Collecting home loan payments has been a messy business in recent years, especially for mortgage servicers like Ocwen Financial (OCN) that specialized in subprime territory. But as the fastest growing mortgage servicer in a blossoming housing market, and with a track record of nearly tripling shareholder money in the past two years alone -- and more than ten times over the past five years -- Ocwen has become one hot stock, indeed, as seen in a stock chart
The more recent trading days on that stock chart are particularly descriptive of investor enthusiasm for these shares. With fourth quarter earnings released February 28, Ocwen beat on the revenue number but missed earnings projections by some 6%. The Wall Street Journal since revealed that the U.S. Justice Department is investigating a recently acquired Ocwen subsidiary in connection with its work in modifying mortgages. In the following few days, Ocwen shares rose nearly 10% while the S&P 500 gained about 1.5%.
Investors like Ocwen’s acquisition spree, in which it is snapping up billions of dollars in mortgage servicing rights shed largely by banks that no longer want the risk of the business. (Mortgage servicers manage home loans for investors that own them through mortgage securities.) Ocwen, a $5.6 billion market cap business, said in a recent regulatory filing that it expected some $1 trillion of servicing and subservicing business to come on the market in the next two to three years. Ocwen already closed numerous acquisitions, including the mortgage division of Ally Financial’s Residential Capital from bankruptcy for $3 billion. Previously, Ocwen bought subprime mortgage servicing portfolios from Barclays (NYSE:BCSPR), Goldman Sachs (GS) and Morgan Stanley (MS).
Loan collection is a notoriously unloved business, and Ocwen has been criticized on several fronts. The company points out that it restructured thousands of loans to help struggling borrowers stay in their homes. Critics recall that last year it paid $5.1 million to settle (admitting no fault) a class action lawsuit accusing it of overcharging delinquent borrowers.
In December, the State of New York required Ocwen to hire a babysitter to assure that it was following foreclosure rules as promised, such as the one that requires a 90-day notice before starting the procedure. Ocwen also has taken heat for extensive use of offshore tax havens and cheap overseas labor, as well as a deal involving the purchase of its chairman’s house. On the truly petty side, we’ll add that the company name – New Co squished together backwards – looks like something created by a 10-year-old.
This is all just noise to many investors focusing on a recovering housing market. It doesn’t take a nuanced understanding of Ocwen’s business to know that acquisitions can quickly build its earnings. Buying servicing rights adds a lot of revenue but not so much expense, and that’s helped keep its share valuations, or PE ratio down. Ocwen’s PE growth, or PEG, ratio is under 0.4. Its forward price-to-earnings ratio is under 9. Ocwen’s profit margins likely will rise as the pace of the housing market picks up, as more mortgages mean more demand for servicing.
It’s possible that Ocwen could pay too much for its numerous acquisitions, or mess up integrating them in such a way that they disappoint on profitability. The bigger potential threat, however, would be that the nation’s housing recovery doesn’t live up to its hype. The company could still grow – banks still have a lot of this business they don’t want – but a serious slow-down in the pace of the housing market recovery could depress servicing fees. This is not a scenario many experts predict. For now, the most exciting charts for Ocwen shareholders are those that illustrate the housing market recovery. It’s later and more plodding than most predicted, but we doubt you’ll hear Ocwen investors complaining.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org.
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