OCN - Ocwen Financial

[johngu]

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.

 

I would disagree with this.  I imagine if the MSR sale is approved, then there's less downside as there's explicit approval from DFS, and assurances from the regulator that benchmarks are being met.  The issue I see is if this introduces another party into the negotiated transaction of the sale which might prolong to delay things, and thus make it less appealing for a bank to work with OCN.  That's a real possibility.

[Guest roark33]

No, that's what you want to believe, because you are long OCN.  Think about it this way, why would you even start the process with OCN, knowing you have to jump through all the hoops?  Why not keep it yourself, sell to Berkadia, WAC or NSM.  Just doesn't make any sense.  The VP who suggests they waste thousands of employee hours on getting approval will get fired on the spot...

[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.

 

"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.

 

If you look at the master agreements as filed, it seems like there is plenty of flexibility on price pretty much all the time, in the normal course of business, within the context of market rates. Stands to reason that when Ocwen's side of the negotiation was supervised by a guy who owned 30% of ASPS, Altisource was getting a pretty favorable interpretation - stands to reason the monitor won't be so friendly, considering these charges mostly flow through to consumers/investors.

[yadayada]

No, that's what you want to believe, because you are long OCN.  Think about it this way, why would you even start the process with OCN, knowing you have to jump through all the hoops?  Why not keep it yourself, sell to Berkadia, WAC or NSM.  Just doesn't make any sense.  The VP who suggests they waste thousands of employee hours on getting approval will get fired on the spot...

 

Because those three large servicers are reaching capacity? Because OCN can underbid them with their cost advantage? Because OCN has a lower complaint ratio?

 

@morningstar, it seems ASPS charges under market rates? At the very least for Hubzu. I just dont think Erbey really took OCN for a ride here. The monitor cannot force them to charge much lower then market rates.

[Guest roark33]

OCN does not have a cost advantage. 

 

Check out the Wells Fargo suit today.  The servicing companies that Wells bought would continue to charge late fees after house was deemed foreclosed, which was against their contractual right.  This is another thing OCN is being sued for in Iowa.  These inflated late fees create an illusion of cost advantage or high profit margins compared to other firms, but when on an even playing field, I don't think OCN has an advantage. 

[yadayada]

You got a link to that? you seem to be very pessimistic, and I have not seen any good facts. This company is down and not v popular right now, so naturally everyone wants a piece of them now.

 

It seems when someone posts numbers in this thread, it just gets hand waved away with empty statements. Would be nice if we could give some substance to this discussion. For example the low complaint ratio gets conventiently ignored... I stand by the fact that if there were real systemic problems that % would be a lot higher compared to other servicers.

[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.

 

If you look at the master agreements as filed, it seems like there is plenty of flexibility on price pretty much all the time, in the normal course of business, within the context of market rates. Stands to reason that when Ocwen's side of the negotiation was supervised by a guy who owned 30% of ASPS, Altisource was getting a pretty favorable interpretation - stands to reason the monitor won't be so friendly, considering these charges mostly flow through to consumers/investors.

 

The risk discussion that says, "If the agreements are terminated..." suggests that the lawyers thought about the possibility. I'm more worried about the Monitor saying you have to do business with someone else OR the new management saying that. Pricing, well yes that affects profits but that is not as problematic if there is a minimum rate of return say 10%. Perhaps Altisource must now compete with servicing technology bids from other companies. I'm not entirely convinced management at OCN will want to terminate the relationship but like you said may play hardball with prices.

 

In all, servicing is looking to be more like an electric utility or insurance. Pricing caps, highly regulated, go to the government begging for price increases every few years. Not a problem if they are allowed to earn an acceptable return on investment. This is what investors need to measure now - returns going forward in run-off and low-growth scenarios.

[pocoapoco]

To the extent that the directors at ocn were rational, would they have agreed to this settlement if there was not a light at the end of the tunnel.  Otherwise why settle at all.

 

[Picasso]

Hasn't this whole thesis been predicated on people being rational?  Erbey not cutting costs so much as to allow this to happen, regulators realizing this may weaken the mortgage recovery, management stopping share buybacks if they saw this coming, etc.

 

Apparently rational behavior has not worked with this investment.

[philly value]

You got a link to that? you seem to be very pessimistic, and I have not seen any good facts. This company is down and not v popular right now, so naturally everyone wants a piece of them now.

 

It seems when someone posts numbers in this thread, it just gets hand waved away with empty statements. Would be nice if we could give some substance to this discussion. For example the low complaint ratio gets conventiently ignored... I stand by the fact that if there were real systemic problems that % would be a lot higher compared to other servicers.

 

I dont think anybody is actively ignoring the numbers on this site; the question is whether the numbers you have cited are meaningful at this point.

 

On the complaint ratio: Many of us looked at this fact in the past and believed it to be justification for the thesis that Lawsky was overstepping; the fact that Erbey and the company have given up and accepted a very negative settlement suggests they did not believe the evidence would be on their side. You might be able to make the argument that Ocwen is being singled out among the servicers, but that only serves as a warning for other servicers, it does not necessarily provide relief to Ocwen investors.

 

On the runoff value: I disagree with your methodology of "Estimate runoff at Ocwen historical margins - $10K * Number of Complaints". I think you have to run the analysis at much lower margins, with the difficulty being that nobody here has any clue how much the profitability of Ocwen will be affected going forward. This makes accurately estimating runoff quite difficult. Further as I suggested before, the high profitability of servicers like Ocwen in the past few years may end up being a blip on the radar, and without Ocwen and other independent servicers as marginal buyers, Ocwen's book value / historical prices paid for MSRs likely overstates liquidation value.

 

So again the question is whether there is a level at which there is a strong margin of safety in Ocwen or ASPS. I'm not sure if that level can be estimated quantitatively at this point, given the level of uncertainty of (a) how exactly the shakedown affects overall profitability, and (b) whether Ocwen or ASPS share the pain equally or disproportionately.

[Ross812]

I own ASPS.

 

I was not expecting Erbey to be forced out. If the ASPS/OCN relationship is broken apart, any runoff value from OCN will not be realized. Worst case, ASPS has to stand on its own with 35% of revenue from 3rd parties. What's the profit margin is on this revenue? Say 12%, so 42M. ASPS is selling for 15x a worst case scenario right now. On the Assets side. I think Hubzu may be worthless without OCN. 85% of Hubzu listings were OCN, the network effect dies in this case.

 

Not expensive but not cheap. If there was not headline risk with ASPS I would be far more comfortable with keeping my position. It might be hard for them to drum up third party business if their name become toxic though...

 

What do you think? 

 

 

[philly value]

I own ASPS.

 

I was not expecting Erbey to be forced out. If the ASPS/OCN relationship is broken apart, any runoff value from OCN will not be realized. Worst case, ASPS has to stand on its own with 35% of revenue from 3rd parties. What's the profit margin is on this revenue? Say 12%, so 42M. ASPS is selling for 15x a worst case scenario right now. On the Assets side. I think Hubzu may be worthless without OCN. 85% of Hubzu listings were OCN, the network effect dies in this case.

 

Not expensive but not cheap. If there was not headline risk with ASPS I would be far more comfortable with keeping my position. It might be hard for them to drum up third party business if their name become toxic though...

 

What do you think?

 

I think in a true disaster scenario for ASPS the capital structure will get in the way; there is $590M of debt as of the past 10-Q and $413M net of cash. Very low relative to the ~$260M of run-rate EBITDA [getting the rough $260M based on annualizing past 9-mo results] but high relative to a scenario in which OCN-related revenue totally disappeared. Recall the large impact the discontinuance of lender placed insurance is expected to have on profitability. I think it's fair to assume OCN-related revenue has a higher margin.

[scorpioncapital]

I think we have to consider also the possibility of OCN buying out ASPS. Look at NSM. They own solutionstar. Was there any reason to spinoff ASPS from OCN? Not really. Just fooling around with trying to get a higher valuation. Sure the contracts may be broken, ASPS tanks and OCN steals it for nothing. Can the Monitor object? Maybe. But it's just an independent technology platform and OCN needs software from someone.

Other possibility - OCN finds another solution provider. Is this likely? I don't think so. They've invested to integrate and learn this platform, why bother? The relationship was always symbiotic so unless OCN finds somebody else, pricing should find some middle ground. It might not change at all except if OCN needs to reduce the price to maintain their margins. Even if a change happens it may be a few quarters or up to 3 years off - that's when the monitor leaves apparently. In the meantime, I hope they buy back shares at $30 with the 200m in cash.

[Travis Wiedower]

To the extent that the directors at ocn were rational, would they have agreed to this settlement if there was not a light at the end of the tunnel.  Otherwise why settle at all.

 

 

This is not a game theory exam question. Assuming human beings act perfectly rational is very dangerous.

[Guest roark33]

Two problems with that.  I think they have probably already spent most of the $200m in cash on buybacks around $50, when it tanked after the forced-placed insurance cancellation.  Second, with the amount of debt that ASPS holds, the capital requirements at OCN level will be tough.  They will have to issue stock to buy ASPS and take on at least 600m in debt.  OCN MSRs are running off much quicker than people are estimating, I believe, and this will quickly start to show up as they will not be allowed to buy any new MSRs in the near future. 

[Patmo]

OCN does not have a cost advantage. 

 

Check out the Wells Fargo suit today.  The servicing companies that Wells bought would continue to charge late fees after house was deemed foreclosed, which was against their contractual right.  This is another thing OCN is being sued for in Iowa.  These inflated late fees create an illusion of cost advantage or high profit margins compared to other firms, but when on an even playing field, I don't think OCN has an advantage.

 

Given the information that you have right now, can you ballpark a price point at which you would start considering going long if at all? Seems like there's plenty of room still for all this stink to get priced into the stock...

[Patmo]

To the extent that the directors at ocn were rational, would they have agreed to this settlement if there was not a light at the end of the tunnel.  Otherwise why settle at all.

 

 

This is not a game theory exam question. Assuming human beings act perfectly rational is very dangerous.

 

Or that this and that is the rational decision to make in the first place. Circumstances, incentives etc, this stuff matters.

[Ross812]

Two problems with that.  I think they have probably already spent most of the $200m in cash on buybacks around $50, when it tanked after the forced-placed insurance cancellation.  Second, with the amount of debt that ASPS holds, the capital requirements at OCN level will be tough.  They will have to issue stock to buy ASPS and take on at least 600m in debt.  OCN MSRs are running off much quicker than people are estimating, I believe, and this will quickly start to show up as they will not be allowed to buy any new MSRs in the near future.

 

Do you think ASPS could continue to grow third party business or will the name be toxic?

 

I'm not sure mortgage servicing technology providers are headline names that banks and servicers necessarily publicize. By this there may not be much headline risk in doing business with ASPS. If there is any continued relationship with OCN, even at a half of ASPS's current margins I think you will still do quite well.

 

Why do you think a runoff will be much quicker than expected? MSRs are typically pretty long lived assets. Are you implying they will be forced to sell their current MSRs? The settlement said they can buy new MSRs provided they meet the monitor's stipulations. Regardless if they never buy another MSR, I would think the current MSRs will have a half life on 10-13 years (13 years is the average time spent in a home).  Thoughts?

[morningstar]

 

Why do you think a runoff will be much quicker than expected? MSRs are typically pretty long lived assets. Are you implying they will be forced to sell their current MSRs? The settlement said they can buy new MSRs provided they meet the monitor's stipulations. Regardless if they never buy another MSR, I would think the current MSRs will have a half life on 10-13 years (13 years is the average time spent in a home).  Thoughts?

 

Your estimate is very bullish - OCN says that its own assumed CPR on its amortized-cost valued MSRs is 14.2%, which equates to a weighted average well under 10 years.

 

 

[yadayada]

Seperating the two would be a total disaster.

 

On the runoff value: I disagree with your methodology of "Estimate runoff at Ocwen historical margins - $10K * Number of Complaints". I think you have to run the analysis at much lower margins, with the difficulty being that nobody here has any clue how much the profitability of Ocwen will be affected going forward. This makes accurately estimating runoff quite difficult. Further as I suggested before, the high profitability of servicers like Ocwen in the past few years may end up being a blip on the radar, and without Ocwen and other independent servicers as marginal buyers, Ocwen's book value / historical prices paid for MSRs likely overstates liquidation value.

 

My point was to illustrate that some serious cost increases will have to come for OCN to lose money at current prices

. Most of the costs of run off would be in the next 5 years or so. So to get 2 billion$ in cost increase you would need 400m$ in cost increase each year... I think at that point they will be the highest cost servicer. I think that is unlikely. My point is MOS in current price is huge. And basicly you would have to assume a horror scenario to lsoe here.

 

Also seperating ASPS and OCN would mean installing a new platform. Which would hurt homeowners. Which would not be in the interest of regulators. It would be almost the same thing as just moving the MSR's...

 

Also banks got fined for aiding terrorism for billions of dollars, and they still do fine. Other banks still do business with them...  I seriously doubt banks will not do businses with OCN if it is clear that complaint ratio's are very low now.

 

Because who else will buy all the MSR's? The other players right now are quite levered, and dont have a lot of ability to scale up..

 

Finally, Erbey is almost 70. Maybe the guy wants to take it easy? Maybe he thought those companies would do fine now on their own, and thought to create goodwill with the regulator, and not have a super high fine, he would just step down?

 

Finally, ASPS cannot easily sell their platform to other servicers because they do not have the infrastructure in place to use it. The platform is not the only thing, the ability to get productivity out of those cheap Indians is another skill.

 

finally

https://glennchan.wordpress.com/2014/12/22/ocnasps-ocwen-settles-with-the-ny-dfs-erbey-steps-down/

 

I think it is best at these prices to await next Q call. Just seems ASPS is now basicly priced as if the whole thing will fall apart. I dont really see new information that makes that likely. Just that costs will go up a bit.

 

Also Ocwen was hated 4 years back. Yet banks still sold them MSR's. Why would that be different now after a back dating issue? They will give money to home owners, and their systems will be much better now... So if anything risks are now lower for banks.

 

 

Im not saying these things are true, just giving a yin to all the yang here.

 

Im a optimistic guy by nature :D

[Guest roark33]

Anyone who thinks Erbey is resigning to spend more time with his wife or because he wants to take it easy has some serious confirmation bias inching into their thinking.  He was obviously forced out...

[peter1234]

Anyone who thinks Erbey is resigning to spend more time with his wife or because he wants to take it easy has some serious confirmation bias inching into their thinking.  He was obviously forced out...

+1

 

Erbey is/was the company.

[yadayada]

I guess what I meant to say is, he could have stayed , but then it would have been drawn out much longer. And would have been much more expensive for shareholders. So he just thinks, fk it, im done with this anyway if it has to be like this, Ill sacrifice myself for the company.

 

Whatever all speculation. Just seems that it makes no sense to sell now. Ill wait and see for next Q call and 10k and see what will happen going forward.

[scorpioncapital]

Back to basics? Servicing and debt collection with regulated profits for the next 3 years at least. Someone's got to do it. I think a 10% return on invested capital is reasonable, so if they invested (according to their B/S of MSR at book value) of 2.5 billion, let's say $250m per year. Current market cap is 2 billion, roughly 10% returns. Implied in this is current price levels paid to ASPS which let's say, in turn, also gets 10%. Since ASPS is making say $100m per year net, and the cap is currently 700m, implies 14%. Since there is apparently a 4% differential here, it seems if ASPS ROIC goes down 4%, OCN would go up 4%?

 

 

[pocoapoco]

Anyone who thinks Erbey is resigning to spend more time with his wife or because he wants to take it easy has some serious confirmation bias inching into their thinking.  He was obviously forced out...

 

Not necessarily. Given that the regulators want a nice headline and a scalp,

Erbey may have offered himself up as a bargaining chip.  He is old enough to be retiring, so if it helps reduce the cost of the settlement (which he cares about as a shareholder) he could propose that.  Which is not the same as being forced out.

 

As far as seperating ocn and asps this is obviously the main concern for asps. But really, why is this a reasonable or probable outcome? The complaints against ocn as it pertains to homeowners is not centered on particularly bad tech platform.  Do they have a very intertwined relationship, yes, but they used to be the same company. Do spinoff companies commonly have to stop doing business with their former parent?  Being under the microscope will cause some lower pricing on the conservative end of asps services. Again I just don't see how it benefits the shareholder OR the public to completely sever that relationship.