What Ocwen and Altisource do

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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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:

1. It’s almost always significantly more expensive than the original hazard/property insurance policy.
2. 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.

Ocwen/Altisource update and links

Lately, the share prices of OCN and ASPS have dropped around a third since the beginning of the year.  This is presumably due to the negative press coverage that Ocwen has been receiving due to its regulatory problems.

1. Ocwen reached a settlement with the Consumer Financial Protection Bureau (CFPB), authorities in 49 states, and the District of Columbia.  Many articles in the media have reported that the settlement amount was $2.125B ($2B in principal reductions to homeowners and $125M in cash).  This is misleading.  Ocwen likely would have provided at least $2B in principal reductions anyways without the settlement.  As for the cash settlement, Ocwen only pays part of it.
2. Wells Fargo’s sale of MSRs to Ocwen has been blocked by the New York State’s Department of Financial Services (DFS).  (The DFS was not party to the settlement mentioned above.)
3. The press has reported speculation that MBS investors might sue Ocwen.  I believe that this is misleading because such lawsuits would be silly.  While the contracts that structure securitizations have problems, Ocwen has not breached their contractual obligations.  As a servicer, Ocwen is allowed to modify mortgages and to reduce the principal on mortgages.  When it comes to principal reductions, Ocwen’s incentives are aligned with investors.

(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.