On Monday, U.S. Bankruptcy Court in Manhattan approved
Ocwen Financial Corp
) bid to acquire Residential Capital's (ResCap)
mortgage-servicing rights (MSRs) in collaboration with
Walter Investment Management Corp
). The deal value is estimated to be around $3 billion.
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The approval came amidst protestations by the individual mortgage
holders, ResCap's parent company, Ally Financial Inc., as well as
the U.S government. The objections were raised in order to ensure
that the sale would be carried forward only if Ocwen agreed to
honor ResCap's portion of a $25 billion legal settlement with the
federal government and 49 state attorneys general. ResCap had
filed for bankruptcy in May this year.
Moreover, the deal encountered another hurdle when Neighborhood
Assistance Corporation of America (NACA), which provides housing
assistance and counseling to financially troubled borrowers,
argued that Ocwen's policy of outsourcing would eventually move
the taxpayers' money overseas.
The judge approved the deal citing ResCap's commendable efforts
that led to the settlement of several objections. Further, ResCap
has agreed to resolve the remaining objections at a later date.
The details of all these would be available after a second
hearing scheduled for November 20, 2012.
Earlier in October this year, Ocwen, along with Walter Investment
won a bid to acquire ResCap's business, which includes the rights
to serve nearly 2.4 million mortgages with an outstanding value
of $374 billion. The company faced serious competition from
Nationstar Mortgage Holdings Inc.
) at the ResCap bankruptcy auction in New York. Nationstar acted
as the stalking horse bidder for the auction. For this, Ocwen
will pay Nationstar a break-up fee of $24 million, which was
included in its final bid amount.
Amidst a scenario where major mortgage servicers are shying away
from mortgage servicing business due to stringent regulations and
balance sheet risk, Ocwen has been filling up this void by a
string of acquisitions. Moreover, it is better positioned than
the other servicers since it focuses only on servicing operations
unlike the others.
Recently, Ocwen announced a deal to acquire Homeward Residential
Holdings Inc. from WL Ross & Co. LLC. Beside this, in a span
of one year, Ocwen acquired Saxon Mortgage Services Inc. - the
mortgage subsidiary of
) - and Litton Loan Servicing from
The Goldman Sachs Group, Inc.
). Also, the company bought certain MSRs related to non-prime
loans from JPMorgan Chase Bank, N.A. - the banking division of
JPMorgan Chase & Co.
) - as well as residential MSRs from Bank of America, National
Association - a unit of
Bank of America Corporation
We believe this deal would enhance Ocwen's position as one of the
biggest non-bank mortgage servicers in an industry dominated
mostly by banking giants. Further, as delinquency rates continue
to slump, the company stands to benefit from the purchase of MSRs
However, we remain concerned about the employees of ResCap, whose
jobs may be at risk, given Ocwen's outsourcing practices.
Ocwen currently retains a Zacks #2 Rank, which translates into a
short-term Buy rating. ResCap deal is a major positive for Ocwen
and it is likely to result in favorable earnings estimate
revisions, which will help it to achieve the highest Zacks Rank.
However, considering the fundamentals, we maintain a long-term
'Neutral' recommendation on the stock.