Politics & MoneyMortgage

Fitch: Ocwen outlook remains negative despite PHH deal

Continuing regulatory overhang not overcome by pending acquisition

The outlook for Ocwen Financial is still negative despite its recently announced $360 million deal to acquire PHH thanks to Ocwen’s continuing regulatory overhang, Fitch Ratings said Friday in a note to clients.

In the note, Fitch’s analysts said that Ocwen’s outstanding issues with the Consumer Financial Protection Bureau and a number of state regulators outweigh any positives that may be gained in the PHH deal.

In the wake of the deal, Fitch affirmed its long-term issuer default ratings of Ocwen Financial and its subsidiary, Ocwen Loan Servicing, at “B-” with a negative outlook.

“The Negative Outlook reflects Fitch’s continued expectation that the legal and procedural overhang resulting from actions filed by the Consumer Financial Protection Bureau and the Multi-State Mortgage Committee, on April 20, 2017, could be relatively protracted,” Fitch said in its report.

“Ocwen is appealing the allegations, which allege material weaknesses in its servicing practices,” Fitch continued. “While Fitch believes the legal proceedings may ultimately result in some form of consumer relief and/or payment of a monetary penalty, which could negatively impact the firm's profitability and strategic direction, clarity on this issue is not expected in the near term.”

But as noted above, Fitch did affirm its previous ratings of Ocwen.

“The affirmations reflect Fitch’s view that the transaction offers Ocwen an opportunity to improve margins through economies of scale, reduce fixed costs on a combined basis by eliminating redundant corporate overhead and public company related costs, and provide potential growth opportunities to offset current portfolio runoff,” Fitch said in its report.

“The potential strategic and financial benefits are offset, in Fitch’s opinion, by execution risk with respect to Ocwen’s ability to achieve stated integration, overhead, servicing and origination synergies,” Fitch continued. “Ocwen’s ratings remain supported by its scale and market position within the subprime mortgage servicing industry, sufficient liquidity and appropriate capitalization and leverage.”

Fitch notes that Ocwen’s long-term issuer default ratings could be downgraded if the company is unable to “achieve the stated strategic and financial benefits” of the PHH deal, which could result in “material deterioration in financial performance, depressed margins, reduced operating cash flow generation or available liquidity, a sustained increase in balance sheet leverage, and/or aggressive capital management.”

Additionally, a downgrade could happen if Ocwen reaches regulatory settlements that carry “meaningful fines or the imposition of significant business restrictions or required servicing and operational enhancements” that impact the company’s ability to stay competitive.

On the other hand, Fitch said that Ocwen’s outlook could be moved from “negative” to “stable” if the pending regulatory and legal actions “do not materially and adversely impact Ocwen's operational, governance or financial position.”

Fitch added that an upgrade to stable could be in the cards should the company achieve a “successful integration of PHH, a strengthening of the combined entity's financial position, and establishment of a sustainable and competitive business model as a mortgage lender, without incurring outsized credit risk.”