Ocwen Financial Corp: Can a Company Be Too Successful? (Part I)

"Sometimes when you win, you really lose, and sometimes when you lose, you really win..."

-- Gloria Clemente, from the 1992 movie White Men Can't Jump

Allegations of poor customer service and potential conflicts of interest have regulators and large investors questioning Ocwen Financial's  (NYSE: OCN  ) business practices. What is Ocwen? Well for starters it is "new co" spelled backwards. Much more important is there is a statistically good chance that an Ocwen controlled company could be servicing your mortgage. It is equally important for investors to understand how this "family" of five Bill Erbey-controlled companies now face headwinds and challenges in 2014, despite a successful 2012 and 2013.

OCN Total Return Price Chart

That is not a mistake on the chart. Shares of Altisource Asset Management (NYSEMKT: AAMC) have skyrocketed since being spun out of Altisource Portfolio Solutions (NASDAQ: ASPS  ) in December, 2012.  

OCN Total Return Price Chart

Fellow Fool Amanda Alix does an excellent job of outlining some of the challenges that mortgage servicers face. Specifically as it relates to Ocwen, the Consumer Financial Protection Bureau or, CFPB, has recently reached agreements for the company to:

·       Pay back $125 million to consumers who have been unfairly foreclosed.

·       Agree to grant $2 billion in loan modifications to struggling borrowers.

In addition, the New York Department of Financial Services, or, NYDFS, has recently put an indefinite hold on the transfer of $39 billion of mortgage servicing rights, or MSR's, from Wells Fargo due to concerns about customer service. To put that into perspective, Ocwen currently services mortgage loans with about $473 billion of unpaid principal balances. 

The NYDFS has also opened an investigation into the business arrangements between the various Bill Erbey controlled entities -- specifically as it relates to "arm's length" transactions and shareholders rights.

Here is a brief rundown of the five related companies and their primary business focus:

·       Ocwen Financial: This is the "mother ship" and has about 10,000 employees. It is the largest servicer of delinquent loans in the U.S. Upon foreclosure or deed in lieu of foreclosure the property could be transferred to...

·       Altisource Portfolio Solutions, S.A.: A Luxembourg based company which employs over 6,000 and is the entity where all of the patents and websites reside, including Hubzu.com; which lists properties for auction, short sale, or standard sale on its online marketplace. Over 85,000 homes have been sold this way. Alternatively, Ocwen could transfer the file to...

·       Altisource Residential (NYSE: RESI  ) : This entity evaluates the options: loan modification, deed for lease, short sale, etc. This is the company that will eventually renovate and lease out single-family homes selected for that portfolio. It has very few employees because it is externally managed by...

·       Altisource Asset Management: AAMC also has just a few employees. This entity owns a title company as well as NewSource, a reinsurer. Remember, this company common stock returned over 5,000% since it was spun out of Ocwen! This bring us to...

·       Home Loan Servicing Solutions, (NASDAQ: HLSS  ) : This entity has just a few employees based in the Cayman Islands. It exclusively buys MSR assets from Ocwen Financial, and contracts back to have Ocwen service the mortgages. It currently pays out a dividend yield north of 8%. Investors should note that the IRS considers HLSS to be a passive foreign investment company, or PFIC. This makes it very important to get tax advice prior to purchase.

Obviously this is a very cursory and surface explanation of the entities and relationships, and interested investors should do their own research. There is no shortage of material to read!

Homeowner takeaway
Mortgage originators -- especially the big banks – are selling mass quantities of MSR's to third parties like Ocwen. When you are notified to send your monthly payments to a new company, make sure that the information is accurate, as it is critical to double check key items like the principal owed and escrow account balances. The CFPB was created after the 2008 financial crisis to aid consumers with financial products including mortgages. Individual states may have agencies in place to help with disputes as well.

Investor takeaway
Ocwen needs to win shareholders confidence, provide winning customer service and upgrade internal oversight procedures. However, the perception of capitalism gone wild may not be an accurate portrayal. In fact, there is actually another side to this story.

Many of the issues confronting Ocwen are due to the incredible success of its business model. That is a happy problem to have. Bill Erby patented technology and created infrastructure over a 15 year period in order to quickly ramp up and service delinquent loans profitably on a very large scale. The second part of this series will explore why the glass could very well be "half full" for the Ocwen family of companies.

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