OCN - Ocwen Financial

[rayfinkle]

So a few things:

-Erby could benefit financially from leaving. He could (personally) buy stock now. Not saying if he is/is not (or should /should not) do this, just saying that if he believes in the business earning power this is an avenue

-One way ASPS is harmed without severing ties with OCN is as follows:

*All intercompany revenues between OCN & ASPS are at above market rates

*OCN is forced to re-cut these agreements at market rate. This would hurt ASPS revenues and CF.

 

Note it is possible that "above market" rates for any intercompany arrangements are better for OCN than lower nominal rates with third parties. Hard to quantify, but the frictional costs of integration & working with unfamiliar tech partners is real (and can be huge). Hopefully new BOD members look wholistically at the economics of these intercompany arrangements (rather than looking only at marginal costs).

[Picasso]

Apparently all news is good news for OCN shareholders.  There is no way Erbey getting kicked out should be viewed as a positive. 

 

There are several lessons to learn from this.  One, it is never too late to sell.  Even this morning OCN was close to $20 and ASPS was in the $40's.  Two, you should never assume rational behavior will drive operational or regulatory decisions.  Three, when a position turns against you it is important to take a step back and really ask yourself if you know as much about the business as you first thought.  Especially if you are a concentrated investor.

 

There are other lessons from reading through this thread.  But the biggest to me are the red flags that repeatedly popped up to the dismissal of most investors.  As an example, when AAMC was repurchasing stock in the 4-digit range you knew that the buybacks were not being done with prudence in mind. 

 

Not to rub salt in the wound, but everyone keeps saying the stock can't go any lower every 10% drop.  There has to be a point where you admit there was minimal margin of safety on this one or ASPS.

[scorpioncapital]

"All intercompany revenues between OCN & ASPS are at above market rates"

 

The problem is this. OCN & ASPS used to be one company. They owned the software and eliminated the expense line it is now paying to ASPS. To make the separation, they had to determine in the agreements the market rate - artificially to some degree. The question is if they outsourced this function, how much would they pay? Are there any other publicly traded mortgage servicing technology companies? I think this is the only one. Most are private or part of larger companies. Yet, we can assume the price is not zero. Anybody know how to estimate what market rates are? Also keeping an eye on % of revenue from OCN. It's 67% and dropping. That's good news. If it gets to 50%, this could be quite undervalued.

[yadayada]

It is obviously a negative, but not nearly as bad as people seem to think.

 

To people thinking selling now is a good idea, what do you think the most likely scenario is, and what do you think run off value was before all this mess?

[Guest roark33]

I am going to detail the numbers more fully on the ASPS thread, but I don't think OCN and ASPS will sever ties, in fact, I think the only solution for ASPS is for OCN to acquire ASPS in stock deal, but that will be expensive given the debt level of ASPS and the capital requirements that OCN will need to maintain going forward.  In the conference call, OCN said they were going to sell their agency MSRs, which will have a negative impact on the ASPS technology revenue streams going forward.  It is obviously smaller than the non-agency portion, but the runoff value calculations will begin to disconnect when the UPBs begin to fall at OCN.

[Liberty]

Apparently all news is good news for OCN shareholders.  There is no way Erbey getting kicked out should be viewed as a positive. 

 

There are several lessons to learn from this.  One, it is never too late to sell.  Even this morning OCN was close to $20 and ASPS was in the $40's.  Two, you should never assume rational behavior will drive operational or regulatory decisions.  Three, when a position turns against you it is important to take a step back and really ask yourself if you know as much about the business as you first thought.  Especially if you are a concentrated investor.

 

There are other lessons from reading through this thread.  But the biggest to me are the red flags that repeatedly popped up to the dismissal of most investors.  As an example, when AAMC was repurchasing stock in the 4-digit range you knew that the buybacks were not being done with prudence in mind. 

 

Not to rub salt in the wound, but everyone keeps saying the stock can't go any lower every 10% drop.  There has to be a point where you admit there was minimal margin of safety on this one or ASPS.

 

Good post.

[Patmo]

Apparently all news is good news for OCN shareholders.  There is no way Erbey getting kicked out should be viewed as a positive. 

 

There are several lessons to learn from this.  One, it is never too late to sell.  Even this morning OCN was close to $20 and ASPS was in the $40's.  Two, you should never assume rational behavior will drive operational or regulatory decisions.  Three, when a position turns against you it is important to take a step back and really ask yourself if you know as much about the business as you first thought.  Especially if you are a concentrated investor.

 

There are other lessons from reading through this thread.  But the biggest to me are the red flags that repeatedly popped up to the dismissal of most investors.  As an example, when AAMC was repurchasing stock in the 4-digit range you knew that the buybacks were not being done with prudence in mind. 

 

Not to rub salt in the wound, but everyone keeps saying the stock can't go any lower every 10% drop.  There has to be a point where you admit there was minimal margin of safety on this one or ASPS.

 

There was no margin of safety, but it seems to be starting to develop. Give it another 6-12 months of this bulls%#t for people to completely dismiss and forget the co, and share price could become quite tasty. I love the smell of a company falling from grace after overreaching.

[Guest roark33]

Lots of companies fall from grace and never climb back up the mountain.  Reading through OCN regulatory filings in the early 90s is really interesting to see how their business was booming and then all of a sudden it disappeared, almost overnight.  It took the great recession for them to find a way to create another business.  I don't think many shareholders are going to wait around for that...

[Patmo]

Lots of companies fall from grace and never climb back up the mountain.  Reading through OCN regulatory filings in the early 90s is really interesting to see how their business was booming and then all of a sudden it disappeared, almost overnight.  It took the great recession for them to find a way to create another business.  I don't think many shareholders are going to wait around for that...

 

The scarier part is more the debt load than anything for me. I doubt co will vanish from existence just like that because a couple suit-and-tie gonzos in some government office decide so, and if that happens oh well even pocket aces lose 20% of the time. But with the lower profits/losses that they are bound to make, fines and lawsuits they are bound to pay, etc, will they be able to support this debt load? The mountain is much easier to climb back up without that gorilla on your back.

[scorpioncapital]

The buybacks at much higher prices financed with debt and leveraging the balance sheet suggests they did not think this regulatory outcome would develop. Still, the fact that the head of the organization is out and the government is regulating it more strictly is a positive development - after the market adjusts for the reduced profits of course and assuming the coverage ratio is acceptable.

 

 

[rukawa]

This is one of those cases where I question whether I should even be investing my own money. I was about to invest in this. I never bit the bullet but I was on the verge. I would have never predicted this.

[LC]

This is one of those cases where I question whether I should even be investing my own money. I was about to invest in this. I never bit the bullet but I was on the verge. I would have never predicted this.

I feel you...I've narrowly avoided a few bad eggs too, probably by luck. But now I just behave conservatively when it comes to people... I never go into business with (i.e. make an investment in) someone who rubs people the wrong way. Good businessmen, good people can manage their image. They can figure out how to make money without leaving a trail of tears in their wake.

 

A few commentators in this thread questioned Erby's character. When NPR hosts a show about the issues with your organization, it's a red flag. That's enough to scare me away. I'd rather miss out than make money with people who I just don't quite trust. Not to change the subject, but the same goes with Biglari. Sanjeev's word is enough to just scare me away. I could be playing it too conservatively, but frankly the potential returns aren't worth that type of grief. If I wanted to make money while having to constantly worry about and keep tabs on the people I'm doing business with, I can go sell drugs on the corner.

 

Ocwen/Altisource may well turn out to be multibaggers for everyone here and for the longs I wish it true, I just don't think the money is worth getting into bed with untrustworthy people.

[netnet]

This is one of those cases where I question whether I should even be investing my own money. I was about to invest in this. I never bit the bullet but I was on the verge. I would have never predicted this.

 

Here I would paraphrase Warren Buffett on the rules of investing:

[*]Don't lose money

[*]Never forget rule number 1

 

To this I add his WEB's adage: "Only shoot fish in a drained barrel."

 

Handicapping legal outcomes is really hard, particularly in a non standard regulatory action, as opposed to a more straight forward BK for example. There is no margin of safety and you can not assign reasonable(realistic?) odds to the outcomes, particularly outcomes that pose an existential threat to the company.

 

With those simple heuristics  (at least they seem simple to me) you just wait to see what will happen, i.e. wait for the barrel to drain.  I think someone on this thread compared Lasky's action to the Salad oil scandal, sorry not even close.  There was never any threat to AmEx core business.  Lasky had a gun pointed at the heart of the company, and I don't know how grievous the wound he inflicted is.

 

(Now, mind you, it took me a while, in fact way too long to come to this conclusion; at one point, I thought maybe I should put in a small position, and then come in later, but I decided that Lasky should not want to destroy the companies, but he might.  Furthermore, my ultimate convictions were not strong enough to publicly call out people on this board or the Altisource board , but hey, I'm no Charlie Munger!)

[Picasso]

In regards to being spooked by the outcome with this whole Erbey thing, I offer a couple suggestions.

 

The red flags were raised many times.  On the AAMC board a couple of us mentioned big issues with the stock valuation and instead of acknowledging the risk there was a disregard as if someone who owns 30% of the company would never run it into the ground.  Anytime you see a stock where bad news is somehow construed as good for the investment, you need to step away. 

 

The second is, when I invest in these kinds of situations I either put it in a basket to minimize the risk or know the price where I am wrong.  There was no way to do a basket with the Erbey empire.  So instead you figure out the downside risk from a worst case scenario and tell yourself if it trades at a price reasonably below that level, you get out.  It sucks because you end up being stopped out of potential winners but it keeps you in the game.  Especially with these low probability tail risks.  If you wait for the facts to change before you take your loss it can be too late.  The other way of doing this is through put options.

 

But that's in the past now.  The question is what does one get at the current price now that blood has been shed.  It seems to me that the mechanics of the business have been severely hampered and it will be a very long time before we have some kind of catalyst.  So we have no catalyst, the guy we were supposed to trust as the capital allocator is gone, and a business model with no growth still trading at mid-teen multiples based on some previous commentator estimates.  You have to believe in some far flung theories or big industry tailwinds to even get past that handicap.

 

No wonder the banks have been in a hurry to get out of this business.  There is an opportunity here somewhere but it takes someone close to the industry to know what that is.

 

I should note that the bonds tied to OCN have been trading in high spreads even for junk bonds for months now.  I would watch OCN trade up while the bonds trading down half to a full point.  I see a similar situation with POST where the bonds are diverging from the equity but people are caught up in the "Outsider" nature of owning the stock.  Needless to say today was a bad day for those OCN bonds, but it might help to compare what the bond market is saying for the "runoff" value of the stock.

 

Edit:  I take that back, there were some high 80 offers that I saw in the morning but it looks the the 2019 OCN bonds ended up positive at 92 for the day.  No much volume at $3 million, but the prices are above what I was seeing in the morning.

[ScottHall]

I think Picasso makes a lot of sense, here. I would add a similar way to look at these sort of situations, which is expanding on the basket scenario.

 

That is, if you think the investment makes sense from an EV perspective but with a high degree of uncertainty, would be to consider whether you'd take 1,000 (or some other arbitrarily large number) such situations and invest a small percentage of your portfolio in each of them. Obviously this isn't possible in practice, but it can be a useful framework.

 

You generally don't want to invest a large percentage of your portfolio in these sort of situations, because they can blow up rather spectacularly. That's a risk you have to be willing to take, and you should size your bets accordingly. You don't want to tank your whole portfolio if one high octane position goes sour.

 

That's one of the issues with concentration in general. If you run a concentrated portfolio, you'd better be damn sure about the prospects of your investments. Considering that that's more or less impossible with this sort of investment, it only really makes sense for a small stake in a well diversified portfolio and you have to be willing to accept the risk of loss.

 

One thing that I notice generally with investors, is that after an event happens (positive or negative), is that they often act surprised when it does. If you owned Ocwen and thought it was 70%-30% in favor of Ocwen working out going in to the settlement, then you shouldn't act surprised when a negative event happens. It should happen 3 every 10 times, or so, with those numbers.

 

But I notice many people are shocked by this development, which seems silly. The same is also true when investments work out favorably and people act like it was a lock to happen.

 

Unless you rate your chances of success at 100%, it's never a lock and you should expect these sort of declines from time to time. In fact, even if you think it's 100%, it's most certainly not.

 

If you invest 100% of your portfolio in one investment for a long enough period of time, you'll eventually you'll go broke (though it could take a really, really long time). This is the same sort of concept.

 

Best wishes,

 

Scott

[morningstar]

Edit:  I take that back, there were some high 80 offers that I saw in the morning but it looks the the 2019 OCN bonds ended up positive at 92 for the day.  No much volume at $3 million, but the prices are above what I was seeing in the morning.

 

Yes - pretty good outcome for OCN bonds and loans today, NSM also up in credit on sympathy. But to me that's because a settlement reduces the variance of outcomes on a company that had a meaningful equity cushion - not because it's good news for the company.

 

Also worth mentioning that there is no real liquidity in high yield credit this week so I wouldn't regard any pricing as fully discovered until the week after the new year.

[valueinvestor82]

What's frustrating for me in almost all of the recent comments is that there's a bunch of high-fiving by everyone who was so smart to avoid this, or how us longs "should have known." I've learned nothing material about the actual impact to the equity value, and I'm guessing that's because the bottom line is that you guys don't know. That said, nor can anyone know just yet, and my guess is that the market just decided to sell first and ask questions later. I see the important determining points (in part) to be:

* how many shares will be bought back at these prices?

* will Erbey actually exhibit more influence now as an "outsider" with a huge stake in the equity?

* how long until MSRs are acquired (didn't anyone else actually find relief in the fact that they'll grow again? Someone on this board projected their negativity and said "years from now" but where did they pull that from)?

* what will expenses be, and is there any plausible scenario where it justifies the current price? I did see a couple of attempts at this question.

* aren't we out of the run-off mode scenario now, given the settlements allowance of future acquisitions?

Today looked like such capitulation I don't see how it was justified to the extent that the decline occurred. Still looking for legit opinions instead of learning how smart everyone was for not buying the stock that they're spending so much time writing about.

[jouni1]

What's frustrating for me in almost all of the recent comments is that there's a bunch of high-fiving by everyone who was so smart to avoid this, or how us longs "should have known."

this thread has been pretty frustrating for a long time. every time someone raises a concern people start fanatically defending erbey/ocn/asps whatever. i'm not sure a return to reasonable discussion is possible anymore  ;D

[innerscorecard]

I think it shows just how hard it is to think about the probability of "unlikely" events. I won't dance around it. I'll just talk about what makes me actually interested in this topic - a certain poster's blog (won't mention it by name here to avoid this coming up on Google searches of his name or CoBF screenname, but everyone knows who it is).

 

He is a great writer and analyst, and I'm really grateful to him for his writing and research on his blog. I really admire his full honesty and disclosure. But I think this episode (along with some others) shows that good analysis can still be hampered by quite bad portfolio management.

 

He swung big on Yongye puts this year, with the rationale that it had "asymmetric upside." That was likely true, and it may only have been luck that made that particular bet work out poorly. But it completely crushed his returns this year because he went big on this bet with a big risk of losing it all.

 

Then his portfolio which was outsized-focused on Ocwen and Altisource gets crushed by this outcome (which was one of many possible outcomes of the known regulatory risk).

 

I think it goes back to matching your stocks with your portfolio management strategy. I see comments on CoBF about how Graham-style investors sometimes lose money when they try a concentrated portfolio, or when GARP investors lose money when they buy net-nets. I think it comes down to - if buying companies that are really quite cheap because of something like this - keeping it to a small portion of your portfolio so that this idiosyncratic risk doesn't wreck you - and when having a very concentrated position, being really, really sure that there isn't in fact a big risk like this. Or the stock has to be so cheap that it can't fall further no matter what the absolute worst outcome is.

 

Anyways, this is just me thinking out loud. I'm not saying I'm smarter than anyone, in fact the opposite. I don't know what the exact lesson to learn from this is, so I'm trying to think about what it is.

[physdude]

I think it shows just how hard it is to think about the probability of "unlikely" events.

 

You raise a very good point. I did go into OCN intending it to be a fairly small part of my portfolio (2% or so mostly in 20 strike 2016 LEAPs) but as the price fell down I started adding short puts to my LEAPs convincing myself that there was a great MOS as well as some decent premiums mainly due to underweighting of the likelihood of a really bad outcome.

 

Another point that is relevant to me, but probably not to others, is that I don't make very good decisions and freeze when I see the price collapsing rapidly. I could have actually exited my short puts (based on 4% of my portfolio) for a profit even at the open yesterday which I obviously should have done due to the very limited upside and large downside risk with the news at hand. But I froze and missed the opportunity which didn't last long and still hold them. At this point, I don't really understand how to value OCN/ASPS so the position has become a tricky one.

 

At least, the upside of the price collapse is that they are down to only about 4% of my portfolio so the concentration is not so bad  :). (It is also ironic since the avoidance of concentration is what decimated my returns this year as I moved a lot of profits out of oversized positions in BRK and QCOR into OCN/ASPS and oil stocks at the worst possible times and am now up only about 12% this year compared to 30% a couple of months ago. I would be up over 40% if I had kept those oversized positions.)

[yadayada]

If I didn't have ASPS on cost basis at 10% id probably buy ASPS now though, not OCN.

 

That company basicly trades like it is likely OCN will not use their platform anymore for anything, and unrelated party revenue will shrink.

 

If you think OCN trades at mid teens multiples you obviously dont understand the situation here. They have one time costs of loading up MSR's on their platform which will go away. And the OCN/ASPS platform is lower cost then the current platforms from the sellers of those MSR's.

 

So if you think you will lose here, that either means OCN will go down and not go in run off. Which would be really bad for homeowners, and that was also not stated in that press statement. Also you think Erbey would just leave the company and let it roll over and die if this was likely? It is his life... I think he would stay and fight.

 

Or the more likely scenario, it goes in run off, but that 70% cost advantage will be severly damaged. With 70% cost advantage by using that automated platform, run off is close to 5 billion$. So to lose here you would have to assume like 3-4 billion$ of extra costs. That would mean higher costs then the other servicers.

 

Obviously I made a mistake buying at higher prices. I should have had more patience. But the patting themselves on the back by all the people in this thread who have not even read a few of their 10k's is rather annoying and does not add anything to the discussion. I saw that in the AAMC thread as well when i tried to discuss various upside scenario's. It seems people have a very black and white view of things here. I thought it was white, but I think it is more grey now. And not black.

 

I think Lawsky targetted OCN here because he did not like their cost advantage, he got the most complaints from them (because they are biggest with the worst quality loans) and they are the most hated. He said he based it in CFPB complaints, and that complaint ratio is rather low. So I doubt it will be that expensive to clean the place up completely.

 

That said, there were investments just as cheap with less dirt that I should have focussed on.

[physdude]

I agree that a plain run-off, even with somewhat higher costs, would still probably mean that OCN is a good investment at this price but I think the agreement raises some really problematic issues. The extra directors might be from the same mold as Lawsky and seek to punish OCN for any and every minor issue. The other states might try to get an updated settlement with greater fines. The release of files could lead to a flood of lawsuits as OCN might be perceived to be easy prey now. The "non-monetary" issues are the real problem here. I would have much preferred a fine of $500m instead of them.

[yadayada]

yeah for OCN to be a good investment now you gotta have some conviction on new MSR's still. Otherwhise there are better idea's out there with less uncertainty and just as much upside. That is why I would go with ASPS. That thing trades much cheaper and has non OCN revenue.

 

I think the interesting question is, where would you sell ASPS if price goes up? At some point it makes sense to sell at a loss and put it in an investment with similar upside but less risk. I dont think OCN is the best idea right now.

[morningstar]

I agree that a plain run-off, even with somewhat higher costs, would still probably mean that OCN is a good investment at this price but I think the agreement raises some really problematic issues. The extra directors might be from the same mold as Lawsky and seek to punish OCN for any and every minor issue. The other states might try to get an updated settlement with greater fines. The release of files could lead to a flood of lawsuits as OCN might be perceived to be easy prey now. The "non-monetary" issues are the real problem here. I would have much preferred a fine of $500m instead of them.

 

This seems pretty hard to believe. We are not pricing at a run-off scenario yet, with the company still trading closer to 2x BV than 1x. (edit: meant to say tangible book here, though still at a decent premium to book as well)

 

The vast majority of OCN's assets have been purchased in the last several years, the bulk of them in a competitive public courthouse auction (Rescap). Their projected lifespan has the company wrapping up in a decade or so, when it will no longer have any hope of servicing scale.

 

Since then, a large additional swath of regulatory burden has been added to the company and shareholder-friendly management has been replaced by effective regulatory control of key management functions. Assuming no growth, I think it's likely the assets are worth LESS than what they paid, not double.

 

Probably this just goes to show that run-off is a pretty onerous and debilitating assumption. Even a company run by Buffett or another legendary investor but in "run off" (i.e. no growth/distribution of all earnings) wouldn't trade far from book value under these circumstances.

[physdude]

BV is 12.81/share at morningstar so it is just a hair above 1.2x book right now. Assuming that they still add value so that MSRs in their hand are still more valuable than the book, their being at run off value is not far-fetched.