saw the DBO as a regulatory entity w/o much teeth, certain when compared to NYDFS.  Furthermore, given the previous settlement with CA along with the other 48 states, OCN didn't see much danger from the DBO's request for information.  In any case, OCN was busy dealing with the NYDFS, and completely mis-managed the situation.  This no doubt frustrated the DBO and the DBO decided to leak the story to the media to force OCN to be more responsive.

 

The tactic obviously worked extremely well, and I'm sure the DBO has OCN's full attention.  I believe that it's very very likely that OCN will settle with DBO, and for an amount that is far less, and with terms far better than, the NYDFS settlement.  The bigger issue is whether OCN now has a big red target on its back for everyone else.

 

Taking a step back, OCN operates in a highly regulated (and inefficient) industry.  There's regulations at the national and state level that they have to comply with.  Being able to navigate these regulations is part of their business, and they've done a sub-par job here.  However, I do believe they offer a real service and fill a real need.  It's a service / need that others can offer, but is in short supply.  As such, I believe that having OCN continue as an ongoing concern is in the ultimate interest of the borrowers.  I believe the DBO also wishes for this to be the ultimate outcome.

 

Last point, on liquidation value.  If OCN is allowed to operate in run-off, I think the $10+ / share might be reasonable.  However, OCN is a large fixed cost business.  You still have to comply with all the rules and regulations even as the number of loans you service decrease.  At some point, it's probably no longer economical to be a servicer at small scale and the MSR will need to be sold.  In run-off, this can be done in an orderly fashion. 

 

I don't really see run-off as a likely scenario.  I feel that OCN will either eventually be allowed to purchase more MSR by NYDFS, or be forced to shutdown completely.  It just doesn't make sense to have an entity that's otherwise compliant in run-off, as that leaves excess servicing capacity that's very much needed at this point.  At the very least, OCN will be allowed to purchase more MSRs to replace natural run-off so that they book doesn't shrink.  The NYDFS will want to ensure that OCN can 1) do reliable servicing at current size, and 2) has the capacity to take on more loans.  Given 1) and the loan book naturally shrinking, I imagine allowing small purchases is a given.

 

In the case of a forced shutdown, I do not believe the current price provides a floor at all.  You are in a situation where you are a forced seller, with few competing buyers.  In the shutdown situation, the concern of regulators would be the orderly transfer of servicing, not OCN's ability to fetch a particular price for its MSRs.  In this case, I think OCN will be forced to sell all its MSRs at very very depressed prices.

[jay21]

johng - you should also think about how they can replace MSRs by originating new loans. This is one major source of opportunity for the company.  I do not believe the DFS has specified that it will force OCN to sell MSRs coming from loans they originate.

[ItsAValueTrap]

If they created fannie/freddie MSRs they may sell them?  I would expect that Ocwen would be fairly conservative in its underwriting of fannie/freddie complaint loans.  I don't see them originating anything that may run afoul of QM rules.

 

They may or may not hold onto their Ginnie Mae reverse mortgage MSRs.

[ItsAValueTrap]

On MSRs with very high delinquencies, the cost of dealing with delinquencies is one of the biggest expenses.  Ocwen is really good at keeping the delinquency-related expenses down.  These MSRs are levered to the value that they can create and can generate high returns on capital.

 

With low delinquency MSRs, your major expenses are amortization (because you had to pay something for the MSR) and the cost of dealing with interest rate and prepayment risk.

 

I think the reason why they want to get out of agency MSRs is because they have low delinquencies.  Because of that, they won't generate high returns on capital from them because they tie up a lot of capital.  You have to hold additional capital in case you lose a lot of money to interest rate risk.  The idea is to sell agency MSRs so you can reinvest it into other areas that generate higher returns on capital:

- Repurchasing shares

- Buying MSRs with high delinquencies.  The kind that attracts regulatory scrutiny.

 

I think they're implicitly saying that it's worth getting into nonagency MSRs despite all of the ugly regulatory problems that they have had.  Right now they can't buy nonagency MSRs... so I think the game plan is to repurchase shares.

[guowei58]

Two questions you need to answer are WHY OCN DIDN'T PROVIDE CA DBO WITH THE INFORMATION REQUESTED?  AND WHY OCN DIDN'T DISCLOSE THE POTENTIAL SUSPENSION OF LICENSES IN OCTOBER?  The answers are probably related.  The most innocent answer is that they didn't think it was a significant event and they could easily cure the issue.  They couldn't provide the information on time given system integration issues.  On the other end of the spectrum, one could imply that they didn't want to provide CA DBO information incriminating themselves and then decided to withhold this information from investors in the hope that no one finds out. 

 

which is more likely?  the following facts have me leaning towards the more innocent answer:

 

1)  CA DBO didn't put out any press release initially.  probably because they want to use the administrative action as leverage to get the information they want.  I don't think they really want to take the license away.  CA DBO's administrative actions previously show a pattern of light enforcement...you can get a sense of the type of work they do by going through their website.

 

2) CA Homeowner Bill of Rights is very basic and most requirements are also required by the National Mortgage Settlement.  Is OCN concealing the failure to comply with these basic requirements?  hard to believe, but it's possible.

 

3) NY DFS has a compliance monitor in place for the last two years.  Their settlement mentions sloppy processes at OCN, but no fraudulent intentions. 

 

4) would management be stupid enough to try to conceal a significant event that is publicly available since October?  They probably have legal advice on this.

 

The biggest concern that I have is not with CA DBO, but with the analysis that Joseph Smith is conducting on OCN's compliance with the National Mortgage Settlement.  This potentially brings OCN under the regulatory power of 49 state AGs...

 

 

[ItsAValueTrap]

It could be something complicated like letter dating issues.  If the system can't keep track of dates properly, then it is much harder to figure out if they complied with laws mandating specific timelines.  Or it might have something to do with the single point of contact rules.  If their systems didn't keep track of that stuff or if was kept track of poorly, then it could be difficult to determine compliance?

 

It could have something to do with loans being moved from one platform to another.

 

I couldn't figure out it based on reading the documents on the California DBO's website.  The website is a little sloppy because they've been changing dates around on it.

https://www.changedetection.com/log/gov/ca/dbo/ocwenloanservicingllc_log.html

[jay21]

Question for the shorts: what do you think the risk/reward is here? In terms of business scenarios, not the price points you structured you short.

[Guest roark33]

I would encourage any interested in OCN or ASPS to read the agreement with DFS.  See link below. 

 

http://www.dfs.ny.gov/about/ea/ea141222.pdf

 

I think many may be overlooking the fact that NY was able to extract 10k per household that was foreclosed on in NY state from OCN.  This wasn't borrower mortgage modification or soft dollars, but money that OCN will have to cut a check to the former homeowner. 

 

I am too lazy to figure out the number of foreclosed homes OCN has worked on, but the amount is large.  I can't imagine why every moderate to left-leaning AG isn't getting in line to get paid.  NY has laid out a list of grievances and it will be easy to find the "smoking gun."--which in the NY case was the backdated letters. 

 

The only bargaining chip that OCN has left is bankruptcy and threat of "customer disruption."  I think that is becoming less of a threat as more evidence comes out that the customers are currently being disrupted through the bad treatment from OCN/ASPS and therefore switching to another servicer wouldn't be that bad after all. 

 

As for run-off value, I am really curious if anyone has ever invested in a company in the past 10 years (besides FUR) that was a good deal due to an actual run-off of the company.  I think that valuation technique is the unicorn of investing.

 

 

[guowei58]

I would encourage any interested in OCN or ASPS to read the agreement with DFS.  See link below. 

 

http://www.dfs.ny.gov/about/ea/ea141222.pdf

 

I think many may be overlooking the fact that NY was able to extract 10k per household that was foreclosed on in NY state from OCN.  This wasn't borrower mortgage modification or soft dollars, but money that OCN will have to cut a check to the former homeowner. 

 

I am too lazy to figure out the number of foreclosed homes OCN has worked on, but the amount is large.  I can't imagine why every moderate to left-leaning AG isn't getting in line to get paid.  NY has laid out a list of grievances and it will be easy to find the "smoking gun."--which in the NY case was the backdated letters. 

 

The only bargaining chip that OCN has left is bankruptcy and threat of "customer disruption."  I think that is becoming less of a threat as more evidence comes out that the customers are currently being disrupted through the bad treatment from OCN/ASPS and therefore switching to another servicer wouldn't be that bad after all. 

 

As for run-off value, I am really curious if anyone has ever invested in a company in the past 10 years (besides FUR) that was a good deal due to an actual run-off of the company.  I think that valuation technique is the unicorn of investing.

 

State AGs have already released OCN from errors and omissions in the servicing process.  this was a part of the National Mortgage Settlement. 

 

State AGs need to prove fraudulent intent and have to go after OCN on a criminal basis.  What do you think?  is this likely?

[Guest roark33]

Why does everything cite the national mortgage settlement as cover that OCN will not be a target of further state proceedings.  NY signed the national mortgage settlement also...Did not stop them...