You can listen to the call and download the presentation slides from the IR website. The whole Erbey complex is rallying presumably because investors realize that the sky isn’t falling down. Highlights:
- Altisource guided down earnings for 2015. Adjusted earnings may drop around 16%. EDIT(1/21/2015): Adjusted earnings may drop around 26.5% without share repurchases.
- Altisource purchased very few shares in Q4.
- Whether or not the profits from the lender-placed insurance brokerage business was recurring is unclear to me.
- Management sees the chance of the DBO revoking Ocwen’s license (and forcing MSR sales) to be very low.
- The company does not see Altisource’s services being repriced lower due to the NY DFS. It believes that its services are at fair market rates.
- There was some drama. Lee Cooperman of Omega Advisors hopped on the call to express his displeasure at the company buying back shares at high prices and not buying back shares at low prices.
- Altisource has fired some of its employees and seems to have exited some areas which are not currently generating revenue.
Lender placed insurance brokerage
I’ve written about this issue previously (here and here).
I’ll wait until the 10-K comes out to see if the company took a large impairment regarding this.
Share and debt repurchases
Given that Altisource shares and its debt trade at depressed prices, many shareholders and analysts have been asking management to buy back shares and/or debt. Lee/Leon Cooperman caused a little stir on the conference call regarding share repurchases.
On the call, the CEO said that he thought that the shares were very undervalued. However, he also stated that the company would only buy back shares if legal counsel felt like the company disclosed enough material information to the market. The question is: what hasn’t Altisource told shareholders? Personally (and this is my theory), I think that the company needs to explain what happened with the lender placed insurance brokerage business. Presumably, the company was involved in kickbacks. Why else would the company exit a highly-profitable business due to regulatory uncertainty? Altisource needs to explain what happened whether or not its earnings stream from that business was recurring or not. I am not sure why it hasn’t done this yet.
Ocwen MSR decline
Altisource’s earnings will be hurt as MSRs naturally run off. Its earnings can be further hurt if Ocwen sells off a lot of its agency MSRs according to its publicly stated intention to do so.
The conference call did not mention anything about Ocwen buying MSRs in the future. I believe it has said that it wants to avoid tying up capital in agency/GSE MSRs and to continue to explore non-agency (private label) MSRs where its competitive strengths are. The earliest timeline for that would be:
- The NY DFS appoints a monitor that meets its requirements. The NY DFS is rather tough on monitors and has punished a monitor in the past.
- 120 days after the monitor is appointed, the monitor must develop a set of benchmarks and provide a preliminary report.
- 90 days after that, the monitor will release a quarterly report. Ocwen may or may not pass the benchmarks established by the monitor.
- My guess is that after #3 happens, Ocwen can begin the process of bidding on MSRs. I don’t know what the market for high-delinquency MSRs will be like. On one hand, there will be a lot of people who will want to sell them because the regulatory risk is so ugly. On the other hand, there may not be many bidders for MSRs because servicing transfers may be scrutinized by the NY DFS and other regulators. It might be a case of “damned if you do damned if you don’t”.
*Disclosure: Long OCN and ASPS.
EDIT (1/16/2015): I originally erroneously thought that Bill Erbey was on the call. I apologize for the error.