Ocwen’s regulatory burdens send up red flags and drive down stock price

Analysts lower price target, Citi drops buy recommendation

Heightened regulatory burdens and compliance costs continue to drag on Ocwen Financial (OCN) a day after its second quarter earnings are announced.

On Thursday, Ocwen reported net income of $67 million, or $0.48 per share, for the second quarter of 2014, compared to net income of $76.7 million, or $0.53 per share, for the second quarter of 2013.

"Our normalized pretax earnings were lower in the quarter as a result of significant compliance and regulatory-related costs and higher interest expense," commented Bill Erbey, Ocwen's executive chairman said Thursday in the call.

On Friday morning, Ocwen was down to its lowest intraday price since late 2012, and down 21% in the worst week the company has seen since 2008.

This morning, Citi (C) rescinded its “buy” rating, noting the same costs as Erbey, cutting their price target $10 to $32.

Sterne Agee reduced its price target to $36, down $9, but it is holding steady on its “buy” recommendation.

Ocwen has been fighting against a thunderstorm of regulatory pushback and scrutiny not so much for anything it has done, but because of its meteoric rise in the nonbank MSR servicing space.

New York State Department of Financial Services Superintendent Benjamin Lawsky said his fight to bring more oversight to nonbanks who are snapping up mortgage servicing rights even as traditional banks are leaving the space in droves is just beginning, but he’s done a lot already to upset Ocwen’s applecart.

Lawsky fired some of the first big salvos in his crusade in early February, when he put an indefinite hold on the $2.7 billion MSR deal between Ocwen and Wells Fargo (WFC).

Ocwen’s CEO said Lawsky’s freeze has chilled almost all MSR deals in the pipeline.

Lawsky’s office has been performing a sort of enhanced interrogation of the increasing role of nonbanks seeking MSRs, as HousingWire has covered, including others like Nationstar (NSM) and Walter Investment Management (WAC). 

 “Now, one of the things we’re concerned about as a regulator is whether these MSR sales trigger a race to the bottom that puts homeowners at risk.  Remember, in most cases, the compensation to be paid for servicing is fixed by the PSA; it cannot be diminished,” Lawsky said in a May speech at a Mortgage Bankers Association conference. “So the cheaper a servicer can service those mortgages, the more profit it expects to earn from the fixed servicing fees, and the more it can offer the banks to buy these MSRs. 

“The result is high prices paid for MSRs, together with incentives for cut-rate servicing by nonbanks. Indeed, one large nonbank servicer touted that it can service distressed loans at a more than 70% discount – in part due to expanded use of information technology,” he said. 

Lawsky said that he believes regulators have a responsibility to ask whether the efficiencies at nonbank mortgage servicers are too good to be true.

Lawsky’s office has also raised questions about how Ocwen operates in relation to its subsidiaries, Hubzu and Altisource, raising investor concerns.

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