OCN - Ocwen Financial

[philly value]

Yeah I'm not sure I see the logical connection between cancelling the WF transaction and reaching a settlement, unless the settlement is very negative for Ocwen in terms of restricting its ability to acquire MSRs.

[scorpioncapital]

"In the wake of the deal initially being placed on hold, Ocwen Executive Chairman William Erbey said that the NYDFS had effectively halted all MSR portfolio deals.

 

“Until we resolve – this relates to Ocwen – until we resolve New York State we’re not acquiring any new (MSR) portfolios at all. As a matter of fact the entire market – nothing is being put out for bid right now,” Erbey said in April. “The whole market has stopped until that gets resolved.”

 

There may be something to a settlement idea, but I don't see the distinction between "indefinite hold" and cancelled.

[ItsAValueTrap]

Because of all of the regulatory and litigation BS that the servicers have to deal with, I think that the profitability of MSRs has gone down.  This means that MSRs will sell at lower prices.

 

This is bad for Ocwen in the short term.  However, it will be able to buy MSRs at cheaper prices / higher discount rates.  The rate of return on buying MSRs may go up for them, especially because they have the scale to keep their compliance costs down.

[rayfinkle]

I don't. But if it was going to happen eventually better sooner than later.

[yadayada]

so you guys think it was cancelled to negotiate a new one? Because of changes in the industry.

[prevalou]

I am not sure MSRs will sell at lower prices. It is quite the contrary: if big banks can't sell them anymore for regulatory reasons, there is a shortage and prices climb. So prices climb and servicers have to put more equity to hold them=not good

Maybe, if OCWEN put his purchases on hold, it will help the market and the other special servicers

[yadayada]

The prices will  only go down.. They still need to offload them, and the longer this takes, the less time there is before regulations. Also if banks can't sell them, who is going to sell them?

[morningstar]

so you guys think it was cancelled to negotiate a new one? Because of changes in the industry.

 

I think this is probably the case, but it seems unlikely the new deal would be with Ocwen while they are still under this cloud. Potentially the $39bn chunk could be sliced up into smaller pieces to reduce the scrutiny a bit.

[scorpioncapital]

The regulators talk about it being unethical for OCN to buy MSRs and yet if the regulator is enabling another competitor to buy them (say NSM) and the CEO did mention something about more deals this month in a conference call, I wonder if the regulator is picking winners and losers in this space. Possible outcome: Ocwen settles, raises costs of servicing more inline with others due to regulatory "costs", and fixes it's conflict of interest situations. It's funny cause NSM has a technology processor under one roof and wanted to spin it off. I fail to see how one company is way better than another.

[valueinvestor82]

Baupost aka my hero Seth Klarman just bought $183 million of OCN. I know he has like $20 billion, but of the stocks visible on the 13F, it's among the top 7 holdings in the portfolio. I'll take him over "pooperman" any day.

[yadayada]

I really hate that i have to be smarter then a bunch of good fund managers though. At this piont you really need faith in Erbey.

[valueinvestor82]

I understand what you're saying, but do you really have to be smarter? The margin of safety rests in the existing numbers. Faith in Erbey would seem to be more important with regard to future growth, the subject of which is absolutely important to the stock short term, but not long term when considering a conservative estimate of cashflow in a "runoff" scenario.

 

Am I correct to think of the existing business as a bond that can be held to "maturity," generating a steady amount of cashflow (with some variation depending on expenses) until that point?

[yadayada]

yeah pretty much, and because it is unclear what run off value will be exactly, the market just prices in disaster to be safe. I think a conservative run off scenario was like 4-5 billion$. I doubt costs go up by 2-3 billion$. So yeah I guess your right. I really wish I would have had some patience with this one. At this point you will probably get a entry point at like 35-40$ when uncertainty goes away.

 

What is nice is that Erbey is buying back stock. So that will juice returns of people who are hanging on. And that is also the whole positive about this thing. If all that bad stuff would go away, the fact that Erbey had the opportunity to buy back stock on the cheap will make up for at least some of the higher costs/income lost.

[morningstar]

I understand what you're saying, but do you really have to be smarter? The margin of safety rests in the existing numbers. Faith in Erbey would seem to be more important with regard to future growth, the subject of which is absolutely important to the stock short term, but not long term when considering a conservative estimate of cashflow in a "runoff" scenario.

 

Am I correct to think of the existing business as a bond that can be held to "maturity," generating a steady amount of cashflow (with some variation depending on expenses) until that point?

 

Sure, but the stock still trades well above the probable liquidation value of its assets - you are still affirming faith that Erbey can earn more from these assets than they are worth today. (In addition to taking the risk that today's market prices for the assets are too high.)

 

There's no doubt the stock would fall significantly if they announced the business was being put into run-off.

[yadayada]

Where do you get it trades above that? It trades below run off value, unless there are large changes in cost (billions$). You cannot look at book value. Book value is what these assets are worth to other servicers, but remember that OCN has a 60-70% cost advantage due to the system ASPS provides them...

 

So basicly if they sold their MSR's, then they would be worth book value. But in run off, they are worth much more then book value to OCN.

 

I think a way to look at this, it used to be a 70% cost advantage, but that has been eroded a bit by regulation already. If you take a 60% cost advantage, you have to take at least their MSR's of 1.9 bn$, and multiply it by 2.5 (the other way around if you reduce something by 60%).

 

So then you get equity value of 4.35 bn$.

[morningstar]

When you look at runoff value being higher than market value, you are taking faith that Erbey's cost advantages are real and can actually realize more value that than assets are worth in the market, which is what I said. Of course if you believe in Erbey's story you should probably be buying this stock aggressively (assuming you like the underlying market risk in the MSRs). But I do think you still need faith in Erbey to be a buyer at these levels.

 

For what is basically a large pool of financial assets, saying runoff value >>> liquidation value is expressing faith in the manager.

 

I would calculate liquidation value by taking net tangible equity of $1.2bn and add the $500m write-up that takes OCN's MSRs from their book value to fair market value (according to OCN's latest presentation); the rest of the assets are probably worth close to book value. So around $1.7bn. You could also perhaps add the $400m in goodwill - after all these were very recent acquisitions.

[yadayada]

well he proved it... You just need to try and pick apart older financials of the past 5 years. He already proved that he can service with a 60-70% cost advantage by offshoring labor and using a AI system that does not required skilled highly trained call centre workers. He has been doing this for a while now.

 

Even if the cost advantage is only like 50%, or maybe 30%, then it still trades at or below run off value.

 

I don't think you need that much faith in Erbey in this regard. Biggest risk here is increased costs due to regulation. But if past is mostly unchanged, then it will mean a 60% or maybe 55% cost advantage ins tead of a 70% advantage.

 

I think this concept is kind of poorly understood by the market. They acquire MSR"s and then integrate them in their own platform. On a small scale they had a 70% cost advantage without having a higher complaint ratio. This is not obvious in the financials right away, but will be next year probably.

 

I forgot to remove goodwill. That would get you 3-4 bn$ in run off probably. So far increased costs are in the tens of millions and not hundreds of millions per year though. ANd those costs will mostly go away when the number of non performing loans go down.

 

But I did not add up write ups, so then it would still be between 3.5-4.5 bn$

 

 

Also the cost advantage does not take into account that they could squeeze more value out of these MSR's I think. Which was also supposed to be true. But maybe Valuetrap can shed some light on this.

[ItsAValueTrap]

AI system that does not required skilled highly trained call centre workers.

It's a script that they go through.  I believe they've done a little extra stuff like having the script vary for different types of callers and be something that they can navigate on a computer instead of a printed paper script.

 

They still need trained workers.  Experience matters.  Especially because you have to train workers about US mortgages and laws and regulations.

 

Churn is very high at Ocwen's offshore operations.  Ideally they'd like that to be lower.

 

Also the cost advantage does not take into account that they could squeeze more value out of these MSR's I think. Which was also supposed to be true. But maybe Valuetrap can shed some light on this.

They might do interesting things with the clean-up calls.  It's capital intensive though.  Maybe they will immediately flip NPLs to RESI.

 

Ocwen is also working on adjacent businesses.  They're getting into originations for reverse mortgages (guaranteed by some GSE).

 

----

 

I think the idea that Ocwen will be blocked from buying MSRs is silly.  At some level, for there to be a healthy mortgage market, you HAVE to allow people to transfer the servicing of loans from one company to another.

 

Suppose a servicer goes bankrupt.  Then it would be crazy if there were regulations against transferring the loans to another servicer.

 

Suppose a GSE that owns lots of mortgages (or rather, REO) wants to farm out servicing activities.  It would be crazy if they were prevented from hiring subservicers.

[yadayada]

How do you see churn is high? Reading glassdoor reviews? If i read the reviews, OCN does not appear to be a fun place to work at .

[ItsAValueTrap]

How do you see churn is high? Reading glassdoor reviews? If i read the reviews, OCN does not appear to be a fun place to work at .

 

http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245363548224

 

The S&P report contains information on their churn rate.

 

(S&P since lowered their rating on Ocwen.)

[rukawa]

Lefty article that might be of interest

http://www.salon.com/2014/11/18/an_ongoing_criminal_enterprise_why_americas_housing_disaster_is_back_and_wreaking_terror/

[ItsAValueTrap]

Lefty article that might be of interest

http://www.salon.com/2014/11/18/an_ongoing_criminal_enterprise_why_americas_housing_disaster_is_back_and_wreaking_terror/

 

Is that the most terrible thing in the world?  America's housing disaster didn't exist because banks accidentally foreclosed on the wrong people.  It exists because a lot of risky mortgages were made.  The blame there lies on the mortgage brokers, lenders, investment banks, ratings agencies, buyers who lied on their applications, etc. etc.

 

That problem was made a little worse by:

- How securitizations were structured, e.g. not allowing loan mods.

- The servicers' incompetence

- The FHA/HUD being hardasses about loan mods

- Not forseeing the ultra-high delinquency rates

[yadayada]

You cannot rely on leftists to think straight. They are generally not exactly the most rational people.

 

demand free shit, then blame the bankers and capitalists when it all goes wrong.

[rukawa]

You cannot rely on leftists to think straight. They are generally not exactly the most rational people.

 

True but leftists writers often are leading indicators for regulators when the Democratic party is in control. Its a thing to monitor because if the rhetoric ends up heating up, the regulation eventually ends up heating up. I am not saying its logical. Just something to keep an eye out for.

[scorpioncapital]

No problem with regulation. These articles on Ocwen, however, suggest a massive bumbling up and incompetence. Miscommunication, wrongful foreclosures, adding huge collection fees to the final bill. It almost sounds like the IRS when they screw up, the left hand doesn't know what the right hand is doing. Hopefully these are just isolated cases the media trumps out to inflame the public but represent a few outliers.