Blows keep raining down on Ocwen and its affiliates

Fifth ‘Lawsky event’ sours outlook among analysts

Like a Top 40 radio station, the hits just keep coming for Ocwen Financial (OCN) in the wake of the latest broadside on Tuesday from the New York Department of Financial Services.

Compass Point downgraded Ocwen affiliate Home Loan Servicing Solutions (HLSS) from Buy to Neutral with a price target of $18.

Meanwhile, Moody's Investors Service has downgraded Ocwen Loan Servicing LLC's servicer quality assessments as a primary servicer of subprime residential mortgage loans to SQ3 from SQ3+ and as a special servicer of residential mortgage loans to SQ3 from SQ3+.

Standard & Poor's Ratings Services lowered its long-term issuer credit rating to 'B' from 'B+' on Ocwen on Wednesday and the outlook is negative.

In addition, they lowered their ratings to 'B' from 'B+' on Ocwen's senior secured debt and to 'B-' from 'B' on its senior unsecured debt.

"The rating action reflects our view of increasing regulatory scrutiny over the company's servicing practices and today's announcement that the company erroneously dated correspondence to some borrowers who were facing foreclosure," said Standard & Poor's Credit Analyst Stephen Lynch. "We believe the culmination of events and ongoing investigations will limit the company's ability to acquire servicing assets."

In one bright spot on Thursday, Altisource Portfolio (ASPS) reported strong third quarter year-over-year growth in service revenue, net income attributable to shareholders and diluted earnings per share.

ASPS posted revenue of $247.7 million, a 37% increase, with net income of $42.3 million, a 17% increase.

"During the third quarter 2014, we continued to execute on our objective of increasing shareholder value by repurchasing Altisource shares, making acquisitions that support our vision to become the premier real estate and mortgage marketplace and investing in the organic development of new and next generation products and services," said Chairman William Erbey.

NYDFS Superintendent Benjamin Lawsky alleges that Ocwen 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 Lawsky's office put a $2.7 billion mortgage servicing rights deal between Ocwen and Wells Fargo (WFC) on an indefinite hold.

Compass Point Analyst Jason Stewart had this to say about HLSS’s downgrade: "We lower our rating on HLSS to Neutral from Buy and reduce our price target to $18. Our revised view is based on the increased risk to HLSS's revenue and assets tied to the Ocwen servicing relationship.”

“Moody's downgraded OCN's primary servicer quality (SQ) assessment to SQ3 from SQ3+. This downgrade follows an August 28, 2014 downgrade from SQ2-. While this last downgrade does not yet trigger the need for immediate action on the part of HLSS, the quick successive downgrades by Moody's suggest there may be more downside to OCN's primary servicer ratings,” Stewart said.

Historically, HLSS has been relatively immune from OCN's regulatory risk and for good reason. HLSS does not touch the consumer as it is simply a capital markets vehicle.

“The last five ‘Lawsky events’ have produced a cumulative one-day loss of -1.7%. This time, however, we see the increased uncertainty persisting. Longer term, we remain constructive on the HLSS story as the balance sheet is diversifying and cash flow profile remains stable in a variety of rate environments,” Stewart said. “Given the risk regulatory scrutiny at OCN is having on HLSS, we are moving to the sidelines and expect long-term buyers will see a lower entry point for the stock.”

Moody's SQ assessments represent its view of a servicer's ability to prevent or mitigate asset pool losses across changing markets. Moody's servicer assessments are differentiated in the marketplace by focusing on performance management. The assessment scale ranges from SQ1 (strong) to SQ5 (weak).

“In our last SQ assessment of Ocwen, on 28 August 2014, we downgraded to SQ3+ from SQ2- the company's assessments as a primary servicer of subprime loans and as a special servicer of residential mortgage loans. Both SQ assessments remained on review for downgrade owing to concerns about the challenges of integrating the acquired servicing platforms and managing the additional distressed loan portfolios. The review also reflected the uncertainty regarding the impact of the regulatory scrutiny and possible regulatory action on the company's servicing stability,” Moody’s said.

On October 21, the NYDFS issued a letter to Ocwen that alleges material deficiencies with Ocwen's servicing systems and processes, including Ocwen's backdating of an unknown number of letters to borrowers.

In addition, the letter questions Ocwen's ability to properly service loans, alleging that Ocwen has not resolved the issues nearly a year after their initial discovery.

The latest letter follows the Aug. 4, 2014 letter from the DFS to Ocwen raising concerns about potential conflicts of interest and potentially inconsistent statements and representations regarding corporate governance.

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, and Home Loan Servicing Solutions, sending a letter to Ocwen’s general counsel about the dealings between the affiliated companies in February and again in August.

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