Ocwen Financial Corp.
) long-term Issuer Default Rating (IDR) has been placed on Rating
Watch Negative by Fitch Ratings for a probable downgrade. The
primary reason for putting the rating under a negative watch is the
recent announcement by the company to acquire Homeward Residential
Holdings Inc. - an integrated mortgage firm with prime lending and
mortgage servicing operations - from WL Ross & Co. LLC.
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Fitch expects that the possible downgrade will not be more than two
notches from the present long term IDR of "B+" rating.
Nevertheless, the rating agency reiterated Ocwen's short term IDR
Homeward currently services approximately 422,000 mortgage loans
with the total unpaid principal balance (UPB) of more than $77
billion. Following the closure of this deal, Ocwen's total mortgage
portfolio would be 1.2 million mortgage loans with the UPB of
roughly $209 billion (based on the company's June 30, 2012 data).
Ocwen stated that the deal, still subject to customary regulatory
approvals, is expected to close by the end of this year. The
company will be paying about $588 million in cash and $162 million
in Ocwen convertible preferred stock.
Ocwen further stated that it will not have to raise any additional
capital to wrap up the acquisition. Nevertheless, Fitch anticipates
that the transaction would lead to an escalation in Ocwen's overall
leverage (on a pro forma basis) as it assumes about $2.3 billion of
Homeward's existing servicing advances.
According to Fitch, despite the acquisition being a strategic fit
for Ocwen's present operations, the near term execution and
integration risk could lead to disruption in servicing the loan
portfolios, which in turn would adversely impact the financials.
Further, the regulatory scrutiny of the mortgage servicing sector
will weigh on the company's risk profile.
Unlike Fitch, last week, Standard & Poor's (S&P) Ratings
Services affirmed its counterparty credit and senior secured debt
ratings at "B" on Ocwen. Also, the outlook for the company remains
At a time when major mortgage servicers are shying away from
mortgage servicing business as a result of stringent regulations
and balance sheet risk, Ocwen has been filling up this void by a
series of acquisitions. Though the company will have to comply with
the regulations related to mortgage servicing, it is better
positioned than the other servicers as it focuses only on servicing
operations unlike the others.
Over the last one year, Ocwen has acquired Saxon Mortgage Services
Inc. - mortgage subsidiary of
) and Litton Loan Servicing from
The Goldman Sachs Group, Inc.
), Also, the company bought certain mortgage-servicing rights
(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
Ocwen currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating. Considering the fundamentals, we also
maintain a long-term 'Neutral' recommendation on the stock.