Erbey’s empire of publicly traded companies (OCN, ASPS, HLSS, AAMC, RESI) is a little confusing. Here’s my understanding of what his companies do.
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writeups – longs
Altisource recap
This is just my opinion, but I think that Altisource is pretty cheap despite being one of the fastest growing stocks around. Here are the company’s historical earnings per share (diluted):
2008: $0.38
2009: $1.07
2010: $1.88
2011: $2.77
2012: $4.43
2013: $5.19
Trailing twelve months: $6.69
Despite this incredible growth, the current TTM P/E is 12.8.
(Ocwen/Altisource) Force-placed insurance
Altisource’s share price fell dramatically today following a letter by Benjamin Lawsky to Ocwen (PDF link) that finds problems with a practice called force-placed insurance. Normally, lenders will require the homeowner to pay for hazard/property insurance. Part of each mortgage payment goes into an escrow account that pays for insurance and property taxes. However, there are some rare cases where the borrower pays hazard/property insurance separately. Perhaps they already had insurance before getting a HELOC. Or, they wish to exercise their right to choose their own insurance provider. In those situations, a borrower who has run into financial difficulties may stop paying their hazard/property insurance because they have more important expenses to pay. This exposes both the lender and the borrower to the risk of catastrophic damage to the home. Mortgage contracts generally allow the mortgage servicer to obtain hazard/property insurance elsewhere on behalf of the borrower.
There are two issues with force-placed insurance:
- It’s almost always significantly more expensive than the original hazard/property insurance policy.
- The mortgage servicer can take kickbacks/commissions from the insurance company.
(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.
Ruger Q2 2014 update – Part 2
I don’t think that investors should panic over Ruger’s drop in EBITDA and distributor orders. Going forward, I see the company gaining market share as its continues to release new products (which it has done so in the past). Volumes and profitability should recover and grow.
That being said, a huge contraction in the gun market or intense competition can hurt Ruger shareholders. I have no special insight into what will happen to the overall gun market.
Ruger Q2 2014 update
Ruger is seeing weak demand for its products and is slowing down production in response.
The press release and quarterly financial statements can be found on the company’s website (PDF). The 10-Q is on EDGAR.
(LMCA) Liberty Broadband spin-off
Liberty recently completed the distribution of 2 class C non-voting shares (ticker symbol LMCK) for each LMCA or LMCB share. Now Liberty intends on completing its spinoff of Liberty Broadband (LBRDA/B/K). Each shareholder of LBRDA/B/K will be slated to receive rights (LBRKR) to purchase shares of LBRDK. Liberty Broadband’s S-1 was filed on July 25.
To summarize: I think that both the parent and the spinoff will be attractive stocks. I plan on owning both. It could make sense to be overweight Liberty Broadband.
Both parts will essentially consist of high quality businesses with high growth (Sirius XM and Charter). I don’t believe that this spinoff will result in a special situation where one piece will contain significantly better assets than the other piece. I think that it is a better idea to own both rather than just Liberty Broadband. Because there will be a lot of leverage underlying the companies, it is probably a good idea to diversify.
