There’s good news and bad news for residential mortgage-backed securities investors when it comes to the $150 million settlement between Ocwen Financial (OCN) and New York Department of Financial Services.
The good news? Ocwen’s settlement won’t hurt RMBS transactions. The bad news? The settlement isn’t going to help RMBS transactions either.
According to a new report from Moody’s Investors Service, Ocwen’s settlement with the NYDFS is a “credit neutral” for the RMBS transactions that Ocwen services.
Why? According to Moody’s analysts, the increased regulatory authority that the NYDFS will have over Ocwen, including placing an independent monitor at Ocwen to ensure that all the stipulations of the settlement are met, will only help to improve Ocwen’s servicing standards.
On the other hand, Ocwen’s cost to do business will almost certainly rise in the wake of the settlement, Moody’s said, which could lead to decreased returns for RMBS investors.
“Overall, Ocwen’s servicing will improve as a result of the settlement’s conditions, which include more DFS oversight,” Moody’s analysts said in a note to clients. “However, servicing costs will increase and transactions with high New York state concentration will face longer foreclosure timelines, reducing recoveries on liquidated loans.”
The analysts added that because the NYDFS settlement doesn’t require additional mortgage modification activity, “incidences of cash flow disruptions will not likely increase.”
But the analysts caution that RMBS transactions with a high concentration in New York are at a risk for disruption because the NYDFS settlement requires Ocwen to pay $50 million to current and former borrowers in New York whose loans were serviced by Ocwen. Those loans must now also be evaluated for modification and other foreclosure alternatives, Moody’s said.
“As a result, Ocwen may halt or restart the foreclosure processes for some of the borrowers in the state,” the analysts added.
In addition to the cash payout to the NYDFS and New York homeowners, Ocwen is now also prohibited from acquiring new mortgage servicing rights without the approval of the NYDFS.
The Moody’s analysts said that the impact of those conditions will be felt by RMBS investors, but in a positive way.
“(The settlement conditions) will limit Ocwen’s ability to acquire more MSRs and will improve servicing activity through increased focus on the existing servicing portfolio,” the analysts said.
“A slowdown in servicing transfers is credit positive for RMBS transactions because servicing transfers typically result in cash-flow disruptions caused by changes in operations and strategy.”
Moody’s analysts added that Ocwen’s decision to exit agency servicing, as Ocwen CEO Ron Faris told investors last week, will allow Ocwen to focus the company bank on its “core strength,” which is servicing seriously delinquent non-agency loans.