Yesterday was a tough day for Ocwen Financial Corp (NYSE:OCN) investors, after a government agency accused the subprime mortgage giant of failing its customers “at every stage” of the borrowing process. In reaction to the bad news, Ocwen shares collapsed over 50% in Thursday’s trading session.
However, the stock regained a little ground Friday morning, rising 13% to $2.81, after the company issued a defensive statement in response to receiving cease and desist orders from state mortgage regulators (State Regulators):
“As with the recent CFPB enforcement action, Ocwen strongly disputes the key allegations made in the State Regulators’ cease and desist orders that Ocwen’s mortgage loan servicing practices have caused substantial consumer harm. Ocwen will not sign unfair and unjust consent orders that make impractical demands that no other market participant could rationally accept, and which would harm consumers. Under these circumstances, Ocwen has a responsibility to its customers, shareholders, and employees to vigorously defend the Company against unfounded claims while continuing to work with State Regulators to resolve any valid concerns.”
Below are the Company’s views on the main topics of the State Regulators’ filings of April 20, 2017:
Escrow – Ocwen’s escrow administration practices are subject to frequent review or examination by independent third parties acting on behalf of mortgage loan investors and rating agencies. These independent reviews have consistently confirmed Ocwen’s escrow practices are in line with common industry standards for timeliness and accuracy. No mortgage servicer is perfect – to the extent mistakes are made, we have a process to identify and remediate consistent with other mortgage servicers.
Ocwen has provided State Regulators with an estimate of the expected expense of an individual loan escrow account review for approximately 2.5 million loans over a four-year period, which a third party estimated to be $1.5 billion, or approximately $600 per file. This review cost did not relate in any way to amounts in escrow accounts or to customer funds. The Company has also provided an alternative of a statistically sound sampling methodology recommended by an independent third party. This alternative is consistent with methods used in other regulatory settlements and with the Multi-State Mortgage Committee’s (MMC) examination manual practices. The Company has engaged the independent review firm to conduct this review.
Financial Condition – Ocwen disagrees with any allegation it is not financially sound. Despite significant operating losses from 2014 to 2016 driven by a shrinking portfolio and $171 million of state and national regulatory monitoring expenses, Ocwen generated over $1.4 billion of positive operating cash flow. The Company ended 2016 with $257 million of cash on the balance sheet. Additionally, in December 2016, Ocwen refinanced its corporate debt, significantly extending the maturity dates and demonstrating significant lender confidence in Ocwen. Over this time period, Ocwen reduced its corporate debt by over $942 million, or 58%, dropping its corporate debt-to-equity ratio from an already conservative 1.6x in 2014 to 1.0x in 2016. Ocwen remains one of the least levered non-bank servicers today.
Ocwen provides a variety of financial information to select individual states as well as the MMC, such as recurring liquidity reports, monthly results, and future financial and cash projections. Additionally, it completed a comprehensive business plan in December 2016, and provided a robust going concern analysis prepared in conjunction with the issuance of Ocwen’s annual report. Despite this remarkable transparency, the MMC continues to ask Ocwen how it would handle “contingent liabilities” such as a hypothetical settlement with CFPB and the escrow analysis described above.
Licensing – Ocwen has worked diligently to correct perceived licensing concerns and has entered into recent settlements with three states, without admitting or denying wrongdoing. Ocwen believes it is properly licensed in all states where it conducts business and welcomes the opportunity to demonstrate its compliance to any State Regulators who may still have questions or concerns.
Cooperation – Over the course of almost two years, Ocwen and the Company’s Board of Directors have been in regular communication with State Regulators. In fact, the State Regulators informed the Company that its cooperation and the amount of information provided by the Company over the past 18 months had been constructive in building stronger supervisory relationships and solidifying Ocwen’s place as a necessary market participant in servicing mortgage loans and keeping borrowers in their homes. Ocwen intends to vigorously defend itself against yesterday’s actions by State Regulators while at the same time working with State Regulators to find common ground to resolve differences.
On the ratings front, OCN has been the subject of a number of recent research reports. In a report issued on April 10, Keefe analyst Bose George reiterated a Hold rating on the stock, with a price target of $5.00, which implies an upside of 101% from current levels. On February 24, Oppenheimer’s Ben Chittenden reiterated a Hold rating on OCN as well.
According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Bose George and Ben Chittenden have a yearly average return of 15.0% and a loss of 0.3% respectively. George has a success rate of 72% and is ranked #71 out of 4562 analysts, while Chittenden has a success rate of 50% and is ranked #3330.
Ocwen Financial Corp. is a financial services holding company, which through its subsidiaries engages in the servicing and origination of mortgage loans. It operates through the following segments: Servicing, Lending, and Corporate Items and Other.