The restructured HLSS/NRZ deal is good for OCN and ASPS

On April 6, 2015 HLSS and NRZ announced that they have restructured the Feb 22 merger agreement between the two companies (press release).  The new deal:

  1. Reduces the value received by HLSS shareholders.
  2. In the near term, HLSS has agreed not to transfer subservicing away from Ocwen.  Ocwen has given up a little bit of value to reduce some of its unusual risks.

The HLSS 10-K

The 10-K states [formatting modified]:

On April 6, 2015, HLSS, HLSS Holdings and Ocwen entered into an amendment to the Purchase Agreement and the sale supplements (effective upon completion of the Asset Sale described below) to, among other things,

(i) obtain Ocwen’s consent to the assignment by HLSS of its interest under the Purchase Agreement and each sale supplement,
(ii) provide that HLSS Holdings will not become the named servicer in connection with any Rights to MSRs, or direct the replacement of Ocwen as named servicer, before April 6, 2017 except under certain limited circumstances,
(iii) extend the scheduled term of Ocwen’s servicing appointment under each sale supplement until the earlier of 8 years from the date of such sale supplement and April 30, 2020, and
(iv) provide that Ocwen will reimburse HLSS Holdings for certain increased financing costs resulting from servicer rating downgrades of Ocwen.

In addition, under such amendment
(x) Ocwen agrees to exercise any “clean-up call” rights under any servicing agreement related to Rights to MSRs only at the direction of HLSS and to sell to HLSS, on an “as-is” basis, the economic beneficial interest in the right to purchase the mortgage loans and other assets in the trust for each designated servicing agreement pursuant to such clean-up call rights and
(y) HLSS agrees to pay to Ocwen a fee equal to 0.50% of  the outstanding balance of the performing mortgage loans purchased in connection with any such exercise and to pay Ocwen’s related costs and expenses of exercise.

ii: My interpretation is that HLSS/NRZ cannot transfer away Ocwen’s subservicing until after April 6, 2017.
iii: My interpretation is that Ocwen’s subservicing contract with HLSS/NRZ will be extended.  As before, HLSS/NRZ can transfer away subservicing under certain conditions without compensating Ocwen (e.g. Ocwen fails to maintain minimum servicer ratings).
iv: Ocwen picks up a new liability.
x and y: My guess is that Ocwen is giving up some value here.  Clean-up call rights have some value that Ocwen has traded away.

Overall, this deal is mostly good for Ocwen as it should reduce the fears around Ocwen’s servicing stability.  In turn, better servicing stability may lead to higher servicer ratings and help Ocwen get out of its problems related to its servicer ratings (e.g. having RMBS noteholders vote to terminate Ocwen as the servicer).  This deal is really good for Altisource because Altisource is the default vendor for non-agency MSRs serviced by Ocwen.  It is good for Altisource that Ocwen will be holding onto more of its MSRs and MSR subservicing contracts.

*Disclosure:  Long OCN and ASPS.

5 thoughts on “The restructured HLSS/NRZ deal is good for OCN and ASPS

  1. Just looking at the OCN prelim financials and it’s ugly. What concerns me is their ongoing litigation and compliance costs and revenue decline due to sale of GSEs. But Operating losses carried forward would cushion some blows. Hard to value this firm. What are your thoughts?

  2. Glenn, almost 2016 and wondering if you still held OCN, ASPS? They are now my biggest positions and I am bullish as there may be a number of catalysts in 2016. They are both so cheap now, that I believe the margin of safety is very wide and that the upside remains high. And (hopefully) most of the carnage is over.

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