Ocwen grabs more mortgage servicing from big banks, prepares ResCap bid
Ocwen Financial Corp. (OCN) continued to acquire mortgage servicing in the second quarter from big banks looking to shrink their portfolios and adjust to new rules.
Bank of America (BAC) sold servicing rights to $10.1 billion in Freddie Mac home loans to Ocwen in June, according to the Ocwen earnings release Thursday.
Ocwen Executive Vice President John Britti said in a conference call with investors Thursday that the company would bid on the Residential Capital assets, including $200 billion in servicing rights and $150 billion in subservicing rights.
Ally Financial placed its ResCap mortgage lending unit in bankruptcy in May. The stalking horse bidder is currently Berkshire Hathaway with Nationstar Mortgage Holdings (NSM) also making an offer on the portfolio.
"We are going to be a competitive bidder on ResCap," Britti said, adding that the overall investment requirement is less than the $263 million Ocwen paid for Litton Loan Services last year.
Ocwen also closed on another $300 million in Fannie Mae mortgage servicing rights in July and said it would acquire another $2.4 billion in Fannie servicing in September from a bank based on the West Coast.
Ocwen became the largest servicer of subprime loans last year as it bought servicing from the largest banks looking to reduce their portfolios or leave the business entirely, including investment banks such as Goldman Sachs (GS) and Barclays Capital (BCS). The five largest servicers, including BofA, Ally, Wells Fargo (WFC), JPMorgan Chase (JPM), and Citigroup (C), signed a $25 billion settlement with state and federal prosecutors over foreclosure abuses in March.
Ocwen CEO Ron Faris said the company is adjusting to new standards from the settlement as well, allowing the large banks to unload servicing to them with state attorney general and federal regulator approval. Business will grow, he said, as other firms sign onto the deal, too.
"The settlement pushed banks to find partners to help, and we have kept pace with these developments to adhere to these requirements," Faris said. "The settlement will expand to other banks."
Profits increased 70% in the second quarter on higher fees from Ocwen's growing portfolio. It serviced nearly $128 billion in mortgages as of June 30, nearly double the $70 billion portfolio it held one year prior, according to its earnings release.
"We are seeing a shift in our business mix toward subservicing for bank customers and acquisition of Freddie Mac, Fannie Mae and Ginnie Mae MSRs that should help sustain profitable growth," Faris said.
Reaping major profits off of the most recent acquistions will take time. The company cuts costs on servicing loans by using a platform that relies heavily on technology and a workforce in India, where employee cost is one-eighth that of U.S-based operations, according to a recent financial filing.
"New deals tend to have their lowest margins in the early months, but return on capital grows over time as delinquencies decline," Faris said.
The delinquency rate on the Ocwen portfolio was 24.5% in June, nearly even with last year's percentage.
Ocwen also launched a publicly traded company in the Cayman Islands to provide more capital for it to grow its portfolio by buying up existing servicing rights. Ocwen Chairman William Erbey is one of the offshore company's largest investors.
BofA continues to unload servicing to smaller firms. Earlier in the year, it shed $10.4 billion of GSE servicing rights to Nationstar.
The bank has a $1.5 trillion mortgage servicing portfolio, which it reduced from nearly $2 trillion one year ago. The bank holds 8.5 million mortgages in its legacy portfolio, down from more than 10 million one year ago. More than 1 million of these loans are at least 60 days delinquent.