The arcane world of specialty mortgage servicers has moved
into the limelight as banks and other large holders of risky
mortgages have sold off servicing rights to them.
Ocwen Financial (
), one of the chief beneficiaries, has seen its shares rise 41%
since early October, when it announced the first of a string of
That first one, which sent shares rising 20% on Oct. 3, was an
agreed merger with Homeward Residential, and with it, $77 billion
worth of mortgage servicing rights.
In a bigger announcement later that month, Ocwen outbid the
favoredNationstar Mortgage (
) in a high-profile bankruptcy auction.
It won more than $300 billion of Residential Capital's
mortgage servicing and origination business, for $2.5 billion.
Co-bidderWalter Investment Management (
) landed the $50 billion Fannie Mae part.
ResCap is the mortgage unit of government-owned Ally
Financial, the former financing arm ofGeneral Motors (
) . The transaction was approved by a bankruptcy court Nov. 21
and is expected to close in March.
Ocwen earns servicing fees on the unpaid principal balance of
the mortgage loans it services. It focuses on reducing
delinquencies on non-prime loans, including those backed by
government service enterprises, such asFannie Mae (
) andFreddie Mac (FMCC).
It also works on government-sponsored loan modifications.
Homeward and ResCap will add nearly $200 billion in mortgage
servicing rights and at least $37 billion in subservicing.
"By the time they integrate Homeward and ResCap they will have
a very dynamic platform," said Sterne Agee analyst Henry
Loan originations from the deals will be a boon for business
"because the more originations you can do the more sustainable
the servicing portfolio is," says analyst Kevin Barker of Compass
"Loans naturally prepay and payoff over time, Barker said. "To
the extent you can refill that with originations, the better you
can capture the runoff. They can do refinancings that aren't
necessarily in their portfolio right now."
Homeward comes with an origination business that has been
generating around $800 million a month.
But to justify its stock price on the heels of the recent
acquisitions, Ocwen must prove it can integrate them profitably,
"These are definitely larger in scale than past acquisitions,"
he said. "But they have been successful in the past and I think
they can do it."
Ocwen has been around for a quarter of a century, its name
said to be a take on the "new company" it once was -- "newco"
spelled backward. But it has operated under the radar on a far
In 2010, it generated revenue of $360 million and earnings of
just 36 cents a share. In contrast, revenue this year is expected
to reach almost $1.7 billion, up 100% from 2012, according to
Thomson Reuters. Earnings are seen rising 213% to $4.48 a
Fourth-quarter and full-year 2012 results will be released on
Analysts estimate Q4 earnings will jump 81% over last year's
same period to 51 cents a share. Revenue in the quarter is
expected to grow 46% to $228 million and for the full year 69% to
What's behind all this growth? U.S. financial reform, consumer
regulations and new global banking rules coming in 2014 from the
Basel Committee on Banking Supervision have been causing large
banks to sell off mortgage servicing rights, especially those in
A lot of that business has been going to Ocwen and rivals
Nationstar and Walter, all experienced at handling distressed
Ocwen claims it's the lowest cost servicer due in large part
to its efficient technology platform and large workforce based in
India. More than 80% of its employees are based in India.
In a recent presentation, Ocwen noted that its cost for each
non-performing loan averages $260 vs. the industry average of
"India definitely plays a part. The costs for salaries and
benefits are much lower," said Barker.
In addition, Ocwen says its ties with investment partnerHome
Loan Servicing Solutions (HLSS) allows it to keep a "capital
light" profile -- to fund growth at a reduced cost.
Typically, specialty servicers borrow lots of money to fund
the costs for advances on delinquent loans. Such costs include
principal and interest and taxes and insurance, as well as
corporate expenses such as legal fees, property valuation fees
Interest expenses on these secured borrowings were one of the
company's largest expenses.
Home Loan essentially helps buy and then holds servicing
rights for Ocwen, who acts as Home Loan's subservicer.
Home Loan has recently issued securitizations using advances
as the collateral, bringing rates paid on them down
"There is a growing market for advance securitizations,"
Barker said. "It definitely is a tail wind to earnings."
Other tail winds are expected, of course, from recent
acquisitions, including a smaller deal forged in October but one
management thinks offers long-term growth: reverse-mortgage
originator Genworth Financial Home Equity Access.
Management expects Genworth, to be renamed Liberty Home Equity
Solutions, to add $8 million to $9 million in net income this
year alone. The deal is expected to close in the current
Among other deals, earlier in 2012 Ocwen bought Saxon Mortgage
Services fromMorgan Stanley (MS), following its purchase of
Litton Loan Servicing fromGoldman Sachs (GS).
In addition, small-balance commercial loans totaling $1.8
billion in principal balance came onboard in late May from Aurora
There's a lot more to come, according to Ocwen.
Execs say the firm is tracking deals worth $350 billion in
unpaid principal, part of $1 trillion of servicing and
subservicing portfolios that they think could come on the market
in the next two to three years.
But Sterne Agee's Coffey says beyond the clear visibility
through 2014, "nobody really knows what the mortgage business is
going to look like in 2015, 2016 and 2017."
He added, "I would say (Ocwen) is very well positioned to step
into the brave new world of whatever this business will look like
in 2015 and 2016."