Ocwen, Wells Fargo MSR-Related Deal Terminated - Analyst Blog

On Thursday, Wells Fargo & Co. (WFC) and Ocwen Financial Corp. (OCN) mutually cancelled the deal entered in Jan 2014 under which Ocwen was to buy residential mortgage-servicing rights (MSRs) on 1,84,000 loans with total principal balance of about $39 billion from Wells Fargo. Notably, the portfolio represented 2% of the bank’s total residential-servicing portfolio as of Dec 31, 2013.

However, such a move will not have a material effect on Wells Fargo’s financial results. Moreover, Ocwen will get back its deposit worth $25 million.

The cancellation followed, superintendent of New York’s Department of Financial Services (DFS), Benjamin Lawsky’s restriction on the proceedings of the cash-deal in Feb 2014. Driven by concerns over the mortgage servicer’s ability to handle the increase in servicing volume, Lawsky halted the Ocwen deal indefinitely. Therefore, Ocwen put the deal on hold at regulator’s request and was cooperating to resolve his concerns regarding its ability to service portfolios.

Further, in Oct 2014, Lawsky accused Ocwen of backdating the foreclosure correspondences of borrowers. Lawsky alleged that the company has harmed thousands of borrowers by denying them a chance to save their homes from being foreclosed. The borrowers received letters informing them to improve their defaults in order to avoid foreclosure, with a date that was already past at the time of receipt.

Additionally, the company was accused of sending loan modification letters to eligible borrowers who received these after the 30 day cut-off time, thereby violating state and federal laws. The correspondence from Lawsky also stated that Ocwen, in spite of being informed of the malpractice by an employee a year ago, had failed to probe into the same.

Nonetheless, after the details of the DFS letter become public, Ocwen initially issued a statement declaring that the backdated letters sent to 283 borrowers in New York had been system generated. Also, although the company believed that the issue has been resolved, it is cooperating with investigators to discern such problems regarding any other cases.

Mortgage servicers’ role is to accumulate payments from homeowners and allocate those to investors who own the loans through mortgage securities. Collectively, over the past two years, servicing rights over $1 trillion in mortgages have changed hands. Therefore, some specialty mortgage servicers have been thriving, which has raised doubt among regulators in the servicers’ capabilities to service such loans.

Of late, Ocwen has been growing inorganically. The company has acquired MSRs from several large banks including Morgan Stanley (MS), The Goldman Sachs Group, Inc. (GS) and JPMorgan Chase & Co. (JPM). Once the company closes all its announced deals, the total servicing portfolio will likely be approximately worth $500 billion. At present, the company is the fourth largest mortgage servicer in the country with a market share of roughly 5%.

After the U.S. housing market collapsed in 2008, home foreclosures increased, which led to a rise in legal costs related to the servicing of mortgage loans. Moreover, some banks had to pay penalties for malpractices related to such loans. Additionally, given the new capital regulations, servicing of loans has become a costly affair for the banks.

Therefore, banks started selling their rights to shrink their mortgage business, thereby reducing risks. Moreover, revenues from mortgage fees have lessened as the boom in mortgage refinancing is gradually fizzling out, which led banks to resort to reducing exposure to the mortgage market.

In Dec 2013, Ocwen announced a settlement with the Consumer Financial Protection Bureau (CFPB) and other regulators, along with 49 states and the District of Columbia. The settlement pertained to the resolution of the alleged charges against the company’s handling of mortgages. However, Oklahoma was not part of the settlement. Ocwen was bound to pay nearly $2.1 billion in relief to distressed homeowners.

Going by the allegations, Ocwen used deceptive and unfair means while working with borrowers who were delinquent and underwater. The company was accused of misrepresenting facts while filing foreclosure documents, charging unjustified fees for default-related services and forcing borrowers to buy unnecessary insurance policies, among others.

Continuation of such settlements will dent Ocwen’s financials in the near term. Moreover, the cancellation of the deal will affect the company’s strategy of increasing revenue through the acquisition of servicing rights from big banks in the coming period.

Currently, Wells Fargo carries a Zacks Rank #3 (Hold), while Ocwen carries a Zacks Rank #5 (Strong Sell).

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