(OCN/ASPS) Ocwen gets into trouble with yet another regulator

California’s DBO (Department of Business Oversight) is going after Ocwen and threatening to take away its license to operate in the state.  Since October 2013, the DBO has requested information and documentation from Ocwen.  Ocwen has been late in supplying the requested information and did not fully comply with the DBO’s request.

On October 6, 2014 the DBO filed a formal accusation against Ocwen.  Since then Ocwen presumably has not been able to fully satisfy the DBO’s requests for information.  Today on Jan 13, 2015, the news broke that the DBO would be going after Ocwen’s license to operate in the state.  If Ocwen’s license were to be revoked, it would likely do a great deal of harm to Ocwen.  Ocwen would be forced to sell MSRs with mortgages in California.  I suspect that such a sale would be at extremely depressed prices since there would be a lot of regulatory risk for the buyer (as shown by Ocwen’s problems with the NY DFS).

Presumably Ocwen will do whatever it takes to get in the DBO’s good graces.  I don’t know why Ocwen was unable to comply with the DBO’s requests for information.  From Ocwen’s issues with the CFPB, it seemed to be the case that there are some issues with Ocwen’s mortgage servicing platform (created by Altisource).  Ocwen is currently being re-examined by the CFPB due to issues with the REALServicing platform.

Ocwen’s investor disclosures and transparency

From what I can tell, Ocwen’s 10-Ks and 10-Qs do not make any mention of the company’s issues with the DBO.

They also do not mention that Ocwen and Altisource were involved in force-placed insurance schemes that would expose the companies to regulatory risk.  Ocwen’s peers Nationstar (NSM) and Walter (WAC) provide more disclosure of “insurance commissions” and “other fees” from force-placed insurance than Ocwen and Altisource.  One could make the argument that Ocwen and Altisource could have been more transparent about their regulatory risks.

Short interest

At Interactive Brokers, the borrow on ASPS is 29.9% and for OCN it is 1.1%I do not know why the borrow on ASPS has suddenly become so expensive and why the shorts love this stock so much.  I can’t figure out why investor sentiment is so negative on Ocwen and Altisource.  I’m not sure why these stocks have been beaten down so much given their historic growth, are currently generating strong cash flow, and have most of their revenues locked in via contracts.  The stocks are trading as if the companies are about to go bankrupt or their profitability is about to be devastated by regulation.  Those scenarios do not seem likely to me.  I don’t understand it so perhaps you can get a better explanation elsewhere.

*Disclosure:  Long OCN and ASPS.

EDIT (1/14/2015): A New York Times Dealbook article quotes Ocwen’s public relations contact as saying: “We do not believe anything particular about RealServicing, as a system, caused the issues identified in the report […] Unlike other servicers, Ocwen’s I.R.G. was tasked with testing on two platforms simultaneously – and that complexity may have been challenging for Ocwen’s I.R.G. during the applicable time period.”  So, it may not be the case that Altisource’s REALServicing is the problem.

19 thoughts on “(OCN/ASPS) Ocwen gets into trouble with yet another regulator

  1. I earlier wrote a comment how this is going to be a good learning experience and it seems like it proved to be one sooner than I thought. Despite everything, I think it would be a mistake to sell ASPS at these levels.

    Unfortunately this kind of incompetence of not being able to comply with DBO by Ocwen was a really sad thing to read of. I think that the most unfortunate part of all this is that Lawsky too seemed to be somewhat incompetent simply because his accusations didn’t make too much sense last year – otherwise I might have taken the accusations more seriously.

    When you consider that there can be more things that can’t be foreseen right now, for an investor at this point ASPS – dunno about OCN – should probably be considered as a gamble with good to very good odds.

    The thesis at $30-50+ per share was pretty much that only the cf from force-placed insurance could be lost, but now it seems that there’s a very real possibility that revenue from OCN can get a serious cut.

    Even though there probably are a lot of people who “called” it, it’s hard to see how one could foresee how massively OCN and ASPS would be pounded by the regulators.

    Unfortunately I must say though that at least regarding to OCN and to some degree ASPS that there were some signs, but once again, I believe it to be slightly unfortunate that none of the seemed too serious. Makes me think about Buffetts obsession with reputation, though I don’t know whether that’s applicable.

    Currently my worst case scenario is $40m+ cash flow / year for asps (OCN disappears), which would put EV / cash flow around 9x. I’m probably going to regret this as there can be something that will surface, but from “objective” (I’m considering the fact that I might be very much biased) perspective it does make sense to buy.

    This might be a bit of a stretch to ask, but any speculation on what they are going to talk about on friday?

    • They will probably say a few sentences about California, and then say that they won’t answer questions about it on the conference call. That’s what they have done in the past about other regulatory issues.

    • How do you reach the $40m figure for cash flow? I assume your model includes assumptions about margin, among other things.

      They did mention “strategy” in the press release, so I hope the call won’t be devoid of interesting content.

  2. “One could make the argument that Ocwen and Altisource could have been more transparent about their regulatory risks.”

    Don’t you think you are a bit soft on yourself here? Shouldn’t any decent company have issued a press release back in October?

  3. Glenn, I enjoy your blog but it strikes me that you always view ASPS/OCN with rose colored glasses. The companies are more ethical than their competitors (how in the world can you know this unless you’ve worked at both companies or you regulate them?), the regulator must be overzealous, etc, etc. That’s a complete 180 from how you seemingly view most other companies (oil companies inflate their reserves, mining companies are scams, CONN is a fraud, etc, etc).

    It seems to me that you should look at ASPS/OCN again, but this time use the same critical eye that you seem to use for most other stocks.

    FWIW, I’ve never owned ASPS/OCN or done any research on them. My comment is strictly based on what I’ve read in your write-ups.

    • In terms of their accounting, I like Altisource’s 10-Ks. They don’t do non-GAAP earnings. They don’t capitalize software development costs (whereas a lot of retailers do it). They aren’t particularly aggressive about pointing out amortization of intangible assets.

      On the transparency side, I don’t know. They could have done a better job in describing risks relating to force-placed insurance. But certainly I think they deserve kudos for exiting that business (?of taking kickbacks?) completely.

      On the operations side, they’ve done a pretty good job at giving out loan modifications.

      To some degree I have been influenced by thestreet.com’s profile piece on Erbey: http://www.thestreet.com/story/12083751/1/bill-erbey-made-23b-off-your-underwater-mortgage.html

    • My thoughts exactly. I have no insights about ASPS either, but what would you do if a regulator tries to get a junior miner to stop mining and the miner would disclose that fact only when forced, a couple of months later?

      Maybe I misread the situation but I think you would instantly dismiss the stock as a long candidate, no more information required.

      • It depends on whether or not the regulatory risk was material at the time.

        Whereas most juniors are super promotional and put a lot of spin on their regulatory risks, Ocwen in my opinion does not do this. WAC strikes me as a lot more promotional than Ocwen.

  4. For asps The market is thinking short term and panicking. I can see that on the cornerofbsrkshire forum and I am disappointed by this thinking there, taking price action as a conclusion about the intrisic value. I have seen it in other threads as well. However proper investing is not buying a share of a company for the next 6 months but for where it will be in the next few years and this is how you can make money as the market is pretty efficient for the next quarterly earnings in general. I don’t think any of this (except maybe the force placed insurance problem) is affecting the long term prospects of asps. They have good technology and even if you write off ocwen, which I dont think it is reasonable as in the mid term they will get to terms with regulators, they have been growing other party revenue fast and it should continue. Technology margins will also increase. They may expand to other areas than finance. If i wasn’t already fully loaded I would get more asps.

  5. Glenn if you have any insight on the tech side of their business. It feels kind of black box to me. But they did grow it very rapidly, and 200m$ is now non OCN tech revenue. But I have no idea how to figure out how much value they really provide. For example, what is equator worth? What is their moat like? They provide very little info on this.

    And what is Hubzu worth without OCN? It was supposed to be worth almost the 2bn$ market cap 6 months ago. My guess is, Hubzu will be a FCF machine for at least 1-2 years, before it could fall of a cliff, unless they get non OCN revenue to fill it up.

    • We know how much they paid for equator. There are some pro forma figures that Altisource released around the acquisition time. We know that Equator didn’t hit its earn-out targets, which is disappointing.

      Hubzu is selling more homes than before. I think they really do get most of their customers from Ocwen (and will be getting some from HSBC). It may be hard for them to get traction in anything other than REOs. As delinquencies fall, Hubzu will see shrinking REOs from Ocwen over time. Ocwen has said that it intends on getting out of agency and into non-agency… so it may or may not be able to grow the number of REOs it sends to Hubzu.

      • Sounded to me that he was really concerned about the buybacks and I agreed with him in that regard, though soon I wished that he would just shut up :). I think he was unreasonable though when he said that it was a mistake to buy higher levels last year and I agreed with Bill that it was mostly according to what they knew back then.

        Anyways, following the price action the whole situation felt really intense. I’m glad I almost doubled my position under $20.

        The market over-reacting (asps dropping under $20) never ceases to amaze me. The stock looks still really cheap.

  6. What is interesting is that they still got the 150 or so million $ in cash. I really hope they aggressively use this to buy back some stock first, and then some debt. That would make up quite a bit actually.

  7. In their presentation on slide 9 it says either a 100m or 170m of adjusted income. Is this only on OCN business? Or does this include non OCN business as well? I cannot figure that out.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.