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The big idea from Ocwen Financial was to establish an offshore entity to help it deal with its massive influx of business.
Now, nearly one year since that company Home Loan Servicing Solutions priced its IPO, the market is heaping praise on its successful business model.
During the third quarter conference call, traders and analysts from Bank of America, Barclays, Deutsche Bank, KBW, Piper Jaffray, Sterne Agee and Wells Fargo congratulated HLSS CFO James Lauter, and chairman William Erbey.
From an earnings perspective, the results don't seem all that great. HLSS earned net income of $6.57 million, or $0.37 per share, in the third quarter of operations, and projects $0.38 to $0.39 for the fourth quarter earnings, due February 7.
The company, during the quarter, purchased mortgage servicing assets representing $29.9 billion of unpaid principal balance. But then Erbey mentioned $700 million in HLSS ABS closed yesterday — trading above par today. What's more, the cost of putting these deals together is getting cheaper and cheaper.
As a side note, HLSS was thought to be created to take mortgage servicing rights, which is now only a portion of total business. 90% of HLSS assets are currently mortgage servicing advances or cash which are carried at par and carry little valuation risk.
"The market is recognizing the safety of those assets," Lauter said. "We expect the financing rate to be lower." Erbey added that this is not an official projection. And the deals from Ocwen will keep coming, as HLSS keeps replenishing its coffers and intends to grow its mortgage-servicing portfolio. So, there is no immediately change coming to the way HLSS is doing business.
The company expects to keep taping product from the $120 billion available to purchase from Ocwen.
One of the callers-in referred to HLSS as an "elegant solution" to financing the Ocwen machine. Erbey remained practical in the face of praise: "We have a business model that says we need to return a certain amount to investors, we intend to do that." Erbey said.
Page six of the accompanying presentation show a reduction in subservicing fees that significantly reduced HLSS cost of financing (click chart below for quick view).
Here is the original reason for creating HLSS:
"Should the HLSS IPO be effective, Ocwen would begin to migrate to a fee-for-service model with lower leverage and lower balance sheet requirements," the company said in an SEC filing a year ago. "The transaction could potentially make Ocwen and HLSS more competitive in bidding for servicing."
Judging by the third quarter conference call, HLSS has done all of this and more. Expect more in February.