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More than half of Altisource revenue is from business with Ocwen

Sterne Agee likes future for non-bank MSR market

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Sterne Agee is initiating coverage on Altisource Portfolio Solutions (ASPS), a provider of servicing tools, with a neutral rating and $125 PT on its positive outlook for growth for non-bank MSR firms.

Altisource provides technology and ancillary services to the mortgage, real estate, and consumer debt industries and engages in roughly ten different revenue generating activities through three business units.

Sterne Agee analyst Henry Coffey says he is strong on the future of non-bank servicers despite recent troubles with regulators.

“We remain optimistic on the long-term growth prospects for non-bank servicing and subsequently ASPS. However, over the near to intermediate term we view the slower pace of servicing transfers, improving mortgage credit quality, and current regulatory uncertainty as factors driving a Neutral rating,” Coffey said.

Growth has been coming fast for non-bank MSR firms. Most recently in mid-March, a big investment in another nonbank, Nationstar Mortgage (NSM), by Kyle Bass’ billion-dollar hedge fund, Hayman Capital Management. Hayman upped its stake in Nationstar by 4.76 million shares, or 5.3%, citing its assessment of potential strength in nonbank servicers in the growing MSR market despite the regulatory headwinds facing nonbank MSRs.

In 2009, Altisource spun off of Ocwen Financial (OCN) to become a publicly traded REO and title insurance company. Business ties remain, however, and as Ocwen continues to buy mortgage servicing rights. New revenue trickles down to Altisource for handling properties Ocwen foreclosed on.

“Altisource Portfolio experienced strong growth due to the rise of the non-bank servicing industry and its relationship with Ocwen and related companies, which together comprise ~65% of revenue,” Coffey said.

After being spun off, Altisource bought up large swathes of Ocwen’s non-core assets. Some have even been critical of the ties between Ocwen and its subsidiaries.

As HousingWire executive editor Jacob Gaffney reported, the New York Department of Financial Services is also probing Ocwen's outlier businesses, Altisource and Home Loan Servicing Solutions. Ocwen execs simply said they are at arms length and left it at that. There is no mention of either firm in the earnings filings with the SEC.

Sterne Agee says that approximately 65-70% revenue falls under the umbrella of default-related services with the remainder derived from software licensing, IT infrastructure, CRM products, and non-default-related mortgage services such as origination and closing/title services.

We are initiating GAAP EPS estimates of $8.30 for 2014 and $9.50 for 2015,” Coffey reports. “The 2014 EPS ramp is driven by loans on the REALServicing platform increasing ~50% to ~1.8 million and delinquent loans increasing ~30% to 0.4 million from servicing already on OCN's balance sheet and the prospective acquisition of $39 billion of mostly non-agency servicing by OCN from Wells Fargo in 2H14.”

Coffey says that the roughly 30% 2014 revenue growth in his model should drive operating leverage, with gross and operating margins increasing about 300bp each to 44% and 27%, respectively.

“Given our assumption of a stabilized OCN servicing portfolio in 2015, ASPS revenue growth slows significantly in our model, with EPS growth driven by expense control and share repurchases. While assumptions are fluid at this point, should the WFC deal not close, it could adversely impact EPS estimates $0.50-$0.60 in 2014 and $1.00-$1.25 in 2015,” he reported.

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