The $45 billion in MSR’s Ocwen is selling consist of 266,000 legacy Fannie Mae loans, a segment of the market the company agreed to exit as part of its $150 million December settlement with the New York Department of Financial Services. This year, Ocwen’s sold a total of $34.8 billion in MSR’s on Fannie Mae and Freddie Mac loans to competitor Nationstar Mortgage Holdings in two separate deals as it stops servicing legacy agency loans. “This sale to Chase furthers Ocwen’s corporate strategy of reducing the size of the company’s Agency servicing portfolio,” Ocwen said of the sale.
Thursday’s MSR sale, Ocwen’s largest to date, is indicative of the regulatory and investor pressure the once fast-growing servicing giant is now facing. Holders of residential backed mortgage securities that Ocwen services are either abandoning the company or threatening to do so, asking that it be removed as a servicer. Meanwhile, operating relationships between Ocwen and its various related parties like Altisource Asset Management, Altisource Residential, Altisource Portfolio Solutions and Home Loan Service Solutions are being reconfigured.
Earlier this year, 119 holders of RMBS securities with an unpaid principal balance (UPB) of $82 billion, including bond giants PIMCO, BlackRock and Neuberger Berman, sought to have Ocwen removed as a servicer of the mortgage securities. More recently, holders of three Ocwen-serviced RMBS deals with a UPB of $820 million sent termination notices to Ocwen as a result of recent ratings downgrades. According to Compass Point analyst Kevin Barker, ratings downgrades have triggered terminations totaling $25 billion in UPB, a figure that’s likely to rise.
Still, in spite of the scrutiny Ocwen faces, the company continues to see itself playing a role in the mortgage market, particularly in the servicing of non-agency loans such as private label mortgages, and mortgages made during the credit bubble. As of late February, Ocwen serviced almost 40% of the outstanding subprime mortgages made between 2004 and 2007, 22% of Alt-A loans, 23% of option ARMs and 8% of prime jumbo loans, according to a report from Morgan Stanley securitized credit analysts.
Earlier this week, Ocwen filed restated financial results after a long delay that excluded language that would cast doubt on its ability to operate as a going concern. CEO Ron Faris also recently told investors Ocwen will remain in the business of servicing Ginnie Mae loans and it will also continue to originate and service new Fannie and Freddie loans.
As Ocwen deals with regulators, some new entrants to the servicing market may be able looking to take its market share. New Residential recently acquired HLSS, a deal that pushes the REIT into the mortgage servicing business. Nationstar, an acquirer of Ocwen MSRs, also could pick up share. However, like Ocwen, Nationstar’s run into financial difficulty as it tries to profitably grow in the servicing market. Nationstar shares are down 35% over the past 12-months after a string of earnings shortfalls. That, nonetheless, compares favorably to the 70% decline in Ocwen’s stock over the same period.
Ocwen rose to prominence by buying up MSR’s from banks who wanted to exit the business of servicing mortgages, particularly those made at the worst of the housing bubble. Over a handful of years in the wake of the mortgage bust, Ocwen grew tenfold to become the largest servicer of subprime mortgages in the U.S. and the nation’s fourth largest mortgage servicer overall, handling an unpaid principal balance of nearly a half trillion dollars by the end of 2013.
Since then, the company’s run aground. Regulators first alleged Ocwen sent back-dated refinancing notices to struggling homeowners, a move that sent many homeowners into default, a series of complaints alleged. NY DFS head Ben Lawsky also took issue with Ocwen’s sprawling corporate structure, accusing the company and its founder William Erbey of widespread conflicts of interest that played to the detriment of investors and homeowners.
Ocwen’s future is still an uncertain subject in the mortgage market. RMBS holders appear increasingly frustrated with Ocwen, further ratings downgrades could create a spiral, and MSR sales generally lower the company’s future profitability. About Ocwen’s woes, Morgan Stanley analysts wrote in February, “It’s been hard to have a conversation about non-agency without mentioning Ocwen… The further down the credit quality spectrum you go, the more you need to concern yourself with the details.”