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Is more trouble brewing between Ocwen and HLSS?

Ocwen delays annual report; reviewing HLSS’ ability to fund servicing advances

It seems that not even a few hours can go by without Ocwen Financial (OCN) making the headlines. Earlier Wednesday, the embattled nonbank announced it is selling a $9.6 billion mortgage servicing rights portfolio to Green Tree Servicing, a subsidiary of Walter Investment Management (WAC).

But the company also announced Wednesday that it is delaying the release of its 2014 annual report, again. Ocwen already delayed the release of its annual report earlier this month, saying in a Securities and Exchange Commission filing that it planned to file for an extension that would allow the nonbank to file its 10-K on or before March 17 without incurring a penalty.

March 17 has since come and gone but Ocwen still has not filed its annual report.

According to a new filing with the SEC, Ocwen now plans to file its 2014 annual report “on or before March 23,” but adds that there “can be no assurance that it will be able to do so.”

The issue at hand – in addition to all of Ocwen’s other troubles – is Ocwen associate Home Loan Servicing Solutions (HLSS) and its ability to fund new servicing advances.

According to the SEC filing, Ocwen “continues to analyze and review” HLSS’ ability to fund servicing advances, adding that “a failure by HLSS to fund new serving advances could have a material negative impact on the company's financial condition.”

Previously, Moody’s Investors Service said that the $1.3 billion acquisition of HLSS by New Residential Investment (NRZ) will actually help stabilize Ocwen’s own servicing operations and improve Ocwen’s future prospects.

On the other hand, Compass Point Research and Trading said the HLSS deal will actually have a “material adverse impact” on Ocwen’s servicing margins, due to the increased cost of maintaining the relationship with HLSS, and operational changes that are required by regulators, including the New York Department of Financial Services.

Part of the loss Ocwen expects to take in the fourth quarter is the $150 million settlement with the NYDFS over its servicing practices.

According to this most recent SEC filing, Ocwen is also working through the accounting of the NYDFS settlement.

“Additionally, the company is clarifying for its auditor the appropriateness of adding back the $150 million New York Department of Financial Services charge as an extraordinary item for certain covenant calculations in one of its advance financing facilities,” Ocwen stated in the SEC filing.

The Ocwen-HLSS relationship was already under the microscope, with some investors calling for HLSS to separate itself from Ocwen.

The analysts from Compass Point believe that New Residential may actually pull the servicing on the HLSS portfolio from Ocwen.

“We believe the risk of having servicing pulled on private label trusts or transferred by New Residential is high,” Compass Point Analysts Kevin Barker and Jesus Bueno said in the report. “If this were to occur, it would have a serious adverse impact on the sustainability of Ocwen’s business model.”

Barker and Bueno cited Ocwen’s recent servicer downgrades as a reason for a potential Ocwen-HLSS separation.

“We believe the recent servicer downgrades at OCN have created an ‘event of default’ between HLSS and OCN,” Barker and Bueno wrote. “An event of default would give HLSS the option to terminate OCN as a servicer and transfer the servicing ‘upon HLSS's written direction to such affect (and)…HLSS shall be entitled to receive all proceeds of such transfer.’ These clauses within the purchase agreement between OCN and HLSS essentially give NRZ control to re-negotiate the terms of the HLSS-OCN agreements (in our opinion).”

For its part, HLSS also appears to be delaying the release of its annual report, saying in a SEC filing that it needs more time to demonstrate “its ability to operate as a growing concern” to its auditors.

The company also previously delayed its annual report earlier this month due to needing additional time to “complete the assessment of recent events related to the company’s business and determine the impact on the company’s financial statements” and other disclosures.

At the time, HLSS said it expected to file the annual report within 15 days.

But now, the company needs more time.

“The company requires additional time to prepare information related to its ability to operate as a going concern and to provide such information to the auditors for the purposes of their audit of the company's financial statements for the year ended December 31, 2014,” HLSS said in a filing with the SEC.

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