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Ocwen buying PHH for $360 million in cash

Deal comes after years of business hiccups for both companies

In a deal that seemingly comes out of nowhere, Ocwen Financial announced Tuesday afternoon that it is buying PHH Corp. for $360 million in cash.

Under the terms of the deal, Ocwen will acquire all of PHH’s outstanding shares for approximately $360 million in cash or $11 per diluted common share.

According to PHH, the purchase prices represent a premium of 24% over the closing price of PHH’s common stock of $8.84 on Feb. 26, 2018.

On the other hand, Ocwen calls the purchase price a 35% discount, based on PHH’s GAAP book equity as of Dec. 31, 2017.

On a combined basis, the company would service 1.9 million loans with an unpaid principal balance of $328 billion and originate over $3 billion of residential mortgages annually, based on Dec. 31, 2017 figures.

In separate release, both companies tout the mutual benefits of the deal.

“We are very pleased to announce the proposed acquisition of PHH, a leading nonbank servicer. PHH is a high-quality servicer with complementary capabilities and business lines to Ocwen, making it a great strategic match for us,” Ocwen President and CEO Ron Faris said in a release.

“In addition to providing significant scale benefits, this transaction gives us the opportunity to migrate to their existing Black Knight LoanSphere MSP servicing platform more quickly and with less risk than had we just implemented the system ourselves,” Faris added. “We are also excited by the opportunity to welcome the PHH employees to the Ocwen family and by the opportunity to bring our industry-leading and innovative loss mitigation capabilities to existing PHH servicing customers currently struggling with their mortgage payments.”

As Faris noted, Ocwen is in the middle of shifting from its proprietary REALServicing platform to Black Knight’s LoanSphere MSP servicing system, a change required by the settlements Ocwen reached with a number of states that took action against the company for servicing and escrow issues.

Now, it appears that Ocwen will accomplish this by acquiring PHH.

“We are pleased to have reached an agreement with Ocwen, and we look forward to working with them to bring this transaction to a successful close,” PHH President and CEO Robert Crowl said. “We are excited by the opportunity to build a stronger combined company for our servicing and subservicing clients, our borrowers, and our employees.”

According to details provided by Ocwen, it appears that cash from PHH itself is funding a significant portion of the purchase.

This is how Ocwen describes the financial portion of the deal:

It is anticipated that at closing, which is expected to occur during the second half of 2018 following various required approvals, there will be sufficient available cash on PHH’s balance sheet to enable $260 million of the $360 million purchase price to be funded out of PHH’s available cash, while providing for sufficient additional liquidity to fund its operations going forward. Ocwen will also assume $119 million of PHH’s outstanding corporate debt.

In a release, Ocwen said that it expects to achieve “various strategic and financial benefits,” including:

  • Accelerating Ocwen’s transition to an industry-leading servicing platform
  • Improving servicing and origination margins through improved economies of scale
  • Reducing fixed costs (on a combined basis) by eliminating redundant corporate overhead and public company-related costs
  • Providing a superior foundation to eventually enable the combined servicing platform to resume new business and growth activities to offset portfolio runoff

In a separate release, Crowl said the deal is the company’s best option.

“We are pleased to have reached an agreement with Ocwen for the sale of our company. This decision follows a comprehensive assessment of the risks and opportunities associated with operating the business and the strategic alternatives available to us,” Crowl said. “The board and management believe the sale of the company to Ocwen represents the best opportunity to maximize shareholder value.”

The deal comes after years of turmoil for both companies. Each company has gone through significant shifts in its business in the last few years.

Back in August 2017, Ocwen revealed that it planned to exit correspondent lending to focus on its “higher margin” channels – retail and wholesale. The company’s focus on wholesale lending ended up lasting just two months, because Ocwen disclosed in October that it planned to exit its wholesale forward lending business, its largest mortgage origination channel.

A few days later, Ocwen said that it is considering selling its reverse mortgage business. If that sale does eventually goes through, Ocwen would have reduced its mortgage originations lines of business from six to one, leaving mortgage servicing and retail forward lending as the company’s only active mortgage lines of business.

Those changes came on the heels of the Consumer Financial Protection Bureau and more than 30 states taking action against Ocwen for mortgage servicing issues.

Those charges came when Ocwen was on the verge of being able to acquire mortgage servicing rights again, after the nonbank reached a new agreement with the New York Department of Financial Services, which put Ocwen out of the MSR acquisition business in 2014 as part of a massive enforcement action.

PHH had its own issues with the CFPB, which attempted to tack a $103 million increase onto a $6 million fine initially levied against PHH for allegedly illegally referring consumers to mortgage insurers in exchange for kickbacks.

PHH later challenged former CFPB Director Richard Cordray’s authority to levy the additional fine along with the constitutionality of the CFPB.

Last month, the Court of Appeals for the District of Columbia Circuit upheld the CFPB’s constitutionality, but vacated the $100+ million fine against PHH.

In late 2016, PHH announced that it planned to sell off its entire mortgage servicing rights portfolio in a massive deal with New Residential Investment.

Earlier that year, PHH announced an exit from correspondent lending, citing “subpar profitability.” PHH also announced that it planned to exit its private-label origination business after “exhaustive consideration of the available alternatives.”

Now, PHH is selling to Ocwen.

According to details provided by PHH, the deal is targeted to close during the latter half of the year, but Ocwen has the option to terminate the deal if PHH’s unrestricted cash or net worth “decline below certain threshold amounts.”

Additionally, upon completion of the deal, PHH’s shares would no longer be listed on the New York Stock Exchange.

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