OCN - Ocwen Financial

[Guest roark33]

 

The "amendment to the term loan" is VERY interesting. The SSTL required that cash derived from sales of the agency MSRs must go towards paying down the SSTL. Did they totally remove this requirement? What will they do with the money?? What is the financial covenant they increased?

 

 

Ocwen has agreed to an accelerated repayment schedule for cash received from asset sales.  --From the release. 

 

Most likely, Ocwen agreed to use all cash from sale of MSRs to pay down debt in accelerated manner, not the other way around....

 

[ItsAValueTrap]

Obligatory weekly material OCN event: http://finance.yahoo.com/news/ocwen-financial-corporation-provides-significant-211840218.html

 

 

This release is quite interesting. Some takeaways and questions I have:

 

64m in uncollectable receivables-- what is this?

 

$45B UPB Agency sale-- that was fast! The $550m for 55B price seems to meet Ocwen's previous claims about the "fair market value" of their Agency MSRs of $1.5B or so relative to their $1.1B carrying value.

 

The "amendment to the term loan" is VERY interesting. The SSTL required that cash derived from sales of the agency MSRs must go towards paying down the SSTL. Did they totally remove this requirement? What will they do with the money?? What is the financial covenant they increased?

 

If they are not using the money to pay down debt, perhaps they will repurchase shares? The final line about hiring Barclays to "advise regarding adjustments to its capital structure" make me wonder. Or maybe they will pay a special dividend?

 

Finally it appears the private label RMBS trusts that terminated Ocwen have about $280m in UPB (0.07% x $400B). So nothing material has happened as far as terminations go... yet. Also hilarious that they will actually book a gain due to the deferred servicing fees.

 

The $550M number might include servicing advances that are freed up.  Ocwen is talking about liquidity, not what they sold their MSRs for???

[mcmaaaaath]

 

The "amendment to the term loan" is VERY interesting. The SSTL required that cash derived from sales of the agency MSRs must go towards paying down the SSTL. Did they totally remove this requirement? What will they do with the money?? What is the financial covenant they increased?

 

 

Ocwen has agreed to an accelerated repayment schedule for cash received from asset sales.  --From the release. 

 

Most likely, Ocwen agreed to use all cash from sale of MSRs to pay down debt in accelerated manner, not the other way around....

 

Ah  yes, don't know how I missed that. That makes more sense.

[mcmaaaaath]

Obligatory weekly material OCN event: http://finance.yahoo.com/news/ocwen-financial-corporation-provides-significant-211840218.html

 

 

This release is quite interesting. Some takeaways and questions I have:

 

64m in uncollectable receivables-- what is this?

 

$45B UPB Agency sale-- that was fast! The $550m for 55B price seems to meet Ocwen's previous claims about the "fair market value" of their Agency MSRs of $1.5B or so relative to their $1.1B carrying value.

 

The "amendment to the term loan" is VERY interesting. The SSTL required that cash derived from sales of the agency MSRs must go towards paying down the SSTL. Did they totally remove this requirement? What will they do with the money?? What is the financial covenant they increased?

 

If they are not using the money to pay down debt, perhaps they will repurchase shares? The final line about hiring Barclays to "advise regarding adjustments to its capital structure" make me wonder. Or maybe they will pay a special dividend?

 

Finally it appears the private label RMBS trusts that terminated Ocwen have about $280m in UPB (0.07% x $400B). So nothing material has happened as far as terminations go... yet. Also hilarious that they will actually book a gain due to the deferred servicing fees.

 

The $550M number might include servicing advances that are freed up.  Ocwen is talking about liquidity, not what they sold their MSRs for???

 

I dont think this would include servicing advances. When I spoke with their IR guy a month or two ago, he said that the plan was to sell only the performing Agency MSRs, which wouldn't have any advances.

 

Also management originally commented that winding down the agency business would free up $200-300m of advances across the entire Agency portfolio. So even if this sale DID include a proportional amount of the advances they think they can "free up", it would amount to like $60 or $70m.

 

From the Dec update call:

 

We believe this approach optimizes shareholder value. As we sell agency MSRs, we expect to book gains, given we

carry the majority our MSRs at the lower of cost or market. We estimate the difference between our $1.1 billion book

value and fair value of our agency MSRs is between $400 million and $500 million. In addition to potentially realizing

these gains, we also have the potential to free up $200 million to $300 million currently allocated to fund agency

advances.

 

[jay21]

1% of UPB is not out of line with other MSR transactions, might be low depending how rates move but not off the mark.

[Guest roark33]

I will be the first to admit that I am not a fan of Ocwen, but I am never opposed to changing my mind. 

 

The good: no huge legal settlements in the offing.  This is their disclosure.  I am somewhat surprised by this, but if you take them at their word, this is great news.

 

The sale of agency MSR is not really a surprise.  Additionally, the price isn't much of news, because the agency market is much more liquid, but all in all, that's good new also. 

 

Goodwill write-down. This is confusing to me.  Write-downs are a function of the decline in the value of some assets on the books below their carrying value.  If the MSRs are above book value, as advertised by Ocwen in the press release, why the need to write-down goodwill? 

 

Just thought I would put that question out there and see if anyone had any specific thoughts.

 

 

[ItsAValueTrap]

I will be the first to admit that I am not a fan of Ocwen, but I am never opposed to changing my mind. 

 

The good: no huge legal settlements in the offing.  This is their disclosure.  I am somewhat surprised by this, but if you take them at their word, this is great news.

 

I feel like the California DBO might do something to Ocwen once the monitor investigates Ocwen.  The monitor will be hired to find problems and I think the monitor will find problems because all servicers make errors.

 

 

Goodwill write-down. This is confusing to me.  Write-downs are a function of the decline in the value of some assets on the books below their carrying value.  If the MSRs are above book value, as advertised by Ocwen in the press release, why the need to write-down goodwill? 

 

Goodwill results from acquisitions.  Ocwen bought Rescap, Homeward, and Liberty (and other companies like Homeq).

 

See page 66 of the 10-K for information on where goodwill is allocated.

http://www.sec.gov/Archives/edgar/data/873860/000144530514000799/a2013123110k.htm

 

Management will be writing down all of the goodwill for the servicing businesses it seems.

It may write down the goodwill for originations too.

 

The Ocwen press release states:

A $370 – $420 million non-cash charge to write-off goodwill.

This corresponds to the goodwill for the servicing and originations businesses.

[Guest roark33]

The other point I noticed about cash flow and liquidity is that Ocwen said they would not be exercising their calls rights.  If these are so valuable, I am unsure why Ocwen isn't doing this asap. 

 

 

[BeerBBQ]

 

Goodwill write-down. This is confusing to me.  Write-downs are a function of the decline in the value of some assets on the books below their carrying value.  If the MSRs are above book value, as advertised by Ocwen in the press release, why the need to write-down goodwill? 

 

 

I recall reading somewhere that sustained declines in the stock price can somehow contribute to Goodwill impairments?

[abitofvalue]

 

Goodwill write-down. This is confusing to me.  Write-downs are a function of the decline in the value of some assets on the books below their carrying value.  If the MSRs are above book value, as advertised by Ocwen in the press release, why the need to write-down goodwill? 

 

 

I recall reading somewhere that sustained declines in the stock price can somehow contribute to Goodwill impairments?

 

didnt they also buy all kinds of legacy systems / infrastructure etc? My understanding was that part of the issues at OCN were because OCN would make huge acquisitions and then just try to patch / connect the old systems to OCN rather than do a full transfer. Makes sense that all those would need to be written down massively given the issues that come out in the last year.

[abitofvalue]

Anyone have thoughts on what these uncollectable receivables comprise of?  I don't understand how they ended up with these.  Advances are supposedly super-duper secure0 per all the Hlss presentations, so it shouldn't be an advance but what other receivables does OCN have. And how did they end up with a 60M writedown on these? 

 

Think they have had some issues related to noncollectable receivables in prior quarters but can't recall how they described it then so hoping someone has insight on this.

[Liberty]

https://glennchan.wordpress.com/2015/03/03/ocn-asps-nsm-and-inflated-fees/

[Guest roark33]

Two points:

Uncollectible receivables: I have never understood this.  The best explanation I received from someone who used to work at nationstar was that fees can run up over the amount that a property can sell for.  This sounds crazy, for example, fees totaling 20k, for a property that only sells for 10k.  They are supposed to be able to dip into the pool of loans to recoup that, but some PSAs do not allow this.  Ocwen's systems are supposed to monitor this and stop accruing fees, but some houses require ongoing maintenance, etc.  I am still not sure if this is right.

 

Second: there is a nice post about OCN and ASPS here.  Anyone bullish on these names should read it, because it isn't from me,  but instead one of the "bulls" and the winds are changing in his mind.

 

https://glennchan.wordpress.com/2015/03/03/ocn-asps-nsm-and-inflated-fees/#more-4867

[philly value]

My position in December after the settlement / Erbey stepping down was that there is extreme uncertainty in the future profitability of servicers and that Altisource was hard to value given that it didn't have hard assets / would suffer from OCN's portfolio shrinking. That was a reason to abandon my long position in OCN near $20 and with ASPS in the low $40s. But with OCN in the free fall a few weeks ago around $6, you aren't betting on future profitability but rather liquidation value, and so I had to dip my paws again. Roark and other bears, do you have a quantitative argument supporting a scenario in which OCN is not worth $8 per share?

[valueinvestor82]

http://www.nationalmortgagenews.com/news/servicing/with-ocwen-enforcement-is-a-balancing-act-1045239-1.html

 

"Too much enforcement could cripple the company and cause major headaches for millions of homeowners..." The article also talks about a 2009 bankruptcy of a servicer that resulted in so much chaos that homeowners were calling the state in a panic, unsure of where to send mortgage payments.

 

I've always said, the "worst case" scenario painted by the OCN haters is nowhere close to reality, because the dire picture painted would be disastrous for every single stakeholder (homeowner, government regulator, OCN) except the short sellers.

[Guest roark33]

I think the downside is clear in terms of forced terminations/transfers, regulatory fines and reduced profitability.  The upside is that Ocwen is able to sell off enough of the portfolio at good enough prices to have cash to "re-invent" their business model.  Even if you think the upside scenario is likely, how do you come up with any sort of cash flow profile on a company that will have half the UPB, no growth prospects, and significantly reduced profitability, with a lot of potential tail-risks.  I am not short Ocwen (I like ASPS as a better short in the 30s), but I think the troubles are with Ocwen. 

 

If someone wants to speculate in the 6s or even 8s that there is upside, you may be right, and it may work out, but I think there are better long candidates out there. 

 

I really don't like the book value or worth more than run-off valuations arguments.  But that's just my two cents...

 

 

[Patmo]

I think the downside is clear in terms of forced terminations/transfers, regulatory fines and reduced profitability.  The upside is that Ocwen is able to sell off enough of the portfolio at good enough prices to have cash to "re-invent" their business model.  Even if you think the upside scenario is likely, how do you come up with any sort of cash flow profile on a company that will have half the UPB, no growth prospects, and significantly reduced profitability, with a lot of potential tail-risks.  I am not short Ocwen (I like ASPS as a better short in the 30s), but I think the troubles are with Ocwen. 

 

If someone wants to speculate in the 6s or even 8s that there is upside, you may be right, and it may work out, but I think there are better long candidates out there. 

 

I really don't like the book value or worth more than run-off valuations arguments.  But that's just my two cents...

Well as far as I'm concerned this type of valuation might be wrong but it paid off in this case. I stuck to the plan and bought a few shares at 6, and sold at  a bit above 9 for a quick 50% gain. Now the problems are somebody elses too.

[guowei58]

Generally better news from the press release yesterday.

 

1) Agency portfolio coming down faster than expected.  Pricing is good. 

 

2) Paying down SSTL.  SSTL loan docs already stipulates that all asset sales goes to pay down SSTL, so no change in my opinion on their amendment.

 

3) Goodwill write down was highly anticipated.

 

4) The transfer of servicing for the two RMBS deals actually accretive to book value.  I'm surprised this would be the case.  I didn't take the deferred servicing fee into account.  SO better than expected. 

 

5) there's $550M of deferred servicing fees not recognized in book value.  I estimate there's 250M of net MSR (net of the HLSS debt) against the nonagency portfolio.  Were those two RMBS deals special that allowed them to create a gain for OCN when the servicing was transferred away?

 

6) No call right deals in the near-term.  This is a negative.

 

7) strategic review could be a negative or positive. 

 

Big risks still around 1) RMBS bondholder litigation, 2) BlueMountain litigation and 3) ability to comply with the National mortgage Settlement.  Out of the three, I think the compliance with National Mortgage Settlement is the biggest near-term risk.  The two litigation are risks too, but I don't have a good handle on them.

 

Upside:  things eventually normalize.  profitability for OCN becomes clear.  NSM trades at 2x book value now.  so maybe OCN will be a $25-30 stock in 2-3 years...

 

Downside: fraud, additional compliance issues, RMBS bondholders win a big settlement.  stock goes to zero.

 

The big question is what probabilities do you assign to the upside case vs. the downside case.  My probability for the upside case has gone up after this press release.

 

 

 

[ItsAValueTrap]

Some random thoughts.

 

1- The best case scenario for Ocwen is if another servicer goes bankrupt.  (Is this a horrible thing to say?)  The oversupply of MSRs versus servicing capacity would be a net positive for Ocwen in the long run because Ocwen has to buy subprime MSRs to stay in that line of business.

 

Other servicers getting into trouble is also good for Ocwen.

 

2- The biggest problem in my opinion was Benjamin Lawsky.  By blocking Ocwen's ability to buy MSRs, he is basically forcing Ocwen into runoff.  We'll have to wait and see how onerous the benchmarks will be for Ocwen (uh... hopefully the NY DFS appoints a monitor ASAP).  On top of that, Ocwen has a costly regulatory burden.

 

3- I am not too worried that the issues with the CFPB will be a big deal.  They haven't been throwing a lot of negative rhetoric at Ocwen like Lawsky did.  Their fines historically were much lighter than the NY DFS.

 

4- The RMBS bondholders didn't actually sue Ocwen yet.  Losing MSRs due to the servicer rating hit is a bigger issue.

 

5- I am worried about the California DBO.  And I think Ocwen's CEO is worried too.  Once the monitor is in place, the California DBO will have lots of ammo to use against Ocwen.  I don't see how the settlement relates to the wrongdoing that Ocwen committed (not providing enough documentation to the DBO).  Unfortunately I couldn't figure out more about how Ocwen's documentation was lacking.

 

The DBO preventing Ocwen from buying MSRs is something that investors should pay attention to.  It is something that could theoretically slowly push Ocwen out of the subprime MSR business.

 

6- The valuation of both Ocwen and Altisource are kinda low.

 

The problem is that these companies went from good management and high growth and high returns on capital to bad management, being forced to shrink, and regulators saddling Ocwen with expenses.

 

7- Everybody took kickbacks on force-placed insurance.  OCN had little transparency about it and went to great lengths to hide it because they didn't want to pay a huge settlement over it like the big banks.  Presumably, Ocwen will stop involving itself in kickbacks because of regulatory scrutiny and how the NY DFS pulled a dick move on them by exposing their practices even though they didn't do kickbacks in New York.

[Guest roark33]

I really think you do a great analysis of these issues.  I have a bone to pick with the idea that somehow the "new" management is bad.  Ron Faris has been at Ocwen his whole career basically, and been President since 2001 and CEO since 2010.  Nothing has changed in the mgmt style.  Faris and Erbey built the company and if you don't like how it is run, it isn't new management, the tide has just went out and we are seeing who is swimming naked...

 

Ronald M. Faris. Mr. Faris has served as a Director of Ocwen since May 2003, as the President of Ocwen since March 2001 and as Chief Executive Officer since October 2010. Mr. Faris served as Executive Vice President of Ocwen from May 1998 to March 2001, as Senior Vice President from May 1997 to May 1998 and as Vice President and Chief Accounting Officer of Ocwen from June 1995 to May 1997. From March 1991 to July 1994, he served as Controller for a subsidiary of Ocwen.

[mcmaaaaath]

I really think you do a great analysis of these issues.  I have a bone to pick with the idea that somehow the "new" management is bad.  Ron Faris has been at Ocwen his whole career basically, and been President since 2001 and CEO since 2010.  Nothing has changed in the mgmt style.  Faris and Erbey built the company and if you don't like how it is run, it isn't new management, the tide has just went out and we are seeing who is swimming naked...

 

Ronald M. Faris. Mr. Faris has served as a Director of Ocwen since May 2003, as the President of Ocwen since March 2001 and as Chief Executive Officer since October 2010. Mr. Faris served as Executive Vice President of Ocwen from May 1998 to March 2001, as Senior Vice President from May 1997 to May 1998 and as Vice President and Chief Accounting Officer of Ocwen from June 1995 to May 1997. From March 1991 to July 1994, he served as Controller for a subsidiary of Ocwen.

 

I agree. Its ValueTrap's opinion, not management, that has changed. 

[ItsAValueTrap]

I really think you do a great analysis of these issues.  I have a bone to pick with the idea that somehow the "new" management is bad.  Ron Faris has been at Ocwen his whole career basically, and been President since 2001 and CEO since 2010.  Nothing has changed in the mgmt style.  Faris and Erbey built the company and if you don't like how it is run, it isn't new management, the tide has just went out and we are seeing who is swimming naked...

 

Ronald M. Faris. Mr. Faris has served as a Director of Ocwen since May 2003, as the President of Ocwen since March 2001 and as Chief Executive Officer since October 2010. Mr. Faris served as Executive Vice President of Ocwen from May 1998 to March 2001, as Senior Vice President from May 1997 to May 1998 and as Vice President and Chief Accounting Officer of Ocwen from June 1995 to May 1997. From March 1991 to July 1994, he served as Controller for a subsidiary of Ocwen.

 

C'mon it's not like Erbey sat around and did nothing.  Anyways... maybe I'm crazy but I really think that both Ocwen and Altisource should buy back their debt.  John Malone would do that in a heartbeat.

 

If you're going bankrupt... you should probably buy back your high yield debt.  (Unless you want to double down on something highly speculative and/or plan on selling shares.)

If you're not going bankrupt... you should buy it back.

 

Maybe I'm wrong?  I have not read the terms of their debt.  However, if they're allowed to buy back shares (both OCN and ASPS bought back shares) then they should be allowed to buy back debt right?

[morningstar]

I really think you do a great analysis of these issues.  I have a bone to pick with the idea that somehow the "new" management is bad.  Ron Faris has been at Ocwen his whole career basically, and been President since 2001 and CEO since 2010.  Nothing has changed in the mgmt style.  Faris and Erbey built the company and if you don't like how it is run, it isn't new management, the tide has just went out and we are seeing who is swimming naked...

 

Ronald M. Faris. Mr. Faris has served as a Director of Ocwen since May 2003, as the President of Ocwen since March 2001 and as Chief Executive Officer since October 2010. Mr. Faris served as Executive Vice President of Ocwen from May 1998 to March 2001, as Senior Vice President from May 1997 to May 1998 and as Vice President and Chief Accounting Officer of Ocwen from June 1995 to May 1997. From March 1991 to July 1994, he served as Controller for a subsidiary of Ocwen.

 

C'mon it's not like Erbey sat around and did nothing.  Anyways... maybe I'm crazy but I really think that both Ocwen and Altisource should buy back their debt.  John Malone would do that in a heartbeat.

 

If you're going bankrupt... you should probably buy back your high yield debt.  (Unless you want to double down on something highly speculative and/or plan on selling shares.)

If you're not going bankrupt... you should buy it back.

 

Maybe I'm wrong?  I have not read the terms of their debt.  However, if they're allowed to buy back shares (both OCN and ASPS bought back shares) then they should be allowed to buy back debt right?

 

The term loans generally no, the company can't buy them in the open market. Ocwen could buy back its bonds but they only yield under 10 pct right now.

[Patmo]

I really think you do a great analysis of these issues.  I have a bone to pick with the idea that somehow the "new" management is bad.  Ron Faris has been at Ocwen his whole career basically, and been President since 2001 and CEO since 2010.  Nothing has changed in the mgmt style.  Faris and Erbey built the company and if you don't like how it is run, it isn't new management, the tide has just went out and we are seeing who is swimming naked...

 

Ronald M. Faris. Mr. Faris has served as a Director of Ocwen since May 2003, as the President of Ocwen since March 2001 and as Chief Executive Officer since October 2010. Mr. Faris served as Executive Vice President of Ocwen from May 1998 to March 2001, as Senior Vice President from May 1997 to May 1998 and as Vice President and Chief Accounting Officer of Ocwen from June 1995 to May 1997. From March 1991 to July 1994, he served as Controller for a subsidiary of Ocwen.

 

I agree. Its ValueTrap's opinion, not management, that has changed.

 

Indeed, it wasn't ever a high growth with great management business to begin with. Mortgage servicing fundamentally has nothing specially attractive about it, hell the banks went out of their way to get rid of this business. While it's easier to say when the cat is out of the bag, one has to appreciate the dubiousness of 50-150% yoy revenue increases and 35-50% operating margins in this industry. People wanted to see another Geico so hard they ignored the possibility of this company being just another greedy banker stretching the sauce, despite the fact that Erbey and co's prior venture turned out to be just that. Fool me once, shame on you. Fool me twice, shame on me...

[ItsAValueTrap]

I really think you do a great analysis of these issues.  I have a bone to pick with the idea that somehow the "new" management is bad.  Ron Faris has been at Ocwen his whole career basically, and been President since 2001 and CEO since 2010.  Nothing has changed in the mgmt style.  Faris and Erbey built the company and if you don't like how it is run, it isn't new management, the tide has just went out and we are seeing who is swimming naked...

 

Ronald M. Faris. Mr. Faris has served as a Director of Ocwen since May 2003, as the President of Ocwen since March 2001 and as Chief Executive Officer since October 2010. Mr. Faris served as Executive Vice President of Ocwen from May 1998 to March 2001, as Senior Vice President from May 1997 to May 1998 and as Vice President and Chief Accounting Officer of Ocwen from June 1995 to May 1997. From March 1991 to July 1994, he served as Controller for a subsidiary of Ocwen.

 

I agree. Its ValueTrap's opinion, not management, that has changed.

 

Indeed, it wasn't ever a high growth with great management business to begin with. Mortgage servicing fundamentally has nothing specially attractive about it, hell the banks went out of their way to get rid of this business. While it's easier to say when the cat is out of the bag, one has to appreciate the dubiousness of 50-150% yoy revenue increases and 35-50% operating margins in this industry. People wanted to see another Geico so hard they ignored the possibility of this company being just another greedy banker stretching the sauce, despite the fact that Erbey and co's prior venture turned out to be just that. Fool me once, shame on you. Fool me twice, shame on me...

 

Which business are you referring to?

 

Ocwen used to be in the business of buying non-performing loans.  Then it exited that business and stayed out even after it debanked and didn't have to deal with the national regulator (office of thrift supervision).  Later, Ocwen spun off Altisource which spun off AAMC and RESI.  AAMC and RESI did quite well for shareholders who held onto their spinoff shares.

 

On a GAAP basis, Ocwen lost huge sums of money on distressed commercial real estate and on affordable housing.  Those are their biggest losers.  (Maybe there's a lot of irony in Ocwen losing money on affordable housing.)

 

Ocwen also used to originate subprime loans.  It held onto residuals so it had skin in the game.  It got burned for doing this.