After Saxon buy, Ocwen looks for more
It is one day after the acquisition of Saxon Mortgage Services from Morgan Stanley (MS) was announced, and the largest subprime mortgage servicer in the country continues to look for more ways to expand. "We are looking at other transactions as we speak," said Ocwen Financial (OCN) CEO Ron Faris in a conference call with investors Tuesday. The Saxon deal is complicated but is expected to boost revenue. Ocwen is already the subservicer for $10.9 billion of the $26.6 billion in mortgage servicing rights it acquired from Saxon. Ocwen was getting a base servicing fee of around 9 basis points of the $10.9 billion of mortgages. Faris said the fee will now go up to 50 bps. The firm expects a 25% return on capital it used to purchase the remaining $16 billion in mortgage servicing rights from Saxon. Ocwen also assumed more than $12.9 billion of loans Saxon serviced for Morgan Stanley and other banks. "We anticipate that some or all of that will transfer away from the platform if not before the deal closes soon after," Faris said, adding that the Saxon deal includes roughly 125,000 mortgages. In 2010, Ocwen was the fourth largest subprime servicer in the U.S. Then, it bought HomEq Servicing from Barclays Capital (BCS) for $1.3 billion in September 2010 and acquired Litton Loan Servicing from Goldman Sachs (GS) in June for $263.7 million. Ocwen services more than $106 billion worth of mortgages as of Sept. 30, up 40% from the $76 billion it serviced the same time last year. The servicing giant boasts an efficiency — less than 24 bps per loan in operating expenses — that is roughly 70% below the industry average. And the company is cutting down the bloated operating expenses at Litton. In September, it cost Ocwen $9.7 million to board and service the loans acquired from Litton, but it expects that to drop to below $7 million per month as servicing advances drop and the amount of delinquent borrowers shrinks. But with efficiency comes questions. The company is widely known for replacing U.S. employees with cheaper overseas staff. Ocwen cut more than 1,000 workers at HomEq after the acquisition. It's a grim reputation to manage when unemployment is still high, but it isn't one Ocwen is about to apologize for. "We can put our servicing platform anywhere on the planet," Faris told investors Tuesday. "Clients start off saying they want a purely domestic operation but when they see the trade-off, they make a number of different decisions." Ocwen does keep a domestic force for lenders and agencies, but as Faris said, "We don't like to make a big deal out of it. We'll put it anywhere they want it." Beyond servicing, the company is looking to move into the securitization business. Ocwen and its former Altisource subsidiary each acquired a 50% stake in a new entity called Correspondent One, which will securitize Lenders One mortgages. The new firm bought its first mortgage in the third quarter, but Faris said Ocwen is being cautious, and the project shouldn't be a major revenue driver in 2011 or even 2012 — that is unless another fortuitous bounce comes Ocwen's way. Faris said if the Federal Housing Finance Agency can finalize its recently proposed servicing fee changes for Fannie Mae and Freddie Mac mortgages, the project could be accelerated. "That could be a sea change for the origination side," Faris said. "That change would be very positive for Correspondent One." Write to Jon Prior. Follow him on Twitter @JonAPrior.