It appears that Ocwen Financial’s (OCN) tarnished reputation is about to take another hit.
Citing “weaknesses in Ocwen's corporate governance and operational control framework,” Fitch Ratings is downgrading Ocwen’s mortgage servicer ratings.
Fitch placed Ocwen’s servicer ratings on “Rating Watch Negative” in October, after the New York Department of Financial Services accused Ocwen of backdating potentially hundreds of thousands of letters to borrowers.
And now, after Ocwen settled with the NYDFS over its servicing practices to the tune of $150 million, Ocwen’s recent settlement with California over Ocwen’s reluctance to provide documentation proving that it could operate in the state and the recent legal threats by mortgage bond investors, who claimed that Ocwen failed in its duties as a mortgage servicer, Fitch is downgrading Ocwen’s servicer ratings due to all those issues and more.
“Fitch has downgraded Ocwen's servicer ratings due to weaknesses in Ocwen's corporate governance and operational control framework,” Fitch said. “While the company continues to perform servicing functions at a proficient level, the (downgrade) is based on weaknesses in the company's control environment, senior management's lack of oversight in connection with identifying and resolving operational deficiencies as well as the inability to respond satisfactorily to regulatory requests for information, and the lack of sufficient escalation procedures that would raise serious issues to senior management.”
According to Fitch, it now lists Ocwen’s servicer ratings as follows:
- Residential primary servicer rating for Prime product downgraded to 'RPS4' from 'RPS3'
- Residential primary servicer rating for Alt-A product downgraded to 'RPS4' from 'RPS3'
- Residential primary servicer rating for Subprime product downgraded to 'RPS4' from 'RPS3'
- Residential primary servicer rating for HELOC product downgraded to 'RPS4' from 'RPS3'
- Residential primary servicer rating for Closed-end Second Lien product downgraded to 'RPS4' from 'RPS3'
- Residential special servicer rating downgraded to 'RSS4' from 'RSS3'
- Residential master servicer rating downgraded to 'RMS4' from 'RMS3'
Fitch’s rates servicers on a 1-5 scale, with 1 being the highest rating, so the drop from 3 to 4 places Ocwen’s servicer ratings just one rung above Fitch’s lowest possible rating.
Fitch notes that its rating of Ocwen continues to reflect “Ocwen's highly integrated technology environment and high concentration of servicing operations located off-shore.” Fitch also said that its ratings of Ocwen incorporate the weakening financial condition of the company.
“Fitch has found that Ocwen's aggressive portfolio, staff growth and integration process over the past several years have not resulted in a unified and cohesive risk management framework for its entire servicing business,” Fitch noted.
“Additionally, while the company has realized greater economies of scale as a result of its acquisitions and use of technology, investment in risk management has lagged and has resulted in a number of deficiencies identified over the past several years,” Fitch continued. “External settlements constrained Ocwen's servicing portfolio growth in 2014 and may cause further declines over the near-term. Fitch believes that a pause in Ocwen's acquisitions will be helpful as the company seeks to address its operational challenges.”
Ocwen is already prohibited from acquiring new mortgage servicing rights in both New York and California without approval from regulators and the company announced recently that it plans to exit agency servicing altogether.
“We are going to focus our servicing business primarily on non-agency servicing,” Ocwen CEO Ron Faris told investors recently.
As part of the settlement with New York, Ocwen’s founder, William Erbey, was forced to resign from his position as executive chairman of the board.
Fitch notes these developments as opportunities for Ocwen to foster improvement in its business practices.
“Ocwen has also embarked on a 'three lines of defense' approach to risk management, which incorporates risk management responsibility firstly at the employee level, secondly within risk management, compliance, and legal groups, and thirdly with internal audit,” Fitch noted.
“The company is in the early stages of implementation of needed improvements; recent steps taken to strengthen its risk management framework and management oversight have been positive,” Fitch continued. “Fitch also views the changes required by the recent regulatory settlements to be a net positive. Fitch will continue to monitor the developments at Ocwen as it works through these changes and its regulatory obligations. Full implementation of its governance and control initiatives and resolution of regulatory matters could contribute to future positive rating direction for the company.”
Fitch adds that the downgrade of Ocwen’s servicer ratings could result in a servicer event of default in some residential mortgage-backed securities that contain Ocwen-serviced loans.
“The servicer rating downgrade may result in a servicer event of default in some U.S. RMBS transactions, providing the trustee and certificate holders the option of transferring servicing in some cases,” Fitch said. “However, few transfers have resulted from events of default in the past. Based on a review of documents on a sample of approximately 450 transactions, Fitch believes the number of transactions likely to experience an event of default due to the servicer rating change is less than 10% of all transactions.”
But a group of investors has already threatened to sue Ocwen, accusing the company of failing to properly collect payments on $82 billion of home loans.
And hedge fund BlueMountain Capital Management recently sent notices of default to Ocwen and Home Loan Servicing Solutions, saying that Ocwen’s regulatory troubles have caused an “irrefutable” default on notes the hedge fund holds in connection with the HLSS Servicer Advance Receivables Trust.
Fitch has already warned that Ocwen-related RMBS deals could be facing a downgrade of their own due to Ocwen’s cavalcade of issues.
And unless Ocwen can quickly implement some of the changes described above, this won’t be the last time that Ocwen is knocked down a peg or two.