OCN - Ocwen Financial

[Guest roark33]

Thanks, just reading that in 10-k.  I think it is good for OCN regarding the continuation of the relationship, but the main reason for doing an asset deal is that the buyer doesn't have to take on the liabilities. This isn't great for OCN, seems like NRZ didn't want to deal with the unknown or known liabilities related to HLSS and OCN.

[ItsAValueTrap]

Thanks, just reading that in 10-k.  I think it is good for OCN regarding the continuation of the relationship, but the main reason for doing an asset deal is that the buyer doesn't have to take on the liabilities. This isn't great for OCN, seems like NRZ didn't want to deal with the unknown or known liabilities related to HLSS and OCN.

 

It seems like the liabilities might be minimal... in the ballpark of $50M?

 

Concurrently with the execution of the NRZ Purchase Agreement, our Board of Directors adopted and approved a plan of complete liquidation and dissolution (the “Liquidation Plan”), pursuant to which we will

(1) cease our business activities other than such activities that are necessary to carry out the provisions of the Liquidation Plan,

(2) pay or make adequate provision for operating expenses expected to be incurred through the completion of the Liquidation Plan and

(3) distribute to our shareholders in one or more distributions,

(a) the cash received by the Company in the Asset Sale and the net proceeds from the sale of NRZ common stock received by the Company in the Asset Sale, less

(b) amounts used to pay the liabilities of the Company and less a reserve in the amount of $50 million that will be held by the Company at the discretion of the Board to ensure that the Company will be able to meet known and unknown liabilities up to the date of the consummation of the transactions contemplated by the New Merger (as defined below) or,

 

if the transactions contemplated by the New Merger are not consummated, the date of the final liquidating distribution after settlement of the liabilities and to ensure that the Company has available resources in the event that it is necessary to enforce against third parties any contractual or other rights of the Company or its officers or directors.

 

If the New Merger is consummated, our shares will be converted automatically into the right to receive $0.69 per share in cash without interest (the “Merger Consideration”).  If the New Merger is not consummated and post-closing expenses and liabilities do not exceed $50 million, it is anticipated that a further cash distribution will be made to shareholders.

[ItsAValueTrap]

It seems like OCN and ASPS are finally seeing some good news.  This should mean that OCN will not see NRZ/HLSS transfer subservicing away from Ocwen.  This should help somewhat with ocwen's servicing stability and therefore servicer ratings.

 

 

[namo]

8K from Ocwen:

https://www.bamsec.com/filing/101905615000363?cik=873860

 

- OCN will remain servicer for the HLSS mortgages for 2 years at least

 

- if OCN is downgraded to below Average by S&P, it will compensate HLSS/NRZ up to $3M per month

 

- OCN will sell to HLSS/NRZ all the clean-up call rights

I wonder if that has an impact on OCN.

From http://www.nationalmortgagenews.com/news/servicing/ocwen-hands-tied-by-ny-turns-to-cleanup-calls-for-profits-1043500-1.html

I gathered that they can be valuable.

 

- "Ocwen also paid down approximately $74 million of its senior secured term loan."

 

I also saw:

"Among other things, it requires additional time to prepare information related to its ability to operate as a going concern"

Is that boilerplate language or is it sign of trouble?

[usdtor05]

boilerplate that's the auditors checking every box this year to make sure tehy don't need to add the paragraph. I remember those days, it's not an imminent sign of anything...majority of bks never even have a going concern

[jay21]

Now that OCN remaining servicer is in writing, does this mean ASPS might resume buybacks?

[abitofvalue]

boilerplate that's the auditors checking every box this year to make sure tehy don't need to add the paragraph. I remember those days, it's not an imminent sign of anything...majority of bks never even have a going concern

 

Unless there was an amendment i missed - the senior term loan has a going concern clause. Not sure about their other debt - the key question is the servicing advances ; ostensibly that was what drove HLSS to agree to the lowr price (uncertainty re funding advances if it received a going concern) 

[BeerBBQ]

What specifically is at issue with regard to a potential going concern qualification?

[BeerBBQ]

Page 12 of the lender presentation has good info on specifics of audit concerns

 

http://www.sec.gov/Archives/edgar/data/873860/000101905615000397/ex99_2.htm

 

Seems like remaining issue is the potential for further ratings downgrade.  However, appears company has been addressing most of the issues that have resulted in previous downgrades so is the potential for a further rating downgrade low?

 

Auditor appears to be in an interesting position. If a qualified opinion is issued, the auditor could actually be the trigger for producing the outcome they are concerned about and are qualifying.

 

Other than the text box on page 7 mentioning a potential loss on $100m in MSR, the info in the presentation looks encouraging.

 

Also, I estimate TBV of $7, TBV (adj for announced agency sales) of $9, Runoff Value of $11-15, and Ongoing business value >$15.

 

I would appreciate any perspectives from those who are more skeptical on the info in the presentation - especially regarding the going concern qualification and the potential impact to the business and business value

 

Thanks

 

 

 

[namo]

Potential problems:

- the monitors (either from NY or CA) get tough on OCN

- "cliff" in 2017 if NRZ takes away the HLSS-related business from OCN as soon as it can

 

Yes, I agree that auditors and rating agencies hold enormous power in this situation.

[BeerBBQ]

Anyone here short at current prices?  If so, what is rationale or what else is out there that current price is not incorporating?

 

I am looking for reasons why I might be wrong to be long.

 

 

[jawn619]

Anyone here short at current prices?  If so, what is rationale or what else is out there that current price is not incorporating?

 

I am looking for reasons why I might be wrong to be long.

 

I think the biggest concern is the "going concern" clause that has people riled up.

 

http://en.wikipedia.org/wiki/Going_concern

[namo]

About the "going concern" problem: the auditors might include it because if OCN gets downgraded

- as a servicer, it might trigger trustees to move servicing to another venue

- as a borrower, it might make refinancing more difficult

then it might end up in BK.

 

But in turn, the rating agencies giving out the grades for servicing and for borrowing will look at the auditors' notes and will take it as a negative sign pushing them towards a downgrade.

 

So there's a real risk associated with this self-fulfilling prophecy of doom for OCN. The odds are impossible to evaluate for me (I'm still long OCN and ASPS, the latter much more so than the former). And it doesn't even depend that much on OCN's actions.

At least the management is doing what it can: generating cash by selling MSR and using that to pay down loans.

 

I expect ValueTrap to have a much more articulate analysis when he drops by. :)

[ItsAValueTrap]

About the "going concern" problem: the auditors might include it because if OCN gets downgraded

- as a servicer, it might trigger trustees to move servicing to another venue

- as a borrower, it might make refinancing more difficult

then it might end up in BK.

 

But in turn, the rating agencies giving out the grades for servicing and for borrowing will look at the auditors' notes and will take it as a negative sign pushing them towards a downgrade.

 

So there's a real risk associated with this self-fulfilling prophecy of doom for OCN. The odds are impossible to evaluate for me (I'm still long OCN and ASPS, the latter much more so than the former). And it doesn't even depend that much on OCN's actions.

At least the management is doing what it can: generating cash by selling MSR and using that to pay down loans.

 

I expect ValueTrap to have a much more articulate analysis when he drops by. :)

 

I pretty much agree with you haha.

[mcmaaaaath]

I'm sure people saw it but in case you didn't, Ocwen filed its 10k this week with OUT a going concern qualification.

 

Also last week, Joseph Smith, the National Mortgage Settlement Monitor, filed a report on Ocwen's Internal Reporting Group. This is the group that was supposed to report to Smith on how Ocwen was doing with the terms of the settlement, but whose independence had been questioned by a whistleblower (necessitating this report/investigation).

 

Smith's findings largely overlapped with the prior findings of the group, but he did find one of the metrics was out of whack. For the metric "Loan Modification Document Collection Timeline Compliance", he found an error rate of almost 12%, much higher than the internal group's finding of 3.76%. This error rate was more than double the threshold compliance rate of 5%.

 

https://www.jasmithmonitoring.com/omso/wp-content/uploads/sites/4/2015/05/Second-Interim-Report-filed.pdf

[davidoosnk]

This article is interesting.

http://www.thestreet.com/story/13145252/1/the-next-asset-likely-to-blow-up-big-banks-balance-sheets.html

 

I'm not well versed in the intricacies of mortgage servicing rights so please forgive if any of my Q's are ill conceived. However, these questions come to mind:

 

-- If a servicer doesn't acquire the loan risk, how can these rights pose a potential systemic problem? (I suppose it might be due to the hedging if it gets out of hand)

-- Does Ocwen do this type of "hedging" (maybe they don't do as much because a lot of the loans they get are already subprime?)

 

In essence I'm trying to figure out Ocwen's exposure to this type of hedging risk. Any insight much appreciated. 

 

 

 

 

 

 

[ItsAValueTrap]

This article is interesting.

http://www.thestreet.com/story/13145252/1/the-next-asset-likely-to-blow-up-big-banks-balance-sheets.html

 

I'm not well versed in the intricacies of mortgage servicing rights so please forgive if any of my Q's are ill conceived. However, these questions come to mind:

 

-- If a servicer doesn't acquire the loan risk, how can these rights pose a potential systemic problem? (I suppose it might be due to the hedging if it gets out of hand)

-- Does Ocwen do this type of "hedging" (maybe they don't do as much because a lot of the loans they get are already subprime?)

 

In essence I'm trying to figure out Ocwen's exposure to this type of hedging risk. Any insight much appreciated.

 

MSRs have unusual risks.  Main risks are prepayment speed and delinquencies.  Somebody will pay off their mortgage early if:

A- They sell the house, e.g. because they need to move.

B- They can get a better rate if they refinance.  This depends on interest rates and the lending standards of the mortgage originators.  Right now, the lending standards are super tight due to the regulatory environment and originators getting burned over reps and warranty clauses.

 

From what I know, hedging doesn't work all the time.  So every once in a blue moon, you can run into a situation where you lose money on the MSRs and lose money on your hedge at the same time.  This is probably one of those situations where you swap one set of risks for another set of risks.

 

2- Sometimes a mortgage originator will want to retain MSRs because some of the risks in MSRs and the mortgage origination business offset each other.

 

If regulations and litigation cause mortgage origination to suck because fewer mortgages can be origination, then the MSRs will do better.  And vice versa.

 

Some people might also want to buy MSRs because many of their risks are uncorrelated with other stuff like ibanking, auto loans, commercial lending, credit cards, etc. etc.

 

3- The article struck me as weird.  Nobody makes that much on MSRs.  And hedging should not increase returns (by that much).

 

4- Ocwen mainly has low-delinquency MSRs and high-delinquency MSRs.  It is selling the low-delinquency stuff.

 

The high-delinquency MSRs has led to its recent troubles with the NY DFS, California DBO, rating agencies downgrading Ocwen, legal problems with RMBS contracts, the HLSS financing structure (Ocwen paid for a 2-year reprieve), and going concern issues on its debt and various debt/financing facilities.

[constructive]

3- The article struck me as weird.  Nobody makes that much on MSRs.  And hedging should not increase returns (by that much).

 

I think the implication was that some companies are overhedging to speculate on interest rates falling. With the Volcker Rule limiting prop trading, banks are now more tempted to overhedge.

[davidoosnk]

Thank you for the insights.

 

My take on it is sort of counterintuitive. Because , like you said, Ocwen is taking on the higher delinquency MSR's, they probably have built in hedge procedures that are less contingent on quantitative analysis. Ie. they are maybe operating more like a casino instead of a bank. Which to me is a good thing and makes them less susceptible to Black Swans. (casino will close that table that has been losing money all night, bank will go under because they relied on a supposedly infallible hedge).

 

I wish I had a better grasp of some of the details. But I will go out on a limb and say that I would rather deal with government interference (high delinquency MSR's) than complex hedges that are perhaps more fickle (low delinquency). Again, wish I knew more about how the hedges operate. If anyone has expertise in this matter it could help further mold the thesis for Ocwen.

 

Of course, there could be other Black Swans like Ocwen perhaps taking on hedges for MSRs it doesn't service. Therefore maybe the analysis should be more reputational, based on their management. I did really well with OCN this year with very heavy exposure initiated in January but some of these ideas make me want to go a little lighter going forward... Oh boy... Decisions decisions..

 

 

 

[jay21]

MSRs have similar risks as fixed rate IOs. You are worried about spikes in prepayments that will reduce your notional (in terms of MSRs you are worried the loan will prepay and you will no longer have a mtge to service). Therefore, you come up with some type of interest rate derivative to hedge against this risk.

 

Mtges are very complicated to hedge but I highly doubt anybody is doing something completely off the wall to hedge the risks. It's possible but remote imo. Im sure you the nonbanks would disclose all their derivative activity which you can reference. Banks probably wouldn't because hedges related to MSRs are a small portion of the balance sheet.

[davidoosnk]

Moody's upgrades OCN debt and S&P places on credit watch.

 

http://www.housingwire.com/articles/34108-ocwen-ceo-gives-baffled-reaction-to-ratings-rollercoaster

 

One particular item sticks out..

 

"Additionally, S&P cited several internal audit results, which included high-risk findings in “key areas” of Ocwen’s servicing and default operations, noting that the company’s internal audit department recently experienced turnover and reorganization."

 

Anyone have access to the full report? Would be interesting to see if there is a real issue or if it's just S&P being extra cautious.

[Sehayes1982]

S&P revised OCNs outlook to stable, removed from creditwatch, DOWNGRADED Servicer rating to "below average." Reasons? Negative investor sentiment and the same old regulatory issues that are largely solved and behind the company.

 

Is it just me, or is this so stupid that a conspiracy theory about S&Ps motivations seems to be the most logical conclusion? Unbelievable. Given that they've gone "full retard," as Robert Downey Jr would say, what are the implications for its servicing? I just can't believe they're trying so desperately to further perpetuate the drama. Who's short, or what institution gave them the incentive to Make such a stretch on this one?

[jawn619]

S&P revised OCNs outlook to stable, removed from creditwatch, DOWNGRADED Servicer rating to "below average." Reasons? Negative investor sentiment and the same old regulatory issues that are largely solved and behind the company.

 

Is it just me, or is this so stupid that a conspiracy theory about S&Ps motivations seems to be the most logical conclusion? Unbelievable. Given that they've gone "full retard," as Robert Downey Jr would say, what are the implications for its servicing? I just can't believe they're trying so desperately to further perpetuate the drama. Who's short, or what institution gave them the incentive to Make such a stretch on this one?

 

I don't think it's a conspiracy. From S&P/Moody's point of view, It's always better to be safer, especially with the added scrutiny after 2008. No one is going to yell at them or get fired if they downgrade or are slow to upgrade Ocwen given the negative news surrounding the company. But imagine if S&P and Moody's upgrade OCN and more trouble's arise. The rating agencies would be in world of hurt.... It makes sense (at least from their perspective) to be a little slower upgrading a company going through troubles.

 

Like my boy Charlie Mungs says... never be thinking about anything else when you could be thinking about incentives.

[valueinvestor82]

That's fair enough. I just found it strange that S&P seems to force the change now, when it would appear that the worst is behind them. Even OCN came out and indicated surprise when they were put on watch for the downgrade.

[valueinvestor82]

Following the farce that was the S&P downgrade, Fitch upgrades OCNs debt outlook and servicer ratings. I'm sure S&P will wait for months before revising their view, just to save face.