In the wake of the Consumer Financial Protection Bureau and a growing group of state regulators accusing Ocwen Financial of widespread mortgage servicing issues, several of the big credit ratings agencies announced that each is taking some form of negative action on the nonbank.
Over the last few days, S&P Global Ratings, Moody’s Investors Service, Fitch Ratings, and Morningstar each released updated views of Ocwen, with each agency’s analysts stating that Ocwen’s recent regulatory troubles could have dire long-term consequences.
S&P was first out of the gate last week, announcing Friday that it is downgrading Ocwen’s long-term issuer credit rating from “B” to “B-”. S&P is also we lowering its ratings to “B+” from “BB-”on Ocwen's senior secured debt, reducing its ratings to “B-” from “B” on its Ocwen’s second-lien debt, and to cutting its ratings to “CC” from “CCC+” on Ocwen’s senior unsecured notes.
Additionally, S&P said that it is also placing all of those ratings on “CreditWatch with negative implications.”
According to S&P, the ratings actions are a direct result of the CFPB’s and state regulators’ allegations against Ocwen, summing up the allegations thusly:
State regulators are alleging that Ocwen could not reconcile consumer escrow accounts and engaged in willful and ongoing unlicensed activity in certain states.
The CFPB alleges that Ocwen serviced loans using error-riddled information, illegally foreclosed on homeowners, failed to credit borrowers' payments, botched escrow accounts, mishandled hazard insurance, bungled borrowers' private mortgage insurance, deceptively signed up and charged borrowers for add-on products, failed to assist heirs in seeking foreclosure alternatives, failed to adequately investigate and respond to borrower complaints, and failed to provide complete and accurate information to new servicers.
The impact of the CFPB’s lawsuit and various state regulator actions will hamper Ocwen’s business going forward, at the least, S&P notes.
“Given the serious nature of these allegations, the impact the cease and desist order will have on originations, and the possible regulatory fines that may follow, we believe Ocwen's business has weakened,” S&P states.
S&P adds that the immediate impact of the restrictions on Ocwen’s origination activities is “relatively modest” because only approximately 10% of Ocwen’s revenue in 2016 came from mortgage originations.
As S&P notes, Ocwen has been unable to buy any new mortgage servicing rights since 2014 as a result of a settlement with the New York Department of Financial Services, but the company was moving closer to having those restrictions removed – until these latest charges emerged.
“We see heightened risk that the company's servicing business could suffer with the new allegations,” S&P concludes.
Moody’s didn’t join S&P in downgrading its ratings for Ocwen, but did place all of Ocwen’s servicer assessments on review for a possible downgrade.
According to Moody’s, the agency placed Ocwen’s servicer assessments as a master servicer of residential mortgage loans, primary servicer of prime residential mortgage loans, primary servicer of prime residential mortgage loans, primary servicer of second lien loans, and special servicer all on review.
“During the review, Moody's will assess the impact of the possible regulatory and legal actions on the financial strength and franchise positions of the company,” Moody’s said.
Moody’s noted that as a result of the increased regulatory scrutiny on Ocwen, the company’s financial stability could be “negatively impacted by monetary fines, judgments and reputational damage.”
Moody’s also noted that Ocwen's servicing operations could be “adversely impacted” if the states’ regulatory action or CFPB’s lawsuit further restricts the company’s ability to conduct business.
Ocwen’s servicing quality assessments could also be downgraded if 1) the company's servicing performance weakens compared to peers, 2) financial strength declines and 3) the company is subject to additional regulatory or legal action resulting in material fines or judgments.
Fitch joined Moody’s in shifting Ocwen’s ratings into the “under review” category. Specifically, Fitch placing the ratings of Ocwen Financial Corporation and its wholly owned, primary operating subsidiary, Ocwen Loan Servicing, on “Rating Watch Negative.”
According to Fitch, the CFPB’s lawsuit, which accused Ocwen of total failure throughout the entire servicing process, calls into question Ocwen’s corporate governance and operational framework.
Fitch notes that these allegations, along with those of the state regulators, raise “critical questions as to Ocwen’s ability to perform its core function of servicing loans, and the ability for the company to address these concerns following years of monitoring by previous regulatory actions.”
Fitch’s report also brings up the potential for New Residential Investment to pull mortgage subservicing from Ocwen, which would further dent the company’s business.
According to Fitch’s report, New Residential currently owns rights to MSRs on $118.7 billion of unpaid principal balances that are currently serviced by Ocwen.
As previously reported, New Residential could pull its servicing from Ocwen if the company’s servicer ratings are downgraded significantly.
“Fitch believes a transfer of servicing duties due to the termination of the servicing contract from initiated by New Residential would drive negative rating actions for Ocwen,” the agency notes.
Morningstar also placed several of its rankings of Ocwen on alert, including the residential nonprime servicer, residential special-servicer, and residential prime servicer rankings for Ocwen Loan Servicing and the residential vendor ranking for Ocwen Financial Solutions.
“Although Morningstar is not taking any action on OFC’s four residential rankings today, we are concerned about the financial and human-resource constraints that defending against these actions could incur on the company,” Morningstar noted its report, adding that “these new regulatory actions pose a significant distraction to the company’s ability to execute its business strategy going forward.”