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Fitch: Here’s the impact of Ocwen’s massive MSR deal with New Residential

Sale would be for approximately 80% of Ocwen's non-agency RMBS portfolio

Ocwen Financial may be facing serious allegations from the Consumer Financial Protection Bureau and a hefty group of state regulators about the company’s mortgage servicing practices, but that isn’t stopping New Residential Investment Corp. from contracting Ocwen to subservice a huge portfolio of loans.

And according to a new report from Fitch Ratings, that deal will not have an impact on Ocwen’s servicer ratings.

But, as Fitch notes, the deal will certainly have an impact on Ocwen’s servicing portfolio, as the deal will see Ocwen sell off nearly 60% of its servicing portfolio to New Residential.

One month ago, Ocwen announced that it was nearing a deal with New Residential to sell approximately $117 billion in mortgage servicing rights.

Per Fitch’s report, as of March 31, Ocwen's residential servicing portfolio consisted of 1.3 million loans totaling $196.4 billion in unpaid principal, down from from 1.6 million loans totaling $245.3 billion in UPB as of the end of 2015.

Ocwen’s current portfolio includes approximately 976,000 loans with a UPB of $145.5 billion in more than 3,000 non-agency residential mortgage-backed securities transactions.

The MSR deal with New Residential would represent roughly 80% of Ocwen's non-agency RMBS portfolio, but would exclude the legacy portfolio acquired from OneWest Bank in 2013, according to Fitch’s report.

In total, the New Residential deal covers $117 billion in mortgage servicing rights, and with Ocwen’s total servicing portfolio totaling $196.4 billion, the deal will see Ocwen’s servicing portfolio reduced to $79.4 million, a reduction of nearly 60%.

But Ocwen wouldn’t entirely lose the servicing it currently has, because under the terms of the deal, Ocwen would subservice the loans on New Residential’s behalf for a period of at least five years.

As part of the deal, New Residential will make upfront payments to Ocwen of $425 million as the MSRs transfer. Additionally, New Residential will make an equity investment in Ocwen and become a 4.9% owner of the nonbank.

New Residential would also grow its own servicing portfolio significantly with the deal.

According to Fitch’s data, New Residential’s MSR portfolio is currently 1.8 million loans with $252 billion in UPB, but the Ocwen deal would increase New Residential’s MSR portfolio to $369 billion.

According to Fitch’s report, the deal has upside for both New Residential and Ocwen.

“Ocwen would continue to service the loans as subservicer under a multi-year contract commitment, with Fitch not envisioning any change or disruption to servicing activity,” Fitch’s Roelof Slump notes in the report.

“Fitch believes that the agreement allows Ocwen to continue to perform key activities and to receive ongoing fee income in its subservicing role,” Slump continues. “The agreement may also reduce the servicing disruption risk, as it is generally easier to replace subservicers than primary servicers in the event the servicer's financial condition or performance deteriorates.”

Fitch also notes that the deal should not affect its primary servicer rating or the ratings on the mortgage bonds currently serviced by Ocwen.

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