(Ocwen) RMBS arbitrage

(This post is about a new venture at Ocwen that will likely be immaterial.)

On the latest conference call, Bill Erbey commented that Ocwen will be pursuing a new RMBS arbitrage strategy:

I believe that Ocwen has substantial opportunities to leverage our strong servicing capabilities by exercising cleanup calls, call rights or investing in existing private label RMBS tranches that we service. Most of RMBS securities we service have cleanup call provisions that allows the servicer to call the deal at par, typically when it has been paid down to 10% of the original unpaid principal balance. Notwithstanding slower prepayments, we see a steady stream of deals maturing in the next several years.

The opportunity results from the arbitrage of the underlying loans in REO being worth more than the securities. In other words, the whole is worth less than the sum of the parts. A condition precedent to our investment is our belief that Ocwen’s servicing creates strong cash flows for the securities overall. We’re building out this program and expect to be in the market purchasing securities in the next few months.

Perhaps some enterprising hedge funds will try to front run Ocwen.

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(Altisource/Ocwen) Mortgage servicing rights overview

Lately, Ocwen has been receiving a lot of bad press due to its problems with regulators.  Both Ocwen and Altisource have seen their share prices tank.  I think that the selloffs are overdone.  If anything Ocwen should have sold off worse than Altisource.

Here’s my take on the situation.

Altisource / Convincing ex-homeowners to leave

Altisource has uploaded its Analyst and Investor Event presentation slides to its website.  The most interesting presentation is on “Innovations in Consumer Analytics” (PDF).

Altisource Q3 2013 update: they are shooting for the stars

Altisource continues to take on more debt to fuel its growth.  $70M was used to buy Equator, a company that makes software for mortgage servicing companies.  (Equator competes with Altisource’s REALServicing platform and Altisource’s Hubzu.)  Equator’s sellers are eligible for up to another $80M in earn-outs in the future.  Altisource also previously purchased mortgage servicing businesses from Ocwen.  On top of that, Altisource has been using debt proceeds to repurchase shares. I believe that the interest rate on the debt (5.75%+) is higher than the earnings yield (~3.5%) on Altisource stock.  The repurchases will only work if Altisource continues to grow its earnings.

AV Homes (AVHI)

This company is a mess but it isn’t as overvalued as some of the other homebuilders.  So, I don’t think it’s a great short.

Hovnanian (HOV)

Hovnanian has a huge mountain of debt that it is trying to outrun.  Management has been diligently extending maturities on Hovnanian’s debt and raising capital through secondary offerings.  My short thesis is this:

1. Hovnanian is overvalued if you were to sell off all of its assets.  Its market cap is $760M.   Book value is -$478M (yes, that’s a negative sign).
2. It’s losing money.
3. They are one of the worst managed homebuilders so they will likely continue to perform poorly in the future.

Altisource (ASPS) – Updated writeup

(This post is featured on Market Folly, a blog that tracks what top hedge funds have been buying/selling and why they do it.  Check it out!)

Altisource is a rapidly-growing business that is riding the trend of financial companies outsourcing their mortgage servicing.  The process of servicing mortgages has become more complex as the US government continually adds more regulations to protect homeowners from foreclosure.  The cost of complying with government regulations and creating automated systems to handle mortgage servicing is mostly fixed.  These economies of scale will likely push the industry towards consolidation.

Altisource has grown its revenues per share by an incredible 36%/year from 2008-2012 (see gurufocus.com for historical stats) and currently trades at a P/E ratio of 21.6 (at $97.36/share).  Its growth next year is practically guaranteed due to its unique relationship with Ocwen.  Its forward P/E is roughly 11.8 (according to Yahoo Finance).  I believe that Altisource is the best managed mortgage servicer in its field.