Altisource Portfolio Solutions (ASPS) announced Wednesday morning that it is ending its lender-placed insurance brokerage business. The announcement, made before the stock market opened, sent Altisource’s stock tumbling to a new low for the year.
Altisource’s stock jumped on Tuesday after reports surfaced Monday that New York Department of Financial Services Superintendent Benjamin Lawsky plans to step down in 2015. Altisource’s stock rose by $2.47 on Tuesday, closing at $72.78.
Lawsky has been a thorn in Altisource’s side since February, when he sent a letter to the general counsel of Ocwen Financial (OCN) about its dealings with some of its affiliated companies, including Altisource.
Lawsky sent another letter to Ocwen’s general counsel in early August, alleging that a complex arrangement exists between Ocwen and Altisource related to lender-placed insurance, and that arrangement “appears designed to funnel as much as $65 million in fees annually from already-distressed homeowners to Altisource for minimal work.”
Citing “uncertainties with industry-wide litigation and the regulatory environment,” Altisource announced that it would be exiting its lender-placed insurance brokerage business early Wednesday morning.
After closing Tuesday at $72.78, Altisource’s stock opened Wednesday drastically down from its previous high, opening at $59.57 and falling to $56 as of 11:50 a.m. Eastern, a drop of more than 20%.
"Altisource believes it is in the best interest of the company and its shareholders to discontinue this line of business and continue to focus attention and resources on developing and delivering leading innovative technology-driven products and services for the real estate and mortgage markets that will provide benefits to consumers, lenders, originators and other participants,” the company said in its announcement.
The company said that the discontinuation of its lender-placed insurance brokerage business is expected to reduce its quarterly diluted earnings per share by an average of between $0.50 and $0.65 from Oct. 1, 2014 through Dec. 31, 2015.
While Altisource’s exit from the lender-placed insurance brokerage business will certainly impact the company’s business and future performance, analysts from Sterne Agee don’t believe that Altisource’s announcement will have a significant impact on lender-placed insurers themselves.
“Given our expectation that ASPS is not an actual insurance provider, but rather generates its revenue from commissions and other fees generated in servicing loans and placing policies when applicable, we don't expect there will be any ‘winner’ or ‘loser’ among lender-placed insurers from ASPS's announcement this morning,” Sterne Agee Analyst John Nadel said in a note.
“Frankly, it is already clear from regulatory changes that commissions for the placement of policies is essentially impermissible following changes required by Fannie Mae and Freddie Mac, as well as a few key state insurance departments including Florida and New York. In our view, ASPS's decision to discontinue the business should have little if any impact on the lender-placed insurers, including Assurant (AIZ)."
As for the outlook for Altisource, Sterne Agee already sounded the alarm on Altisource’s future performance in the wake of the Lawsky sending another letter to Ocwen, alleging that Ocwen was backdating letters to borrowers.
In the note, Sterne Agee Analyst Henry Coffey said that because almost all of Altisource’s business comes directly from Ocwen, Ocwen’s regulatory concerns are going to have a serious impact on Altisource’s performance going forward.
Coffey said that Sterne Agee is lowering its Altisource price target from $117 to $65. Sterne Agee is also lowering its 2014 earnings-per-share estimate from $8.60 to $7.48 and reducing its 2015 EPS estimate from $9.30 to $6.25.
“The underlying challenge facing ASPS is converting the opportunity created by its partnership with OCN into a business supported by a broad range of other clients and services that reach beyond OCN,” Coffey said. “To date, the company has not been able to jump this hurdle.”
And now that the company is out of the lender-placed insurance brokerage business, reaching Sterne Agee’s previously established price target of $65 may be even more difficult.
As of 12:57 p.m. Eastern, Altisource was trading at $58.01.