Barclays: California situation could destroy Ocwen

Potential settlement could permanently cripple nonbank

Now that Ocwen Financial (OCN) is facing serious regulatory pressure from the state of California, which said this week that it was seeking to suspend Ocwen’s mortgage license because the company failed to turn over documentation showing that it complies with the state’s laws, analysts are questioning if this is the beginning of the end for the troubled nonbank.

In a note to clients, Barclays analysts Jasraj Vaidya, Dennis Lee and Harkaran Talwar suggest that Ocwen may be facing a New York-esque problem in California and that a negative outcome for Ocwen in California could be too much for the company to recover from.

Ocwen was under fire for most of last year, especially from the New York Department of Financial Services, which reached a settlement with Ocwen last month for failures in its mortgage servicing practices.

As part of the settlement, the NYDFS forced Ocwen Executive Chairman William Erbey to resign from his position as chairman of the board of directors of Ocwen, over allegations into Ocwen’s servicing practices and its relationships with its affiliated companies.

Ocwen was also ordered to pay $150 million in “hard-dollar” assistance, including $50 million in direct, hard-dollar restitution payments to former and current Ocwen homeowners in New York for Ocwen’s handling of foreclosures.

“While the recent action by the California Department of Business Oversight certainly differs from the NYDFS’ complaint in many ways, if Ocwen ultimately reaches a settlement with the California regulatory agency, its settlement may be similar to the one agreed to by the company and the NYDFS,” the Barclays analysts said.

The analysts also say that Ocwen, which says it’s cooperating with California, may ultimately agree to compensate homeowners for violations of the California Homeowner Bill of Rights and have a monitor installed to review its business operations in the state.

Ocwen may also be required to pay a civil monetary fine as part of a potential settlement.

And the Barclays analysts suggest that paying out another massive settlement may be more than Ocwen can handle financially.

“Given that Ocwen has already paid $150 million to the NYDFS under the settlement last month, the company may run into liquidity concerns if it is also required to pay a substantial fine to regulatory bodies in California, and especially if additional states levy their own fines,” the analysts said.

“Moreover, penalties on Ocwen could quickly escalate if Ocwen is found to be in breach of the National Mortgage Settlement and could cast serious doubt on the continuity of Ocwen’s operations.”

Despite Ocwen’s claims that it is cooperating with California, the Barclays analysts say that there is still the nuclear option for Ocwen, namely choosing not to settle with California.

“However, we do not view this as a realistic option,” the analysts said. “If Ocwen’s mortgage license in California were to be suspended, it is possible that Ocwen would have to sell its entire non-agency MSR portfolio.”

This option seems unlikely, considering that Ocwen’s CEO Ron Faris told investors last month that the company plans to exit agency servicing and focus primarily on non-agency servicing going forward.

But if Ocwen chooses to go the nuclear route and not settle with California, the Barclays analysts believe it could lead to Ocwen losing its rights to serve as the master servicer for any of its non-agency trusts.

“Given the size of California to its servicing portfolio (23% by unpaid principal balance of the portfolio and 15% by number of loans) and the fact that every non-agency RMBS pool holds some loans in California, Ocwen could potentially become ineligible to be a master servicer for any of its non-agency trusts,” the analysts said.

“While it may be possible that Ocwen could sell only the sub-servicing rights on its California loans to other third-party servicers, this would still represent a substantial reduction in its servicing fees.”

The analysts say that either scenario would be a “very negative development” for Ocwen and would call into question the company’s ability to continue as a going concern.

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