OCN - Ocwen Financial

[APG12]

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...

 

It was certainly high growth but the growth largely came from arbitrary capital standards and regulations imposed on banks. At the end of the day, the industry is controlled by bureaucrats. There is little rule of law: transactions can be put on hold willy-nilly, business models destroyed, shareholder wealth extorted, fascistic 'monitors' installed, and licenses revoked by a large number of agencies and offices with contradictory goals. The government giveth and the government taketh away.

[mcmaaaaath]

Interesting tidbit on the ASPS call this morning-- ASPS management seemed skeptical about the NRZ/ HLSS deal in terms of NRZ's commitment to keep Ocwen as servicer. The quote was "NRZ and HLSS said all the right things about wanting to work with Ocwen, but we'd like to see that in writing".

 

 

[ItsAValueTrap]

Interesting tidbit on the ASPS call this morning-- ASPS management seemed skeptical about the NRZ/ HLSS deal in terms of NRZ's commitment to keep Ocwen as servicer. The quote was "NRZ and HLSS said all the right things about wanting to work with Ocwen, but we'd like to see that in writing".

 

What Shepro actually said:

We also appreciate New Residential's statements of commitment to Ocwen in both the call discussing the transaction and New Residential's earnings call. Of course, we think these commitments should be memorialized in writing.

 

I suppose if HLSS/NRZ 'memorializes it in writing', they would be giving away a free option?  So Ocwen would presumably have to pay for that?

[ItsAValueTrap]

Interesting tidbit on the ASPS call this morning-- ASPS management seemed skeptical about the NRZ/ HLSS deal in terms of NRZ's commitment to keep Ocwen as servicer. The quote was "NRZ and HLSS said all the right things about wanting to work with Ocwen, but we'd like to see that in writing".

 

What Shepro actually said:

We also appreciate New Residential's statements of commitment to Ocwen in both the call discussing the transaction and New Residential's earnings call. Of course, we think these commitments should be memorialized in writing.

 

I suppose if HLSS/NRZ 'memorializes it in writing', they would be giving away a free option?  So Ocwen would presumably have to pay for that?

 

From the conf call

 

Q:

  And then just one last thing, can you just expand on your comments at the beginning of the call about memorializing in writing some of the commitments that were made on the NRZ-HLSS merger call?

 

A:

  Sure. There's not much more we want to say beyond what we said in the prepared remarks. But I think, look, NRZ and HLSS said all the right things, at least from Altisource's perspective, in wanting to work with -- which obviously benefits Altisource. We would love to see that, those commitments made in writing and we'll leave it to HLSS and NRZ and -- as to how they move forward.

[namo]

Has anyone come up with figures regarding how much NRZ "firing" OCN would impact OCN?

[ItsAValueTrap]

Circling back to the California DBO.  It really looks like they are setting themselves up to shake down Ocwen.  Ocwen agreed to something dopey when it agreed to stop buying MSRs, effectively pushing itself into run-off.  The DBO still has them by the balls (so to speak).

 

Reasons why I think that the DBO has been very, very, very unreasonable:

- It shouldn't have threatened to revoke Ocwen's license unless what it did was really egregious.  As far as I can tell, the DBO wasn't sure if Ocwen was complying with HBOR.  Not that egregious.

- There was no transparency about what documentation Ocwen did not provide to the DBO.  If you are another mortgage servicer, how are you supposed to know whether or not you are compliant with what the DBO wants?

- The settlement doesn't seem to have much to do with the crime.  Firstly, Ocwen paid $2.5M which isn't even a law.  Secondly, they've agreed to be examined on a number of issues that don't seem to have anything to do with California laws as written.

- It looks like Ocwen will be severely shaken down on a very arbitrary set of open-ended rules.... none of which are written down anywhere.

 

There is some evidence that the California DBO and NY DFS are comparing notes and talking to each other.  For example, the DBO seems to be contemplating rules on Bitcoin.

http://dealbook.nytimes.com/2015/01/28/coinbase-a-bitcoin-exchange-is-operating-without-licenses-so-far/?_r=0

 

Ocwen appears to be scared about its liquidity.  Like they're afraid that a lot of subservicing and MSRs will be pulled for them and that they will have problems funding their advances.  If they run into big problems with the DBO then I think that could happen.

[valueinvestor82]

IAValueTrap, I appreciate your thoughtful contributions always. It's good to consider the risks, which can be be irrational and unpredictable when government regulators get involved, which you (and many others) have alluded to. I tend to agree with your assessment, but then I always flip back to settling more on the bull side when I consider the following:

OCNs mortgages in California are largely subprime, from my understanding. There aren't as many servicers set up to handle a large number of subprime mortgages as on the agency side, which could make transfer difficult. That and a number of other potentially highly disruptive issues tells me that CA will not want to take such action as to give OCN a defacto "death penalty." Even NY has said as recently as January that they look forward to working constructively with OCN for the long term, which would imply (in my view) that they do plan to open up on acquiring servicing rights. Otherwise, what is long term? Forcing runoff mode for more than a few months would seem to imply short term only, not long term, since acquiring new rights is fundamental to long term survival.

 

I just hope (and believe most likely) that any future action taken by the DBO will be manageable, you know, a nonlethal parasite. As a fan of the free market and the rule of law, the entire OCN situation and the out of control nature of the administrative arm of the government in all areas of the "private" sector drives me nuts.

[Guest roark33]

In response to the CA DBO--it looks like the DBO made a document request and OCN brushed them aside.  It may not be transparent to us what was requested, but I have to believe that Ocwen knew exactly what they wanted. 

[ItsAValueTrap]

In response to the CA DBO--it looks like the DBO made a document request and OCN brushed them aside.  It may not be transparent to us what was requested, but I have to believe that Ocwen knew exactly what they wanted.

 

According to the documents on the DBO website:

- Ocwen was late.

- Ocwen partially complied with the requests for documentation.

It's unclear to me as to why the DBO was unsatisfied.

 

I think it's likely that Ocwen tried its hardest to comply.  It doesn't make a lot of sense for them not to comply.  Maybe it had problems with its IT systems that made it difficult for them to produce the documentation requested- I don't know.

 

But anyways... what does the settlement have to do with the lack of documentation?  I don't get how it's a reasonable response.  It really looks like they are out for blood and they are going to use the monitor to dig up dirt on Ocwen so they can shake them down.

 

since acquiring new rights is fundamental to long term survival.

Well... clearly the NY DFS and DBO don't care about this.  The NY DFS originally blocked the Wells fargo deal.  In the end, it will be likely that the NY DFS blocked Ocwen's lifeblood for 2 years.  Once the NY DFS appoints a monitor for Ocwen, it will likely be at least 120/210 days before Ocwen can start buying MSRs again.

 

There aren't as many servicers set up to handle a large number of subprime mortgages as on the agency side, which could make transfer difficult. That and a number of other potentially highly disruptive issues tells me that CA will not want to take such action as to give OCN a defacto "death penalty."

They already threatened to issue a "death penalty" by threatening to revoke their license.

 

I know it's ridiculous but... that's what they did.  I guess Erbey wrongly assumed that Lawsky wouldn't do something ridiculous.  But he did so... Erbey is now forced out of his company.

[Guest roark33]

I almost can't take it anymore, "Ocwen tried its hardest to comply.."  Really??  After all this, you are giving Ocwen the benefit of the doubt.  How about this, they asked for specific documentation regarding something that they suspected Ocwen not complying with whatever regulation, who knows.  Ocwen didn't provide the complete documentation because it would show they were guilty of violating said regulation.  Ocwen thought it was better to just drag their feet and maybe the regulator would just go away, instead of handing over the smoking gun...That scenario seems much more likely to comport with what we objectively know about Ocwen.

[ItsAValueTrap]

I almost can't take it anymore, "Ocwen tried its hardest to comply.."  Really??  After all this, you are giving Ocwen the benefit of the doubt.  How about this, they asked for specific documentation regarding something that they suspected Ocwen not complying with whatever regulation, who knows.  Ocwen didn't provide the complete documentation because it would show they were guilty of violating said regulation.  Ocwen thought it was better to just drag their feet and maybe the regulator would just go away, instead of handing over the smoking gun...That scenario seems much more likely to comport with what we objectively know about Ocwen.

 

We know they're incompetent and sloppy.  For example, look at their work with CFPB compliance.  The monitor commented that their work was sloppy at best... maybe there's more.

It's not clear whether or not they were trying to hide some nefarious evidence or whatever.  I don't even know what they can hide at this point given the colonoscopy by the NY DFS.

 

In any case, I don't think it even matters.  The California DBO might go after them hard regardless of wrongdoing, then the ratings agency drops Ocwen's ratings, and then Ocwen might lose some MSRs.  Because it uses short-term funding, it might hit a nasty liquidity squeeze??????

[ItsAValueTrap]

Not that I think this will matter but... apparently Ocwen/Altisource may have took less in kickbacks than its peers.

 

Walter had the following in Insurance revenue:

$71.010 M - FY2014

$84.478 M - FY2013

$73.249 M - FY2012

 

Ocwen should come out to somewhere around $36-61M ish / year.  The related party transactions disclose how much it was getting from Altisource.  The Altisource press release announcing the cancellation of the lender placed insurance "brokerage" states the EPS hit.

A 50 to 65 cents EPS hit translates to roughly $11.82M to $15.266M per quarter.  So $61M / year

 

*Walter has fewer delinquencies and fewer loans than Ocwen.  Taking that into account, Walter took significantly more than Ocwen.

**Everyone's insurance commissions (or similar nonsense payments) were lower in FY2014 because the GSEs banned it starting June 2014.  Walter has a higher percentage of agency loans than Ocwen.

[valueinvestor82]

ValueTrap, from your balancing of pros/cons, and the previous discussions about $8-$9 being a depressed "liquidation" scenario (barring some massive litigation etc), where do you stand on your opinion of the stock? If you don't mind sharing..it seems that you're too concerned about regulators to want to own the stock, but I could be wrong?

[ItsAValueTrap]

ValueTrap, from your balancing of pros/cons, and the previous discussions about $8-$9 being a depressed "liquidation" scenario (barring some massive litigation etc), where do you stand on your opinion of the stock? If you don't mind sharing..it seems that you're too concerned about regulators to want to own the stock, but I could be wrong?

 

Well I'm starting to think this might be too complicated and esoteric to me.  In October 2014, Lawsky sent Ocwen a letter about the backdated letters.  In that month, Ocwen and ASPS were buying back shares but that was also the month they stopped.  On Oct 30 2014, Ocwen announced its quarterly results and that it would be taking a $100M charge.  The press release didn't really explain how awful the NY DFS settlement would be.

 

But by the end of October 2014, Ocwen and Altisource were no longer backing up the truck to buy back shares.  Erbey must have figured out that Lawsky might go after him hard.  On December 22 2014, Ocwen formally announced its settlement.  To me, somewhere between October to December was a huge turning point in the stock that I missed.  I did not figure out that Ocwen and Altisource were going to be badly hurt by regulators.  I also didn't figure out that the regulation would lead to ratings downgrades, which would lead to the possibility of Ocwen losing MSRs and some of the HLSS subservicing.  Also, Ocwen might have problems with its debt and the covenants on its debt.

 

2- What I don't understand is the possibility that Ocwen might lose MSRs and some of the HLSS subservicing.

To me, it seems that both Ocwen and Altisource are behaving like they're scared.  Both companies are trying to sit on cash and don't have an appetite for repurchasing debt.  I don't get it.  Why are they so concerned about liquidity?

 

3- There's some weird stuff in the legal contracts and the covenants.

 

A significant portion of our non-Agency servicing portfolio servicing agreements contain provisions whereby we could be terminated as servicer without compensation upon the failure of the serviced loans to meet certain portfolio delinquency or cumulative loss thresholds or in the event we fail to maintain required servicer ratings, among other provisions. As a result of the economic downturn of recent years, the portfolio delinquency and/or cumulative loss threshold provisions have been breached by many private-label securitizations in our non-Agency servicing portfolio. Terminations as servicer as a result of a breach of any of these provisions have been minimal. In the event we were terminated as servicer and the Rights to MSRs were sold to HLSS, we would be obligated to compensate HLSS.

 

For example, if the MSRs underlying the HLSS deal are transferred away, I believe that Ocwen has to compensate HLSS (based on the book value of the MSR... which is set out in the contract I think).

 

In hindsight, I guess Ocwen wishes it didn't put certain clauses into its HLSS contract because the servicer ratings thing can snowball and have an effect similar to a run on the bank.

[redwood]

from Merrill lynch report about the liquidity issue.

"Taking actions to keep liquidity available In addition to asset sales, OCN has also amended its debt agreements to ensure near-term liquidity. OCN amended its $1.3B Senior Term Loan to remove restrictions on asset sales as well as permanently modifying financial covenants. The amended agreement requires OCN to use asset sale proceeds to repay the Term Loan on an accelerated basis. In addition, OCN has also arranged for replacement financing for its $450M servicing advance facility that matures in June should OCN not be able to come to an agreement with the current lender. Management’s recent actions suggest lending markets remain open for OCN. "

 

Also more capital maybe needed for slower loan resolutions.

 

"Risks to achieving our price objective are 1) slower loan resolutions could increase the company's capital requirements, 2) changes to the legal or regulatory backdrop, 3) faster prepayments could depress earnings and impair asset values, 4) loss of servicing rights and 5) increase in competition for investments may limit attractive incremental growth opportunities. Execution risk, namely poor asset selection, could also negatively impact shares"

 

 

[mcmaaaaath]

I almost can't take it anymore, "Ocwen tried its hardest to comply.."  Really??  After all this, you are giving Ocwen the benefit of the doubt.  How about this, they asked for specific documentation regarding something that they suspected Ocwen not complying with whatever regulation, who knows.  Ocwen didn't provide the complete documentation because it would show they were guilty of violating said regulation.  Ocwen thought it was better to just drag their feet and maybe the regulator would just go away, instead of handing over the smoking gun...That scenario seems much more likely to comport with what we objectively know about Ocwen.

 

Agreed, and I'm long!

[guowei58]

There's $550M of deferred servicing fee that's not recognized in book value.  All of this related to the non-agency portfolio.  By my math, the book value of the non-agency MSR is $850M.  This is gross, unadjusted for the HLSS debt on OCN's balance sheet.  Net MSR value is only $250M...is the wholesale loss of the nonagency MSR really that big of a deal for OCN from a book value perspective?  The cancellation of servicing by the two RMBS deals actually created a gain for OCN.  Are these two deals special and people don't expect OCN to repeat this miracle for future servicing transfers?

 

Very interesting to me that the market (including all of these knowledgeable people on this site) is reading NRZ transaction so differently from me...would be a good case study a year from now on whether the market is efficient, or I am dead wrong...

[mcmaaaaath]

There's $550M of deferred servicing fee that's not recognized in book value.  All of this related to the non-agency portfolio.  By my math, the book value of the non-agency MSR is $850M.  This is gross, unadjusted for the HLSS debt on OCN's balance sheet.  Net MSR value is only $250M...is the wholesale loss of the nonagency MSR really that big of a deal for OCN from a book value perspective?  The cancellation of servicing by the two RMBS deals actually created a gain for OCN.  Are these two deals special and people don't expect OCN to repeat this miracle for future servicing transfers?

 

Very interesting to me that the market (including all of these knowledgeable people on this site) is reading NRZ transaction so differently from me...would be a good case study a year from now on whether the market is efficient, or I am dead wrong...

 

From a book value perspective, I think your math is dead right. The canceling of ALL of the HLSS MSR's would have the following effects:

 

-removal of $850m ish asset on the balance sheet

-removal of $619m ish liability on the balance sheet

-acceleration of deferred servicing fees of $559m

 

So the net of all that would appear to be a gain of book value. The one thing I wonder about is the last line in the following statement, from their 10-Q:

 

A significant portion of our non-Agency servicing portfolio servicing agreements contain provisions whereby we could be terminated as servicer without compensation upon the failure of the serviced loans to meet certain portfolio delinquency or cumulative loss thresholds or in the event we fail to maintain required servicer ratings, among other provisions. As a result of the economic downturn of recent years, the portfolio delinquency and/or cumulative loss threshold provisions have been breached by many private-label securitizations in our non-Agency servicing portfolio. Terminations as servicer as a result of a breach of any of these provisions have been minimal. In the event we were terminated as servicer and the Rights to MSRs were sold to HLSS, we would be obligated to compensate HLSS.

 

If the rights to the MSRs are sold to HLSS, they are obligated to compensate HLSS? What does that mean?

[guowei58]

If the rights to the MSRs are sold to HLSS, they are obligated to compensate HLSS? What does that mean?

 

OCN obviously is not on the hook if NRZ decides to transfer servicing away from OCN.  It only applies if HLSS/NRZ is replaced as the servicer by RMBS bondholders (and not by NRZ switching out subservicer).  Read section 8.3 of the Master Servicing Agreement between OCN and HLSS.  As that section states, OCN is on the hook to indemnify HLSS under 4 conditions. These provisions seem fair to me.  In the event that RMBS bondholders elect to kick out OCN on a deal due to breaching one of these 4 specific reasons, OCN will need to pay HLSS the BV of the MSR associated with the that deal.  There will be litigation between OCN and HLSS before OCN pays this amount.  The two RMBS deals that switched out OCN did not seem to meet the requirements under Section 8.3, so no indemnification (that's my guess).

 

Btw, the math you outline is not my math.  I don't know how the $550M of deferred servicing fee will be distributed between OCN and HLSS.  Not all of it will accrue to OCN.  My point before is that If the two RMBS deals that switched out OCN were typical, then I would imagine OCN's book value is well protected from servicing transfers.

 

Also Btw, OCN still technically owns the MSR.  They have legal title now pending third party consent.  It's an interesting twist that complicates the analysis. 

 

Any how, the analysis is complicated, but I think the general gist is that the risks are fairly low.

[ItsAValueTrap]

If the rights to the MSRs are sold to HLSS, they are obligated to compensate HLSS? What does that mean?

 

A- So when OCN did the financing deal with HLSS, Ocwen still technically owned the MSRs.  However, it sold rights to the MSRs to HLSS.  HLSS paid for cash flows from Ocwen's MSRs.

 

B- There are some MSRs where Ocwen has all the rights and didn't sell anything to HLSS.

 

Suppose Ocwen loses MSRs because the trustee (based on what the bondholders want under a vote or whatever) kicked Ocwen out as the Master Servicer.  If A applies, then Ocwen has to pay HLSS book value of the MSRs.

If B applies, then Ocwen doesn't have to pay because HLSS doesn't have anything to do with that particular MSR.

 

I suspect that the contract can now seriously hurt Ocwen. 

[guowei58]

If the rights to the MSRs are sold to HLSS, they are obligated to compensate HLSS? What does that mean?

 

A- So when OCN did the financing deal with HLSS, Ocwen still technically owned the MSRs.  However, it sold rights to the MSRs to HLSS.  HLSS paid for cash flows from Ocwen's MSRs.

 

B- There are some MSRs where Ocwen has all the rights and didn't sell anything to HLSS.

 

Suppose Ocwen loses MSRs because the trustee (based on what the bondholders want under a vote or whatever) kicked Ocwen out as the Master Servicer.  If A applies, then Ocwen has to pay HLSS book value of the MSRs.

If B applies, then Ocwen doesn't have to pay because HLSS doesn't have anything to do with that particular MSR.

 

I suspect that the contract can now seriously hurt Ocwen.

 

ValueTrap, the indemnification provision does not seem bad to me.  Looks like you have a different opinion.  the way I read it, it's only under certain conditions that OCN is on the hook.  OCN is not on the hook automatically.  Below is the indemnification language.  Specifically, if RMBS bondholders vote to replace OCN because of a ratings downgrade, then OCN is not on the hook.

 

8.3 Indemnification.

(a) Ocwen shall indemnify and hold harmless Servicer and each officer, director, agent, employee or Affiliate of Servicer (each, a “Servicer Indemnified Party”) from any Loss incurred by Servicer or any such other Person (whether or not resulting from a Third Party Claim) directly or indirectly resulting from (i) a breach of any representation or warranty of Ocwen set forth in this Agreement or any Subservicing Supplement, (ii) Ocwen’s failure to observe and perform any of Ocwen’s duties, obligations, covenants or agreements contained in

this Agreement or any Subservicing Supplement; (iii) any acts or omissions by Ocwen or its employees or agents in performance of its duties or obligations pursuant to this Agreement or any Subservicing Supplement, or (iv) any willful malfeasance, bad faith, fraud or negligence of Ocwen in the performance of its duties hereunder or under any Subservicing Supplement, or the reckless disregard by Ocwen of its obligations or duties hereunder or under any Subservicing Supplement. In particular, it is agreed by the parties that if Servicer is terminated as servicer under any Subject Servicing Agreement as a result of any action described in clauses (i)—(iv) above, Ocwen shall also pay to Servicer, as reasonable and just compensation for such termination, an amount equal to Book Value of the mortgage servicing rights related to such Subject Servicing Agreement as of the date Servicer is terminated, and Servicer shall accept such sum as liquidated damages, and not as penalty, in the event of such a termination.

[ItsAValueTrap]

If the rights to the MSRs are sold to HLSS, they are obligated to compensate HLSS? What does that mean?

 

A- So when OCN did the financing deal with HLSS, Ocwen still technically owned the MSRs.  However, it sold rights to the MSRs to HLSS.  HLSS paid for cash flows from Ocwen's MSRs.

 

B- There are some MSRs where Ocwen has all the rights and didn't sell anything to HLSS.

 

Suppose Ocwen loses MSRs because the trustee (based on what the bondholders want under a vote or whatever) kicked Ocwen out as the Master Servicer.  If A applies, then Ocwen has to pay HLSS book value of the MSRs.

If B applies, then Ocwen doesn't have to pay because HLSS doesn't have anything to do with that particular MSR.

 

I suspect that the contract can now seriously hurt Ocwen.

 

ValueTrap, the indemnification provision does not seem bad to me.  Looks like you have a different opinion.  the way I read it, it's only under certain conditions that OCN is on the hook.  OCN is not on the hook automatically.  Below is the indemnification language.  Specifically, if RMBS bondholders vote to replace OCN because of a ratings downgrade, then OCN is not on the hook.

 

8.3 Indemnification.

(a) Ocwen shall indemnify and hold harmless Servicer and each officer, director, agent, employee or Affiliate of Servicer (each, a “Servicer Indemnified Party”) from any Loss incurred by Servicer or any such other Person (whether or not resulting from a Third Party Claim) directly or indirectly resulting from (i) a breach of any representation or warranty of Ocwen set forth in this Agreement or any Subservicing Supplement, (ii) Ocwen’s failure to observe and perform any of Ocwen’s duties, obligations, covenants or agreements contained in

this Agreement or any Subservicing Supplement; (iii) any acts or omissions by Ocwen or its employees or agents in performance of its duties or obligations pursuant to this Agreement or any Subservicing Supplement, or (iv) any willful malfeasance, bad faith, fraud or negligence of Ocwen in the performance of its duties hereunder or under any Subservicing Supplement, or the reckless disregard by Ocwen of its obligations or duties hereunder or under any Subservicing Supplement. In particular, it is agreed by the parties that if Servicer is terminated as servicer under any Subject Servicing Agreement as a result of any action described in clauses (i)—(iv) above, Ocwen shall also pay to Servicer, as reasonable and just compensation for such termination, an amount equal to Book Value of the mortgage servicing rights related to such Subject Servicing Agreement as of the date Servicer is terminated, and Servicer shall accept such sum as liquidated damages, and not as penalty, in the event of such a termination.

 

I think Ocwen is on the hook if the RMBS noteholders vote to kick Ocwen out as the servicer.

 

So here's what the October 25 2013 sales supplement states:

 

8.6 Additional Indemnification.

(a) Without limiting Seller’s obligations under Article 8 of this Sale Supplement, it is agreed by the parties that if Seller is terminated as servicer under any Deferred Servicing Agreement as a result of any action described in clauses (a) through (e) of Section 8.1 above, Seller shall also pay to Purchasers, as reasonable and just compensation for such termination, an amount equal to the product of

    (i) the Purchase Price for such Deferred Servicing Agreement and

    (ii) the Amortization Percentage for the calendar month in which Seller received notice of such termination,

and Purchasers shall accept such sum as liquidated damages, and not as penalty, in the event of such a termination.

http://www.sec.gov/Archives/edgar/data/1513161/000119312513416011/d619099dex101.htm

 

One of the clauses in Section 8.1 is:

Seller’s failure to observe and perform any of Seller’s duties, obligations, covenants or agreements contained in the Agreement, this Sale Supplement or any other Related Agreement,

 

---

 

What the 10-Q says:

 

    A significant portion of our non-Agency servicing portfolio servicing agreements contain provisions whereby we could be terminated as servicer without compensation upon the failure of the serviced loans to meet certain portfolio delinquency or cumulative loss thresholds or in the event we fail to maintain required servicer ratings, among other provisions. As a result of the economic downturn of recent years, the portfolio delinquency and/or cumulative loss threshold provisions have been breached by many private-label securitizations in our non-Agency servicing portfolio. Terminations as servicer as a result of a breach of any of these provisions have been minimal. In the event we were terminated as servicer and the Rights to MSRs were sold to HLSS, we would be obligated to compensate HLSS.

 

Page 20 of the latest 10-Q shows how much Ocwen has had to pay so far:

 

    In the event of a transfer of servicing to another party related to Rights to MSRs sold to HLSS, we are required to reimburse HLSS at predetermined contractual rates for the loss of servicing revenues. Settlements for Financing liability - MSRs pledged for the three and nine months ended September 30, 2014 includes $2.0 million of such reimbursements.

[BeerBBQ]

Regarding the potential for HLSS/NRZ to transfer servicing away from OCN, why would Erbey have set up a structure where he doesn't have control of a situation that could potentially wipe him out financially?

 

90% of his wealth (as it relates to the erbey complex) is in OCN, ASPS, and AAMC.  Only 3% is in HLSS and he owns 1% of the outstanding there.  It doesn't make sense that he would set up a structure where he has no control or ownership yet that entity could negatively affect 90% of his personal wealth by transferring servicing away from OCN.

 

Am I reading this wrong?

 

Also, on the HLSS/NRZ announcement, the question was asked "Do you have the ability to force the hiring of a sub-servicer other than Ocwen?" and Van VLack's response was "Contractually, that ability would exist, but it's a contractual ability only in my view. "

 

Does anyone know what document this contractual ability resides in (looking for the language that specifically talks about HLSS ability to terminate OCN as sub-servicer) ?  And does this contractual ability only become "live" so to speak once legal title has actually transferred to HLSS?

[ItsAValueTrap]

Regarding the potential for HLSS/NRZ to transfer servicing away from OCN, why would Erbey have set up a structure where he doesn't have control of a situation that could potentially wipe him out financially?

 

90% of his wealth (as it relates to the erbey complex) is in OCN, ASPS, and AAMC.  Only 3% is in HLSS and he owns 1% of the outstanding there.  It doesn't make sense that he would set up a structure where he has no control or ownership yet that entity could negatively affect 90% of his personal wealth by transferring servicing away from OCN.

 

Am I reading this wrong?

 

Also, on the HLSS/NRZ announcement, the question was asked "Do you have the ability to force the hiring of a sub-servicer other than Ocwen?" and Van Exk's response was "Contractually, that ability would exist, but it's a contractual ability only in my view. "

 

Does anyone know what document this contractual ability resides in (looking for the language that specifically talks about HLSS ability to terminate OCN as sub-servicer) ?  And does this contractual ability only become "live" so to speak once legal title has actually transferred to HLSS?

 

See the October 25 2013 sales supplement I linked to earlier

http://www.sec.gov/Archives/edgar/data/1513161/000119312513416011/d619099dex101.htm

 

As to why Erbey did this, I think it was because it seemed like the right thing to do.  At the time, it seemed like a good idea to give HLSS shareholders a reasonable level of protection.

 

To some degree it's a bad contract.  In this specific case, do the HLSS shareholders really need protection?  If you believe that Ocwen can still profitably service the MSRs, then there's no problem.  If Ocwen couldn't profitably service the MSRs, then there would be a problem because losing the servicer would cause a massive disruption and emergency servicing transfers.  (In the past, Ocwen got some MSRs during an emergency transfer because somebody else blew up.)

 

2- In the past, Ocwen was a subprime lender and got burned because it held onto the residuals.  Holding onto residuals is the right thing to do because having skin in the game aligns your interests with the mortgage investors.  In hindsight however, it was the wrong thing to do financially.

 

3- Going further back, Erbey bought interest only securities from Ocwen above market value because he thought that it was the right thing to do.

[philly value]

@BeerBBQ: Sorry I can't add anything substantive here. But the most dangerous assumption that has been uttered repeatedly in the OCN and ASPS threads is the assumption that Erbey was logical and knew what he was doing. It wasn't that long ago when it seemed so obvious that, if Erbey had most of his net worth in OCN and ASPS, and he was aggressively ordering these companies to take on debt and repurchase shares at $30+ and $100+ per share, then he must know that their intrinsic value was far higher than that.