Ocwen has bad management + CA DBO issues

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.

  1. The commercial auto lending business is likely a mistake.
  2. They have lost their way and are wasting money on dumb things like $25M for strategic advisors.
  3. In my opinion, management is trying to hide #2 from investors.  This is why their 10-K has unnecessary re-classifications of expenses.

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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.

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Unusual risks at Ocwen

Unfortunately for me, the drama never seems to end at the Erbey complex (OCN/ASPS/HLSS/RESI/AAMC).  Ocwen’s regulatory problems has been cascading into other problems.  I suppose the lesson here is that some companies sit on very unusual risks.  When it rains it pours.

I believe Ocwen’s financing deal with HLSS exposes it to a very unusual risk.  Ocwen had (more or less) sold excess servicing rights on its MSRs to HLSS.  If Ocwen loses its MSRs, then it has to compensate HLSS for HLSS’ loss.  The payment will be for the purchase price of the excess servicing rights adjusted for run-off at rates pre-determined in the contract between Ocwen and HLSS (8-K filing).

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OCN, ASPS, NSM, and inflated fees

I made a mistake.  I did not figure out the game that Ocwen and Altisource are playing.  Ocwen seems to receive fees from Altisource that could be (mis)construed as kickbacks under its “Data Access and Services Agreement”.  These fees could be seen as a quid pro quo (“you scratch my back I’ll scratch yours”) for the big profits that Altisource formerly earned for lender placed insurance “brokerage”.

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Ocwen/Altisource: What went wrong

Lessons learned:

  1. Regulators are difficult to predict.
  2. Don’t underestimate the amount of damage that a regulator can do.
  3. Use small position sizes for companies with potentially nasty regulatory risk.

While I was always aware of #1, #2 is what really got me into trouble.  Due to the actions of the NY DFS, I do not see the subprime mortgage servicing industry as an attractive one.  Lawsky may succeed in regulating away the industry’s profitability and crippling the growth of subprime servicers.

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Ocwen’s issues with the California DBO might turn into a witchhunt?

The consent order is now up on the DBO’s website (PDF).  The original issue seemed to be that the DBO requested information on 10 + 1200 + 120 loan files and did not feel that Ocwen fully complied with its request.  The consent order now dictates that an auditor will look into many aspects of Ocwen’s business including “the adequacy of Ocwen’s staffing levels” and “staff training”.  It seems to me that the DBO has decided to change the rules on Ocwen.

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