Ocwen Financial taking a beating in the ratings, on the Street

Ratings downgrades and falling stock follow NYDFS assault

Ocwen Financial (OCN) is enduring a second day that looks like a UFC-level beat down on Wall Street as ratings agencies and investors turn on the firm after the New York Department of Financial Services dealt the nonbank firm yet another blow on Tuesday.

The NYDFS on Tuesday issued an open letter to Ocwen alleging serious issues with its servicing systems and processes, including backdating letters to borrowers. NYDFS Superintendent Benjamin Lawsky alleges that Ocwen Financial has been backdating potentially hundreds of thousands of letters to borrowers “likely causing them significant harm.”

Ocwen has been in Lawsky’s crosshairs since February, when it put a $2.7 billion mortgage servicing rights deal between Ocwen and Wells Fargo (WFC) on an indefinite hold.

The stock immediately plunged shortly after HousingWire broke the story Tuesday, with volatility so high trading was temporarily suspended twice. The stock was in the mid-$26 range and immediately plunged about 20%, ending the day at $21.48.

The stock opened Wednesday at $20.12 and was down about 8.5% as of 11:30 a.m. ET.

Meanwhile, ratings for Ocwen and its affiliated companies have been falling like a woodcutters axe –regularly and with purpose.

Moody's Investors Service has downgraded the following ratings, and they note that all ratings remain on review for possible downgrade:

Ocwen Financial Corporate Family Rating downgraded to B2 from B1; Senior Secured Bank Credit Facility downgraded to B2 from B1; Senior Unsecured Debt downgraded to B3 from B2

Altisource Solutions – Corporate Family Rating downgraded to B2 from B1; Senior Secured Bank Credit Facility downgraded to B2 from B1

Home Loan Servicing Solutions – Corporate Family Rating downgraded to B2 from Ba3; Senior Secured Bank Credit Facility downgraded to B2 from Ba3

“These allegations raise the risk of actions that restrict Ocwen's activities, the levying of monetary fines against Ocwen, or additional actions that negatively affect Ocwen's credit strength. In addition, the continued regulatory scrutiny further damages Ocwen's franchise position,” Moody’s said in a client note Wednesday.

They also noted the close ties between the companies drove the downgrades.

“HLSS and Altisource's ratings are driven in large part by their reliance on Ocwen whereby any changes to Ocwen's ratings would likely result in changes to their ratings. The two notch downgrade of HLSS rating to the same level as Ocwen is due to the expectation that HLSS' will accelerate its diversification into other asset classes beyond non-prime servicing assets such as non-performing loans which have a higher risk profile along with the increased possibility that the servicing contracts could be terminated without compensation,” Moody’s says. “While HLSS has contractual protections in its agreements with Ocwen, there is no guarantee that HLSS will be able to successfully assert its rights, including its right to full indemnification, thereunder.”

Moody’s added that Ocwen's ratings could be downgraded further in the event that regulatory action materially restricts the company's business activities, management or governance, or further harms its franchise and reputation.

“In addition, the ratings could be downgraded if a) its business model is expected to shift to areas with even greater operating risk, or b) if the company's servicing performance or financial fundamentals weaken,” Moody’s says. “In the event that Ocwen's ratings are downgraded, the ratings of HLSS and Altisource would likely also be downgraded. In addition, negative ratings pressure on HLSS' ratings could result if the company's financial fundamentals weaken, with particular focus on: a) adequate funding availability and b) financial leverage. In addition, negative ratings pressure on Altisource's ratings could result if it loses its contract with Ocwen or if the company's financial metrics materially deteriorate for an extended period of time.”

Bank of America (BAC) and Evercore Partners both likewise downgraded Ocwen to Neutral/Hold.

Sterne Agee analyst Henry Coffey was more long-term in his analysis and somewhat positive.

He says that while over the long term Sterne Agee believes its assessment that Ocwen has the issues at hand under control, the follow-on release and immediate fallout was disconcerting.

“The press releases issued by the NY Department of Financial Services tend to dramatize the issues at hand, and OCN's press release focuses only on the extent of this problem in NY state,” Coffey notes. “We are looking forward to a more complete explanation as to the magnitude of this problem and an analysis as to any actual harm suffered by delinquent borrowers, an explanation as to whether it was an OCN internal issue or represented problems with an acquired platform, and the extent to which the DFS and OCN will be able to negotiate a sustainable settlement.”

Coffey says that without any identifiable capacity to grow revenue, Ocwen shares are more likely to trade at or below investors' estimates of the company's tangible book value, adjusted for any premium one is likely to place on the market or fair value of the mortgage servicing rights.

“OCN carries the bulk of its MSRs at the lower of cost or market (LOCM). Our own estimate suggests a run-off or estimated book value for OCN of ~$23 per share. Published estimates supplied by the company suggest a value of between $14.50 and $30 per share,” he says. “At this juncture we would prefer to focus on the following companies in the servicing/housing rental-fiancé equation: 1) servicing: Nationstar (BUY), 2) capital for servicers: NewResidential (BUY), and 3) single-family rental and discounted loan pools–PennyMac (BUY) or Starwood Waypoint (BUY).”

A full copy of the Lawsky letter can be read here.

In recent months, Lawsky and the NYDFS have also focused on Ocwen’s close relationship with Altisource Residential (RESI), Altisource Asset Management Corp (AAMC), Altisource Portfolio (ASPS), and Home Loan Servicing Solutions (HLSS), sending a letter to Ocwen’s general counsel about the dealings between the affiliated companies in February.

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