Ocwen Financial Corp.
) tumbled on Tuesday, after
reported the possibility of legal action against the mortgage
servicer by a group of institutional investors. Ocwen's stock
price fell 9.03% and came in at $38.07.
Investors are contemplating filing a legal case against Ocwen
over its mortgage servicing practices and loan modifications.
They claim that the non-bank mortgage servicer's practices have
affected the performance of securities purchased by the
The investors' group including Pimco and
) is being represented by the law firm - Gibbs & Bruns.
Notably, this law firm has represented similar cases against
major banks including
JPMorgan Chase & Co.
) and Bank of America.
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Mortgage servicers' role is to accumulate payments from
homeowners and allocate those to investors who own the loans
through mortgage securities. Collectively, over the past two
years, servicing rights over $1 trillion in mortgages have
changed hands. Therefore, some specialty mortgage servicers have
been thriving, which has raised doubt over the servicers'
capabilities to service such loans.
Ocwen is facing increased scrutiny over its practices after it
announced a $2.1 billion settlement with the Consumer Financial
Protection Bureau (CFPB) and other regulators, along with 49
states and the District of Columbia in Dec 2013.
As per the allegations, Ocwen used deceptive and unfair means
while working with borrowers who were delinquent and underwater.
The company was accused of misrepresenting facts while filing
foreclosure documents, charging unjustified fees for
default-related services and forcing borrowers to buy unnecessary
insurance policies, among others.
Further, last week, Benjamin Lawsky, superintendent of New York's
Department of Financial Services (DFS) restricted the proceedings
of the cash-deal worth $2.7 billion entered into by
Wells Fargo & Co.
) and Ocwen last month. As per the terms of agreement, Ocwen was
to buy residential mortgage-servicing rights (MSRs) on 1,84,000
loans with total principal balance of about $39 billion from
Wells Fargo. Driven by concerns over the mortgage servicer's
ability to handle the rise in servicing volume, Lawsky has
indefinitely halted Ocwen's recent deal.
Continuation of such legal issues will dent Ocwen's financials in
the near term. Moreover, the holding back of the deal by
regulators will affect the company's strategy of increasing
revenue through the acquisition of servicing rights from big
banks in the coming period. Further, if the lawsuit is filed and
Ocwen is found guilty, it would take the share price further
down, thereby affecting investors' confidence.
Following such legal actions against Ocwen, the Zacks Consensus
Estimate for 2014 has declined 3.8% to $5.08 per share, over the
last 30 days. Moreover, our proven model does not conclusively
show that Ocwen is likely to beat the Zacks Consensus Estimate in
the fourth quarter. This is because a stock needs to have both a
and a Zacks Rank #1 (Strong Buy) or at least 2 or 3 for this to
happen. Unfortunately, this is not the case here as elaborated
The Earnings ESP for Ocwen is -5.95%. This is
because the Most Accurate estimate of 79 cents is below the Zacks
Consensus Estimate of 84 cents.
Ocwen's Zacks Rank #3 (Hold), however, increases the predictive
power of ESP. That said, we also need to have a positive ESP to
be confident of an earnings surprise call.
Ocwen is expected to release fourth-quarter 2013 results at the
end of February.