Since thereal estate bubble burst in 2007, many people have
fallen behind on theirmortgage payments. As a result, banks and
financial firms have seen profits decline as short sales and
foreclosures pile up.
Five years later, the country is still feeling the effects of
the bubble burst. About 28% of all single-family homes with a
mortgage in the United States are now underwater, with U.S. home
prices down nearly 33% from where they were during the peak of the
housing bubble, real estate intelligence firm
Zillow Inc. (Nasdaq: Z)
As a whole, the U.S. housing market lost nearly
$6.3 trillion in value since the housing crisis first began. This
lost value has hit homeowners and lenders equally hard.
Historically, the percentage of residential mortgages inforeclosure
in the United States hovered between 1 and 1.5%. Today, it is up
about 4.5%. Foreclosure filings in the United States are projected
to keep increasing for the next few years, according to RealtyTrac,
an online database of foreclosures, auction and bank-owned
To make things worse, the foreclosure process is taking longer.
Just two years ago, the average U.S. homeowner in the foreclosure
process hadn't made a payment in 11 months. Today, that number has
jumped to 17 months. These foreclosures are destroying the
profitability of banks and other lenders.
And the numbers going forward don't look too encouraging either.
It is estimated that there are currently more than 4.5 million home
loans either in some stage of foreclosure or at least 90 days
delinquent. Currently, there are about 8 million Americans who
are at least one month behind on their mortgage payments and
another 5 million who are two months behind, according to Mortgage
Bankers Association. Many of these homes will likely go into
But there is one company that's successfully helping lenders and
borrowers mitigate their losses in a big way.
Ocwen Financial Corp. (
is maneuvering through the crisis and helping troubled individuals
and companies get back on their feet without filing for bankruptcy
or defaulting on their loans. The demand for this company's
services has been so great, that the stock is up 150% in the past
year alone. The best part is there is still tremendous upside
potential from here for investors who want to take advantage of the
Take a look at the chart below and notice how the stock has
soared as the mortgage crisis worsened:
The financial services company helps borrowers with residential
andcommercial real estate , business and consumer loans. It also
acquires non-performing loans and negotiates with the originator to
repay or foreclose on the loan as quickly as possible. The company
also specializes in the development of loan servicing technology
and software for the mortgage and real estate industries.
Through the company's new SharedAppreciation Modification
), borrowers are able to slash their mortgages by an average of
about $75,000. With a SAM program, theprincipal of the loan is
written down to 95% of the currentmarket value of the home. The
written-down portion is forgiven in one-third increments during the
next three years, so long as the homeowner stays current on the
modified mortgage. When the house is later sold or refinanced,
borrowers must share 25% of the appreciation with the investors
that own the loan and keep the remaining 75% of the gain. So far,
there are 34 U.S. states that have given the SAM program regulatory
Ocwen has been able to achieve resolution rates of 70% or more
from pre-foreclosures, while keeping its re-default rates the
lowest among its competitors. As a result, Ocwen has been able to
mend loans and keep the highest amount of existing borrowers than
any other company in this industry.
The good news is the stock appears undervalued right now, based
on its price-to-cash flow ratio of 2.95, which is much less than
the average of 5.47 in the financial sector.
Financially, the stock also shows signs of its strength. Total
revenue for the first nine months of the year increased 79% to
$608.6 million compared with the same period last year.Net earnings
were up about 68% to $115.6 million, or 84 cents a share, compared
with $68.7 million (64 cents a share) in the first three quarter of
Risk to Consider:
Last quarter, Ocwen had missed onearnings when it announced
quarterly earnings of 37 cents per share, a negative surprise of
7.7% below the consensus forecast of 40 cents a share.
Additionally, because Ocwen is in the business of lending money,
there isdefault risk . It also has a bit ofdownside risk and
volatility as the financial sector could get hit hard with another
major economic downturn. For example, during the past 90 days, the
stocks' standard deviation, which measure the volatility of a
stock, has been 3.4 while that of the S&P 500Index has been
Action to Take -->
Having said that, Ocwen is well diversified with lending, and
technology services, so it should fare much better than others in
Buy Ocwen up to $38 a share. This stock could easily hit $50 or
higher during the next 12 months, as unemployment remains high and
loan delinquencies continue to rise.