Ocwen Letter Spooks the Market

Ocwen just can't seem to get a break.

After a rough first 9 months to the year -- stock was down 53.5% YTD as of Monday's close -- the release of NY State Fin. Dept. Superintendent Benjamin Lawsky's letter to Ocwen's general counsel sent the stock tumbling again. 

Our last coverage was back in February, after Ocwen had agreed to a settlement fee, with the CFPB, of $2.2 billion, for its missteps from 2009-2012.  We showed the potential for this litigation expense to grow, as there were even more complaints in 2013 against Ocwen than in 2012.

The stock is now down 24.8% from Monday's close: Lawsky's letter included some powerful language, some of which could have repercussions to Ocwen beyond the immediate scope of the letter.

Lawsky's previous letter to Ocwen, dated April 2014, brought to the fore what Lawsky's office saw to be a "particularly troubling issue" - "the relationship between Ocwen and Altisource Portfolio’s subsidiary, Hubzu, which Ocwen uses as its principal online auction site for the sale of its borrowers’ homes facing foreclosure, as well as investor-owned properties following foreclosure." 

Hubzu appears to be charging auction fees on Ocwen-serviced properties that are up to three times the fees charged to non-Ocwen customers. In other words, when Ocwen selects its affiliate Hubzu to host foreclosure or short sale auctions on behalf of mortgage investors and borrowers, the Hubzu auction fee is 4.5%; when Hubzu is competing for auction business on the open market, its fee is as low as 1.5%. These higher fees, of course, ultimately get passed on to the investors and struggling borrowers who are typically trying to mitigate their losses and are not involved in the selection of Hubzu as the host site.

In August, Moody's downgraded Ocwen's primary servicer and special servicer ratings - and left both assessments on watch for further downgrade.  The shareholder class action complaints started to trickle in in August, and by September 2014 a handful of shareholder complaints had been filed.  (See for example NORBERT TUSEO, Individually and on Behalf of All Others Similarly Situated v. OCWEN FINANCIAL CORPORATION, RONALD M. FARIS, JOHN V. BRITTI and WILLIAM C. ERBEY)

The recent information about Ocwen's potentially backdating thousands of foreclosure documents is relevant not just insofar as it affects the nature of all current shareholder litigation, but insofar as Ocwen is being sued by mortgage borrowers, directly, and by mortgage market players and investors.  Crucially, Ocwen's servicing performance can be critical to the performance of RMBS securities.

For example, at least five third-party complaints have recently been filed by Nomura Credit & Capital, Inc. against, among other co-defendants, Ocwen as the servicer of the RMBS trusts. The complaints argue that Ocwen's underperformance has harmed the plaintiff, or that the breaches ought alternatively to relieve Nomura of certain of its duties to the trust.  The following excerpt comes from Nomura Credit & Capital, Inc. v Wells Fargo Bank, N.A., and Ocwen Loan Servicing, LLC, filed 8/11/14.

This public embarrassment can make it more difficult for Ocwen to defend itself in the existing and future litigation as it will inevitable have suffered a deterioration in reputation capital.  Last but not least, it will likely further hinder any near-term hopes Ocwen may have had of buying additional mortgage servicing rights (MSRs), and expanding its business.