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New Residential to buy Home Loan Servicing Solutions for $1.3 billion

Ocwen associate was under heavy investor pressure

It appears that Home Loan Servicing Solutions (HLSS) was listening to the growing chorus of investors who wanted the company to separate itself from embattled nonbank Ocwen Financial (OCN).

Early Monday morning, Home Loan Servicing Solutions announced that it entered into a definitive merger agreement with New Residential Investment (NRZ), which is managed by an affiliate of Fortress Investment Group (FIG).

Under the terms of the agreement, New Residential will acquire all of HLSS’ outstanding shares for $18.25 per share in cash, a 9% premium based on HLSS’ closing stock price on Friday.

The total price tag for HLSS? $1.3 billion.

"I am pleased that this transaction offers our investors cash equivalent to the book value of their shares and addresses the uncertainty associated with our future financing obligations,” HLSS CEO John Van Vlack said.

“Of the strategic proposals received, New Residential's was the most attractive for a variety of reasons including valuation and certainty of execution,” Van Vlack continued. “We believe that New Residential is well positioned to provide support and act as a strategic financing party to Ocwen over the long-term."

The pressure on Home Loan Servicing Solutions to disassociate itself from Ocwen has been growing over the last few months.

Late last week, hedge fund BlueMountain Capital Management, which recently sent notices of default to Ocwen and HLSS, said that Ocwen’s recent regulatory troubles have caused HLSS and Ocwen to breach their mortgage bond covenants.

BlueMountain Capital specifically mentions Fitch Ratings’ recent downgrade of Ocwen’s mortgage servicer ratings as further evidence of default.

HLSS publicly questioned BlueMountain’s claims, saying that the hedge fund is motivated by the short position it holds in the stocks of both Ocwen and HLSS.

But that wasn’t the only battle HLSS was fighting with a hedge fund.

One of the company’s 10 largest shareholders, Mangrove Partners, recently threatened to replace HLSS’ board of directors in an effort to force the company to end its relationship with Ocwen.

Last week, Mangrove, which disclosed that it owns more than 1.6 million of HLSS’ 71 million outstanding shares, accused the HLSS board of “dereliction of duty” and demanded that HLSS terminate its business relationship with Ocwen, which subservices all of the mortgage loans that HLSS holds servicing rights for.

Mangrove went so far as to nominate new board members for HLSS, including Mangrove’s founder and president, Nathaniel August.

As for New Residential, the company’s CEO, Michael Nierenberg, called the HLSS deal a “landmark transaction” for New Residential.

“The acquisition will significantly add to the value of our book of mortgage servicing assets and expand our relationships with mortgage servicers to include both Nationstar Mortgage (NSM) and Ocwen Financial Corp., which are the two largest non-bank servicers in the United States,” Nierenberg said. “We are confident that this transaction will enhance our earnings growth potential and our ability to generate strong returns for our shareholders."

The acquisition has been approved by the board of directors of each company and is expected to close in the second quarter of 2015, subject to HLSS shareholder approval and other customary closing conditions, the companies said in a joint release.

The acquistion was the second big announcement from an Ocwen-related company on Monday.

Ocwen also announced Monday that it is selling the residential mortgage servicing rights on a $9.8 billion portfolio to Nationstar.

"This transaction represents the first step in the execution of our previously-announced strategy to transfer certain types of non-strategic servicing," said Ronald Faris, CEO of Ocwen. "We look forward to exploring additional MSR transactions with Nationstar."

The two announcements sent Ocwen's stock spinning. First, Ocwen dropped and then shot back sharply. So sharply in fact, that trading on Ocwen's shares was momentarily halted due to the stock's volatility.

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