Mortgage

OcwenÕ servicer ratings just took another hit

Morningstar becomes latest to downgrade troubled nonbank

Things just keep going from bad to worse for Ocwen Financial (OCN). After Fitch Ratings downgraded the nonbank's mortgage servicer ratings earlier this week, Morningstar is issuing a downgrade of its own, as a result of Ocwen’s “continuing regulatory scrutiny and allegations of improper servicing practices.”

In late December, Morningstar placed four of Ocwen’s operational risk assessment rankings on “alert,” including the rating of Ocwen as a residential non-prime servicer, residential special servicer, and residential prime servicer rankings for Ocwen Loan Servicing, and the residential vendor ranking for Ocwen Financial Solutions.

The good news for Ocwen is that those ratings are now no longer on alert. But the bad news is that Morningstar is lowering Ocwen’s residential non-prime servicer, residential prime servicer, and residential special servicer rankings from “MOR RS2” to “MOR RS3.”

Additionally, Morningstar lowered its residential vendor ranking for Ocwen Financial Solutions from “MOR RV2” to “MOR RV3.”

Morningstar cited Ocwen’s litany of recent issues as the reasons for the downgrade. In December, Ocwen settled with the NYDFS over its servicing practices to the tune of $150 million. Then Ocwen settled with the state of California over Ocwen’s reluctance to provide documentation proving that it was allowed operate in the state. And most recently, Ocwen was the subject of legal threats by mortgage bond investors, who claimed that Ocwen failed in its duties as a mortgage servicer.

“Morningstar believes continuing regulatory scrutiny, litigation by mortgage bond investors, the increasing cost and associated liquidity pressures of servicing loans amid several regulatory settlements, and management and staff departures could have further negative consequences for OFC’s residential mortgage servicing business,” Morningstar said in its report, adding that the forecast for Ocwen’s four servicer ratings is “negative.”

Morningstar’s downgrade marks the second time in two days that a ratings agency has downgraded Ocwen’s servicer ratings. Fitch dropped Ocwen’s servicer ratings earlier this week, citing “weaknesses in Ocwen's corporate governance and operational control framework.”

In its report, Fitch said that Ocwen’s aggressive growth lead to deficiencies in its servicing practices.

“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 continued. “Fitch believes that a pause in Ocwen's acquisitions will be helpful as the company seeks to address its operational challenges.”

Ocwen responded to Fitch’s decision as part of an update sent to Ocwen’s shareholders Thursday. In the letter, Ocwen CEO Ron Faris said that no ratings agency has identified any actual servicing performance deficiencies among Ocwen-serviced loans in residential mortgage-backed securities.

In his update, Faris notes that Fitch stated that despite the downgrade, Ocwen “continues to perform servicing functions at a proficient level.” Faris added that “objective data” on private-label security performance “continues to show that Ocwen excels in managing loss mitigation timelines, bringing borrowers current on their payments and keeping them current.”

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