OCN - Ocwen Financial

[Fat Pitch]

http://www.bloomberg.com/news/2014-12-18/ocwen-said-to-have-stalled-home-sales-by-underwater-borrowers.html

 

Geez at this rate when does the DOJ/FBI/SEC get involved?

[yadayada]

Yeah im really not happy with those options i got. I guess i got a bit too greedy on this one. Even when they can buy new MSR's, this one will get a discount for some time with all the shit surrounding it.

[RadMan24]

Well, if one looks at big banks a few years ago and GM today, lawsuits and litigation are going to draw investor and regulatory scrutiny.  But almost in all cases, the long term business models can remain intact.  If one believes Ocwen's business model will survive and be able to adjust to new regulations and avoid future potholes, then this investment could still be very successful.  Legislation, litigation and regulation are always risks, being able to evaluate them in the midst of potential changes is difficult, but the margin of safety presented in these uncertain times often outweighs and compensates for the risk of being wrong.  I think I'll be digging down and finding out more about this company in the coming days, thanks to all those who posted such valuable analysis and comments. 

[Fat Pitch]

The big question here is did Ocwen maliciously commit fraud? The monitor already suggested Ocwen might have been cherry picking data to hand over for their audits. We'll find out sometime in February if this was the case.

[ItsAValueTrap]

The big question here is did Ocwen maliciously commit fraud? The monitor already suggested Ocwen might have been cherry picking data to hand over for their audits. We'll find out sometime in February if this was the case.

 

Timeline:

 

For the full story, see the Monitor's interim report regarding Ocwen's loan servicing.

https://www.jasmithmonitoring.com/omso/wp-content/uploads/sites/4/2014/12/Pldg-194-Monitor%E2%80%99s-Interim-Report-re-Ocwen-Loan-Servicing.pdf

 

In early May, the Co-Chairman of the Monitoring Committee forwarded emails to the monitor containing allegations of irregularities and improprieties

relative to the IRG and its work.

 

The monitor investigates the whistleblower's claims.  Ocwen hired an outside law firm and co-operated with the investigation.

 

Based on the evidence identified by the IRG Investigation Team and the conclusions drawn from that evidence, the monitor notified Servicer’s general counsel by

letter dated August 29, 2014.  The monitor said that it had determined the work of the IRG could not be relied upon for at least Test Period 7.

 

In September 2014, the monitor engaged McGladrey to undertake independent re-testing of a number of Metrics for Test Period 7 (Q1 2014).

 

Ocwen would have been aware of some of these issues on May 2014 or earlier.  Both Ocwen and Altisource had massive share repurchases in Q3 (July-September), roughly buying back three to four times their normalized earnings.  Ocwen repurchased $231M while Altisource repurchased $128M.

Throughout July to September, both Ocwen and Altisource bought back a significant number of shares in the fiscal quarter.  Altisource's investor presentation for Q3 on October 23 seem to suggest that the share repurchases will continue.

 

Throughout Q1 to Q3 2014, Ocwen was boarding loans from Rescap's Fiserv platform onto the REALServicing platform developed by Altisource.

 

----

 

Ocwen was buying back shares despite knowing about these issues.

[Guest roark33]

Erbey to resign as part of settlement. Article cites 150m settlement number.

 

http://www.wsj.com/articles/ocwen-head-to-resign-in-new-york-settlement-1419224476?mod=WSJ_hp_LEFTWhatsNewsCollection

[yadayada]

jesus.... And they are not even allowed to buy new msr's yet... I guess some good news though. Non of the horror scenario's the market has priced in right now. I wonder how much control erbey will have now? I mean he can still talk with the CEO behind the screens right? What difference will this make now he steps down?

[Travis Wiedower]

I'm not as optimistic as you are yada. Sounds like they're halting MSR transfers for potentially years while an outside monitor ensures OCN is operating 100% legit. In that time the state can asses more penalties and fines (and potentially put them in run-off which doesn't seem as unlikely as it did yesterday).

 

And don't count on Erbey still running things. They're not going to force him out of the company and then turn their head if he's running the show behind their back.

[philly value]

Thinking this one may have been best left in the too hard pile. It's very difficult to understand how much value there is in OCN when the settlement that has been reached includes a thorough regulatory scrutiny of the business / appointment of two Lawsky-approved board members. The runoff projections that I had been relying on in assessing downside potential are dependent on profit margins, which may be reduced considerably pending the shakedown. Trying to guess at MSR market value / looking at OCN book value may not be very useful, because the marginal buyer of MSRs over the past few years has been companies like OCN, which was willing to pay a certain price depending on expected servicing costs that may no longer be applicable. 

[yadayada]

Pissed off at myself for averaging down now.

 

Technically Erbey is an activist shareholder though. He could make serious waves. If for example things happen he does not approve, he can start a vote, and probably the other large holders will follow suit. So im not so sure if Erbey will really lose his grip. This, plus the right incentives for management should ensure things dont go south.

[jay21]

Well, if one looks at big banks a few years ago and GM today, lawsuits and litigation are going to draw investor and regulatory scrutiny.  But almost in all cases, the long term business models can remain intact.  If one believes Ocwen's business model will survive and be able to adjust to new regulations and avoid future potholes, then this investment could still be very successful.  Legislation, litigation and regulation are always risks, being able to evaluate them in the midst of potential changes is difficult, but the margin of safety presented in these uncertain times often outweighs and compensates for the risk of being wrong.  I think I'll be digging down and finding out more about this company in the coming days, thanks to all those who posted such valuable analysis and comments.

 

This is kind of how I view them.

 

The settlement was a little more punitive than I would have thought in terms of "non-monetary" actions so now I am wondering if we are hitting "peak pessimism/bad news".

 

I am still long and I shall see.

[A_Hamilton]

Well, if one looks at big banks a few years ago and GM today, lawsuits and litigation are going to draw investor and regulatory scrutiny.  But almost in all cases, the long term business models can remain intact.  If one believes Ocwen's business model will survive and be able to adjust to new regulations and avoid future potholes, then this investment could still be very successful.  Legislation, litigation and regulation are always risks, being able to evaluate them in the midst of potential changes is difficult, but the margin of safety presented in these uncertain times often outweighs and compensates for the risk of being wrong.  I think I'll be digging down and finding out more about this company in the coming days, thanks to all those who posted such valuable analysis and comments.

 

This is kind of how I view them.

 

The settlement was a little more punitive than I would have thought in terms of "non-monetary" actions so now I am wondering if we are hitting "peak pessimism/bad news".

 

I am still long and I shall see.

 

Why do you think the problems will end with a settlement with the NY AG's office and not go to the other 49 states in the land...

[jay21]

Well, if one looks at big banks a few years ago and GM today, lawsuits and litigation are going to draw investor and regulatory scrutiny.  But almost in all cases, the long term business models can remain intact.  If one believes Ocwen's business model will survive and be able to adjust to new regulations and avoid future potholes, then this investment could still be very successful.  Legislation, litigation and regulation are always risks, being able to evaluate them in the midst of potential changes is difficult, but the margin of safety presented in these uncertain times often outweighs and compensates for the risk of being wrong.  I think I'll be digging down and finding out more about this company in the coming days, thanks to all those who posted such valuable analysis and comments.

 

This is kind of how I view them.

 

The settlement was a little more punitive than I would have thought in terms of "non-monetary" actions so now I am wondering if we are hitting "peak pessimism/bad news".

 

I am still long and I shall see.

 

Why do you think the problems will end with a settlement with the NY AG's office and not go to the other 49 states in the land...

 

Lawsky has consistently pushed the envelope in terms of what the DFS's jurisdiction is. I dont see any other AG having the purview that the DFS does. Also, the non-monetary stuff is all in this settlement. Would all the other states require a Monitor, the clearing of related party transactions, review of transfers, etc?

 

Maybe there could be more settlements/homeowner relief, but thats also winding down as the delq pipeline cures. They also paid out some relief as part of their National settlement.

 

I dont think regulators are going to bankrupt a company they are investing resources into improving. Because if they did they would just cause some problems they are trying to solve. IE where do the MSRs go? They would be bulk transferred.

[Guest roark33]

I think there is a lot of bias in the thought process of someone who holds OCN or ASPS right now.  Take a step back and think, if I didn't own either one, would I buy it now.  The settlement included $10k for each borrower foreclosed on during the 2009-2013/14(?) period.  I would find it hard to imagine that every AG in the country would not grasp on to that number.  As for ASPS, I can't imagine them having a leg to stand given the debt that they have.  In fact, I think the best play by OCN would be to buy ASPS now to eliminate the "inter-party" dealings and just make them an explicit part of the servicing cost.  However, ASPS has a lot of debt now, so I am not sure if that would be feasible. 

[philly value]

Well, if one looks at big banks a few years ago and GM today, lawsuits and litigation are going to draw investor and regulatory scrutiny.  But almost in all cases, the long term business models can remain intact.  If one believes Ocwen's business model will survive and be able to adjust to new regulations and avoid future potholes, then this investment could still be very successful.  Legislation, litigation and regulation are always risks, being able to evaluate them in the midst of potential changes is difficult, but the margin of safety presented in these uncertain times often outweighs and compensates for the risk of being wrong.  I think I'll be digging down and finding out more about this company in the coming days, thanks to all those who posted such valuable analysis and comments.

 

This is kind of how I view them.

 

The settlement was a little more punitive than I would have thought in terms of "non-monetary" actions so now I am wondering if we are hitting "peak pessimism/bad news".

 

I am still long and I shall see.

 

Why do you think the problems will end with a settlement with the NY AG's office and not go to the other 49 states in the land...

 

Lawsky has consistently pushed the envelope in terms of what the DFS's jurisdiction is. I dont see any other AG having the purview that the DFS does. Also, the non-monetary stuff is all in this settlement. Would all the other states require a Monitor, the clearing of related party transactions, review of transfers, etc?

 

Maybe there could be more settlements/homeowner relief, but thats also winding down as the delq pipeline cures. They also paid out some relief as part of their National settlement.

 

I dont think regulators are going to bankrupt a company they are investing resources into improving. Because if they did they would just cause some problems they are trying to solve. IE where do the MSRs go? They would be bulk transferred.

 

Putting aside other regulators, my concern is that the company appears like a black box at this point - how do you value a company when regulators are about to comb through its operations and may require significant changes? You can't really look at historical profit margins. And there's not a clear market price for MSRs with which one could value Ocwen's existing book. With Erbey gone and acquisition activity seemingly stalled for quite some time, the strong capital allocation / growth thesis no longer applies. I think what many of us were forecasting was a fine plus minor organizational changes, whereas it now appears that a significant part of the slate may be rewritten.

 

Personally for me I exited premarket because the uncertainty appears too high for there to be any margin of safety and the thesis has drifted too much for my comfort. I think roark has a point above, it is difficult to rationally evaluate Ocwen/Altisource given the losses suffered.

[jay21]

Understand and respect your opinions and they warrant consideration.

 

I reached a different conclusion (while still admitting I got the regulatory picture completely wrong here).

[yadayada]

I dont think their business will change and costs will go up by like 2-300m$ a year. So the run off value still stands. At this price they would need to spend billions extra on run off just to break even... Also people are very pessimistic on new MSR's. He basicly said, if they follow regulation, they can get new MSR's... So it is very cheap at this price. But i dont buy more because im full already.

 

I mean let's not forget that besides the backdating issue, complaint ratio for OCN is very low compared to the rest of the bunch... You cannot argue with that.

 

That WSJ piece is also v negative sounding.

 

I still wish I would have waited on this one though. I dont think my initial margin of safety was large enough.

 

Also Erbey stepping down is not really a big deal I think. Management still has the right incentives here. And he is still a large holder. He can still pull strings through activism. If Erbey says bad things happen, most of the large holders will probably follow suit.

 

I think with a 3-4 year time horizon, you will do v well on both stocks.

[pocoapoco]

It's interesting that asps is trading down in lockstep with ocn.

Are we to assume that ocn will now stop using asps technology?  If anything, the settlement indicated that a tech overhaul was needed (to simplify codes for instance) so why wouldn't that result in increased demand for tech services.

It seems unlikely that ocn would scrap their tech relationship with asps and bring in a new partner but maybe that's what the market implies?

[yadayada]

At this point my thesis is mostly based on this:

http://www.valuewalk.com/wp-content/uploads/2014/03/tRW7I9h.png

 

If we take out the 6000 backdating issues this year , complaint ratio is 0.8%... Or if you think only some complained, it is still lower then any of those other servicers.

 

And it seems basicly that the whole critisim on OCN is based around that. The article mentions possible conflict of interest and back dating.

 

Those stats are public btw, so you can verify yourself. Any thoughts on this? Lawsky was basing his crusade on CFPB complaints.

[scorpioncapital]

Can OCN even scrap the deals with ASPS? Aren't they pretty solid contracts set for a period of years? Also Erbey still owns 30% of ASPS, as a shareholder he must have some influence. I think ASPS is pretty cheap now considering a run-off scenario plus you get some entrepreneurial ventures such as an auction site for selling and buying real estate.

[yadayada]

The way I see this, there have been like 10k complaints in the past few years. Let's say there are 30k problem scenario's. This is like a 3 year period? So let's say that they have to spend 10k$ per complaint per year extra to solve them really well. This is 90m$. Since these things get resolved, run off would only change by 3-400m$ at most... So then you still get 4 billion$ of run off.

 

You would have to assume that everyone who complained basicly get their own personal manager that has to work full time for them and be paid like 50-60k$ a year.

 

Just seems with these cases that people forget to look at the numbers and just panic.

[philly value]

The way I see this, there have been like 10k complaints in the past few years. Let's say there are 30k problem scenario's. This is like a 3 year period? So let's say that they have to spend 10k$ per complaint per year extra to solve them really well. This is 90m$. Since these things get resolved, run off would only change by 3-400m$ at most... So then you still get 4 billion$ of run off.

 

You would have to assume that everyone who complained basicly get their own personal manager that has to work full time for them and be paid like 50-60k$ a year.

 

Just seems with these cases that people forget to look at the numbers and just panic.

 

I'm not sure it's the right way to assess the impact on value. Your methodology is essentially "There have been X complaints, each has a negative value of Y, so the effect vs. status quo Ocwen is -X*Y". That methodology makes a lot of sense in a scenario where a major error resulted in X bad outcomes and the error has subsequently been corrected, yet the company will face litigation/etc. But here it appears Ocwen will have to make changes to the system that generated X complaints, not just pay a penalty to make the X complaints go away.

[morningstar]

It's interesting that asps is trading down in lockstep with ocn.

Are we to assume that ocn will now stop using asps technology?  If anything, the settlement indicated that a tech overhaul was needed (to simplify codes for instance) so why wouldn't that result in increased demand for tech services.

It seems unlikely that ocn would scrap their tech relationship with asps and bring in a new partner but maybe that's what the market implies?

 

(1) ASPS's valuation depends a lot on the future growth of the OCN family - the fact that the settlement doesn't allow OCN to resume buying MSRs is pretty negative for the growth outlook. (2) The monitor is specifically authorized to sign off on affiliate services pricing and according to the WSJ article, OCN admitted that its affiliate relationships may have resulted in borrowers being overcharged. You would have to assume pressure on ASPS's margins going forward.

 

Furthermore, the family links between these companies are being broken through the elimination of Erbey and the new recusal rules. I don't think ASPS has demonstrated a real ability to win non-affiliated revenue so far, so this is negative for the outlook.

[Guest roark33]

I can't imagine any major bank or mortgage originator wanting to sell to OCN in the near future (and by near, I mean ever).  I don't think that is an exaggeration.  I don't think there is any upside to that transaction. 

[scorpioncapital]

It's interesting that asps is trading down in lockstep with ocn.

Are we to assume that ocn will now stop using asps technology?  If anything, the settlement indicated that a tech overhaul was needed (to simplify codes for instance) so why wouldn't that result in increased demand for tech services.

It seems unlikely that ocn would scrap their tech relationship with asps and bring in a new partner but maybe that's what the market implies?

 

(1) ASPS's valuation depends a lot on the future growth of the OCN family - the fact that the settlement doesn't allow OCN to resume buying MSRs is pretty negative for the growth outlook. (2) The monitor is specifically authorized to sign off on affiliate services pricing and according to the WSJ article, OCN admitted that its affiliate relationships may have resulted in borrowers being overcharged. You would have to assume pressure on ASPS's margins going forward.

 

Furthermore, the family links between these companies are being broken through the elimination of Erbey and the new recusal rules. I don't think ASPS has demonstrated a real ability to win non-affiliated revenue so far, so this is negative for the outlook.

 

"We currently generate approximately 65% of our revenue from Ocwen and its subsidiaries.  Ocwen is contractually obligated to purchase certain services from our Mortgage Services, Financial Services and Technology Services segments under service agreements that extend through August 2025 subject to termination under certain provisions.  The loss of Ocwen as a customer or their failure to pay us would significantly reduce our revenue and adversely affect our results of operations.  "

 

The question is if the monitor appointment is a provision under which the service agreements can be terminated or amended. If not, the revenue won't change much for the next 10 years.