Ocwen Financial profits slightly under estimates

Posted strong fourth-quarter earnings

Ocwen Financial Corp. (OCN) remains highly profitable, posting a net income of $105 million, or 74 cents per share, and revenue of $556 million in the fourth quarter.

That's compared to $67 million in the third quarter.

And it is under consensus, which stood at EPS of $0.95 on revenues of $558 billion.

"We are working cooperatively with the New York Department of Financial Services to address its concerns that led to an indefinite hold on our transaction with Wells Fargo. Longer-term we believe developments remain positive for our business, particularly in three areas," said Bill Erbey, chairman of Ocwen.

"First, prepayments continue to trend lower, lengthening the duration of our assets. Secondly, Ocwen's continued ability to help homeowners with foreclosure alternatives along with an improving economy continues to drive down delinquencies on loans we service and further slows prepayments," he said.

"Lastly, the OASIS financing that we just closed should enhance our prime origination business," he added. "Oasis enables us to reduce our exposure to prepayment risk and lower our cost of capital disadvantage vis-à-vis commercial banks."

Moody's Investors Service is citing concerns that nonbank mortgage servicing companies, such as Ocwen, Nationstar (NSM) and Walter Investments (WAC), will begin originating nonprime mortgages.

This move could happen, the credit ratings agencies say, as regulators try to limit the amount of growth at those firms.

On Feb. 6 the New York Department of Financial Services indefinitely halted Ocwen's $2.7 billion deal to purchase mortgage servicing rights on approximately $39 billion of unpaid principal balance from Wells Fargo (WFC).

Many consider this a signal for regulators to limit the rapid growth of these kinds of companies. These limits are good, in Moody's opinion.

Over the medium term the regulatory attention could accelerate a shift in servicers’ business models to areas with even greater operating risk," Moody's said.

For now, the origination of non-prime mortgages is not a huge operation at any of the three mentioned firms. Nationstar, for example, is currently limiting its mortgage originations and plans to keep shrinking its market share.

However, Moody's is right to note there is an opportunity in the space. Traditonal lenders are exiting the mortgage business as it becomes more unprofitable. Other players, such as real estate investment trust Redwood, is getting into the conforming mortgage market.

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