Ocwen has gotten killed in the past few days, falling from $6.15 to today’s close of $2.27 (-63%). I actually have no idea why it fell so much. Things don’t seem as ugly as last year when it had issues with the NY DFS, CA DBO, and was in danger of losing MSRs due to its servicer ratings.
However, while Ocwen may potentially be quite cheap relative to liquidation value, it has not been very well managed lately.
- The commercial auto lending business is likely a mistake.
- They have lost their way and are wasting money on dumb things like $25M for strategic advisors.
- In my opinion, management is trying to hide #2 from investors. This is why their 10-K has unnecessary re-classifications of expenses.
Commercial auto lending
In general, auto lending tends to be cyclical. The market clearly bottomed in 2008-2009. Any company still alive generated excellent returns on capital coming out of ’08-’09. We are probably near the top of the cycle right now. The risk/reward will likely get worse in the coming years. I really don’t understand why a mortgage servicing company would want to enter a business fairly unrelated to their core business. To some degree, I can understand that there’s a lot to dislike about mortgage servicing (and mortgage origination). You can randomly lose money due to the whims of the various regulators (there are 50 state regulators and several federal regulators). The industry will shrink significantly in the coming years as regulation is killing subprime mortgage lending. But getting into unrelated industries is not the answer.
As well, Ocwen should be spending its capital more wisely. It could continue to deleverage. Improving its servicer ratings would prevent NRZ from sniping its MSRs (due to a poorly thought-out contract between OCN and HLSS; HLSS was later purchased by NRZ). Ocwen could buy back shares. It could sit on dry powder and wait for banks to puke out their remaining non-agency high-delinquency MSRs. It seems to me that management could have come up with better uses of capital.
Lastly, the part in the presentation about “25%+” ROE in the auto lending segment strikes me as delusional and indicative of management’s inexperience with commercial auto lending. I’m sure that you can leverage yourself like crazy to deliver 25%+ ROE, but that does not mean that what you’re doing is smart. A more sensible metric would be return on assets. The business is currently losing money as implied by <0% ROE. Perhaps management should provide the exact figure; clearly they should know what it is.
There’s just all levels of crazy going on here.
According to page 65 of the Ocwen 10-K, Ocwen incurred $25.1 of strategic advisor costs in 2015. Ocwen is probably also wasting money on consultants, although I can’t figure this out from the 10-K. Computer hardware and software went up from $55,132 to $68,228 (+23.75%).
Various expenses have been shuffled around to hide the poor operating performance of the business segments. Expenses have been shifted to the corporate/un-allocated segment. However, I don’t think that Ocwen is trying to create paper earnings. They depreciate computer hardware and software on a straight-line basis over 2-3 years rather than something like 3-5 years.
In the past, the regulator has publicly talked about revoking Ocwen’s license. Ocwen continues to have issues with this regulator. From page 9 of the 10-K:
At this time, we believe that we will be able to resolve all matters related to such observations in a constructive manner with the CA DBO, and we are not aware of any issue that we believe will have a material impact on our financial condition. As part of these observations, the CA DBO has informed us of its position that certain onboarding activities relating to new California originations in 2015 were prohibited by the Consent Order and represent a material breach of the agreement. We disagree with this position. Given that we have already made adjustments to our processes for California originations, the CA DBO has not asked us to make any additional changes to such processes at this time. The CA DBO has also raised similar concerns related to our on-boarding of loans subject to subservicing agreements. The CA DBO is still evaluating this activity as it relates to the Consent Order. The CA DBO has not asked us to cease any subservicing activities, and these activities are not material to our overall operations. However, it is possible that the CA DBO could determine to take action against us, which could subject us to financial penalties or other regulatory action, and it is possible that the CA Auditor or the CA DBO could allege that other activities do not comply with California laws or regulations, which could also result in regulatory action against us.
From page 11 of the 10-K:
Separately, on February 10, 2015, we received a letter from the Staff informing us that it was conducting an investigation relating to the use of collection agents by mortgage loan servicers. The letter requested that we voluntarily produce documents and information. We believe that the February 10, 2015 letter was also sent to other companies in the industry. On February 11, 2016, we received a letter from the Staff informing us that it was conducting an investigation relating to fees and expenses charged in connection with liquidated loans and REO properties held in non-agency RMBS trusts. The letter requested that we voluntarily produce documents and information. We are cooperating with the Staff on these matters.
As pointed out by an analyst on the conference call, it is strange for the SEC to be looking into an issue that affects consumers rather than investors.
*Disclosure: I have been long OCN for a long time. I bought some more recently but that’s mainly because I’m crazy. You really should not copy me. Owning this stock has been frustrating.