Cancelation of Wells Fargo deal spells more trouble for Ocwen

Stock approaching new low for the year

Considering the fact that Ocwen Financial (OCN) announced the cancelation of its $2.7 billion mortgage servicing rights deal with Wells Fargo (WFC) after the stock market closed yesterday, the company probably knew that its stock was going to take a hit when the market reopened on Friday.

And that’s just what happened when trading began on Friday. The stock closed Thursday at $22.62 and opened Friday down more than $1.50 per share at $21.14.

By the time the market closed on Friday, Ocwen’s stock lost nearly 9% of its value, closing at $20.60.

Just three days ago, Ocwen closed at $23.04, receiving a bump on rumors that New York Department of Financial Services Superintendent Benjamin Lawsky may be stepping down in 2015.

Lawsky has been a thorn in Ocwen’s side throughout 2014. In February, the NYDFS put an indefinite hold on the Wells Fargo MSR deal because it said that it was concerned about Ocwen’s ability to handle Wells Fargo’s portfolio of mortgage servicing rights in the deal. The deal would have given Ocwen the right to service approximately $39 billion in mortgages.

Lawsky has also questioned Ocwen’s close relationship with Altisource Residential (RESI), Altisource Asset Management Corp (AAMC), Altisource Portfolio (ASPS), and Home Loan Servicing Solutions (HLSS) since the NYDFS first sent a letter to Ocwen’s general counsel about the dealings between the affiliated companies in February.

Lawsky has also targeted Ocwen over the practice of lender-placed insurance by Ocwen’s affiliate Altisource Portfolio Solutions.

In an open letter to Ocwen’s general counsel, Timothy Hayes, Lawsky raises a series of questions in August, alleging that there exists a complex arrangement related to force-placement that “appears designed to funnel as much as $65 million in fees annually from already-distressed homeowners to Altisource for minimal work.”

But despite rumors of Lawsky's departure from the NYDFS, this week saw Ocwen’s and its affiliates surrender to Lawsky and the NYDFS on several fronts. First, Altisource announced that it would be ending its lender-placed insurance brokerage business, citing “uncertainties with industry-wide litigation and the regulatory environment.”

Then Ocwen and Wells Fargo decided to kill the long-delayed MSR deal that Lawsky first put the brakes on nine months ago.

Plus, Ocwen announced two weeks ago in its own earnings statement that it booked a $100 million charge for a potential settlement with the New York Department of Financial Services over allegations that it was backdating letters to borrowers.

The latest batch of bad news for Ocwen led to investors and analysts from all sides of Wall Street bailing on the company.

According to a report from Seeking Alpha, Ocwen “lost a fan” in the form of Leon Cooperman, whose Omega Advisors “unloaded its stake” in Ocwen after the Wells Fargo deal fell apart. Seeking Alpha said that Omega’s stake in Ocwen was 1.26% of its fund holdings.

Additionally, analysts from Sterne Agee said that Ocwen is attempting to “walk away” from its current “distractions” in order to build a more successful business in the future.

Sterne Agee Analyst Henry Coffey also said that they believe a settlement with the NYDFS is imminent.

“There is, in our view, obviously a settlement with the Department of Financial Services near, but the price so far has been high–OCN gives up on the WFC deal, and earlier Wednesday, ASPS walks away from its very profitable lender-placed insurance business,” Coffey said in a note. “Hopefully this is all the pain to come…”

Coffey cautioned that the pain is not nearly over for Altisource though.

“An estimated 70-75% of AltiSource's revenue comes from OCN or OCN-owned and serviced loans with most of this tied to its default management services,” Coffey said.

“This has been a shrinking pipeline as of late and the loss of a major book of non-agency servicing (this business was not in our or we believe any analyst's estimates) is going to be discouraging to anyone still holding on to their ASPS shares.”

For the year, Ocwen’s stock is down 63.47%, having lost $35.79 per share in 2014.

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