Risks to Ocwen and Altisource

I apologize for the high volume of Altisource posts.  Altisource is by far my biggest position so I need to make sure that I’m not goofing this one up (especially because I have been doubling down on Altisource).

As far as the risks go:

•  Ocwen’s future earnings will likely be hurt as I do not see it taking kickbacks on force-placed insurance.
• Regulation can theoretically be very ugly for Ocwen and Altisource.
• Declining delinquencies could slow or reverse growth at either company.

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Are mortgage servicers evil?

This post will take a look at situations where mortgage servicers screw up and why they screw up.  I’ll let you decide whether or not they are “evil” and whether or not they deserve their bad press and regulatory attention.

Misconceptions about Ocwen and Altisource

This year, both Ocwen and Altisource’s share prices have gone down roughly two thirds.  I think that some of the fears regarding these stocks are based on misconceptions.

(ASPS/OCN) Kickbacks on force-placed insurance revisited

This is a follow-up to my previous post.  I suspect that the EPS decrease from Altisource shutting down its lender placed insurance brokerage business is largely not recurring and is more like a one-time charge.  If the EPS hit is one-time, it would mean that Altisource’s franchise is largely unaffected.

Altisource exits force-placed insurance “brokerage” business

Today, Altisource stated that it is discontinuing its lender placed insurance brokerage business (press release).

The discontinuation of this business line is expected to reduce Altisource’s quarterly diluted earnings per share by an average of approximately $0.50 – $0.65 for the period October 1, 2014 through December 31, 2015.

My guess is that Altisource was involved in taking kickbacks for force-placed insurance.  It is Ocwen that should decide whether or not to take kickbacks and it is Ocwen that would get to keep such kickbacks.  However, it could be the case that Ocwen took its kickbacks as a lump sum fee when it sold Beltline Road Insurance to Altisource.  See this Associated Press article which explains how it works.  The article quotes a source that argues that what Ocwen/Altisource are doing is wrong.

Currently, Erbey wants Altisource to get out of (kickbacks on) force-placed insurance due to “uncertainties with industry-wide litigation and the regulatory environment”.

Portfolio update November 2014

Overall, my portfolio is down several percent YTD mainly due to a longshot bet on Yongye put options and mark-to-market losses on Altisource common shares.

On the short side, shorting common stock has worked incredibly well for me this year.  Unfortunately, my gains were offset by losses on Yongye puts.

On the long side, I made massive bets on Kinder Morgan warrants and Altisource common stock.  The former has been profitable while the latter hasn’t.  Altisource has been beaten down -53% YTD and I have been adding to my position on the way down.  While Altisource continues to have absurd earnings growth, its share price has fallen dramatically due to fears that regulation may hurt the company.

(OCN/ASPS) Benjamin Lawsky’s fishing expedition

Benjamin Lawsky has gone after Ocwen looking for wrongdoing.  So far it seems that he has found very little.  Here are some of the claims that he has made:

• Ocwen’s rapid growth has hurt its ability to maintain the same servicing quality.  A press release on the NY DFS’s website (May 20, 2014) essentially makes these claims about Ocwen without naming the company specifically.  (But it’s pretty obvious that he is implying Ocwen with the reference to 70% lower costs.)
• Ocwen is potentially harming homeowners or MBS investors due to the conflicts of interest between Bill Erbey’s publicly traded companies.  See the February 26, 2014 letter (this Housingwire article provides some background).
• Ocwen may be harming homeowners (and MBS investors) by taking kickbacks on force-placed insurance.  Housingwire has an Aug 2014 article that provides some context.
• Ocwen has “backdated” some of the letters it has sent homeowners, potentially hurting their ability to stay in their home with a loan modification.  Here is a copy of their letter dated October 21, 2014: 243853685-Lawsky-Ocwen-Letter