Ocwen Financial Corp. (OCN): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

Summary:
Ocwen's fourth-quarter adjusted earnings widely surpassed the Zacks Consensus Estimate. Top-line growth, higher interest income, strength in balance sheet and decent liquidity were the tailwinds. These were partially offset by rise in both operating costs and interest expenses. Though market volatility and contraction in subprime MSR market remain causes of concern, Ocwen continues to be steadfast on loan modifications and new business acquisitions. Additionally, the company can still take advantage of other opportunities to acquire servicing portfolios, given its strong liquidity position. However, the recent challenges increased the regulators' scrutiny of Ocwen's capability to service loans. This, together with sluggish economic recovery, mounting expenses and new regulations remain causes of apprehension in the near term.

Overview:

Founded in 1988 and headquartered in Atlanta, GA, Ocwen Financial Corporation is engaged in a variety of businesses related to residential and commercial mortgage servicing, real estate asset management, asset recovery, global outsourcing, as well as the marketing and sales of technology solutions to third parties. It also provides special servicing and receivables management services.

In the past, Ocwen operated as a savings and loan holding company, but terminated its status as "Thrift" in June 2005 after an extended "de-banking" initiative. The company has offices in Florida, New Jersey, Pennsylvania, Texas, United States Virgin Islands and Washington, D.C. and ancillary operations in India, the Philippines and Uruguay.

In 2000, Ocwen began shifting its focus from a capital-intensive business model, involving the purchase and origination of loans, to a fee-based, servicing-only model. The company acquired mortgage-servicing rights (MSRs) for performing, sub-performing and nonperforming residential mortgage loans, from which it earns annual servicing fees and late fees. The company has been approved for loan servicing by the Department of Housing and Urban Development, Freddie Mac and Fannie Mae.

As of Dec 31, 2013, Ocwen owned all the common stocks of Ocwen Mortgage Servicing, Inc. (OMS). The company either directly or indirectly owned all the outstanding stock of its primary operating subsidiaries: Homeward Residential, Inc. (Homeward), Liberty Home Equity Solutions, Inc. (Liberty), Ocwen Loan Servicing LLC (OLS) and Ocwen Financial Solutions Private Limited (OFSPL).

Ocwen operates through the following segments:

The Servicing segment provides loan servicing for a fee, including asset management and resolution services, primarily to owners of subprime residential mortgages. It mainly comprises the company's core residential servicing and sub-servicing businesses.

The Lending segment originates and purchases conventional, government insured forward mortgage loans and Home Equity Conversion Mortgages (HECM or reverse mortgage loans) insured by Federal Housing Authority through the direct, wholesale and correspondent lending channels. These loans are packaged and sold in the secondary mortgage market.

The Corporate Items and Other segment includes items of revenues and expense that are not directly related to a business, business activities that are individually insignificant, interest income on short-term investments of cash and other corporate expenses. The segment also included the diversified fee-based businesses that was acquired as part of the Homeward and ResCap Acquisitions, and subsequently sold to Altisource.

Since its inception, Ocwen continues to streamline its operations through mergers, acquisitions, divestments or spin-offs. In 2007, Ocwen closed Funding America LLC, its subprime loan origination operations. In Aug 2009, the company separated from Ocwen Solutions in a tax-free spin-off to Ocwen shareholders, following which Ocwen Solutions became a separate publicly traded company. This spin-off excluded BMS Holdings and Global Servicing Solutions GSS.

Since 2009, Ocwen disposed its investment in Bankhaus Oswald Kruber GmbH & Co. KG and closed the sale of MSRs to HLSS Holdings LLC.

Further, since 2010 the company's major acquisitions include HomEq servicing portfolio and platform from Barclays Bank, Litton Loan Servicing from Goldman Sachs, specified MSRs and the related assets from Saxon Mortgage Services Inc., specified MSRs related to non-prime loans from JPMorgan Chase Bank, N.A. and Aurora Bank FSB's commercial servicing rights portfolio.

Additionally, In Dec 2012, Ocwen completed the acquisition of Homeward Residential Holdings Inc. an integrated mortgage firm with prime lending and mortgage servicing operations from WL Ross & Co. LLC for $766 million.

Further, in 2013, Ocwen continued with its restructuring strategy. The company acquired Residential Capital LLC's (ResCap) MSRs in collaboration with Walter Investment Management Corp., Genworth Financial Home Equity Access, Inc. from Genworth Financial, Inc. and UPB related to Freddie Mac and Fannie Mae loans from OneWest Bank. Moreover, the company divested rights to MSRs and associated servicing advances for a servicing portfolio of subprime and Alt-A residential mortgage loans to HLSS Holdings and sold diversified fee-based businesses acquired from Residential Capital LLC and Homeward to Altisource Portfolio Solutions S.A.

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