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Ocwen to Buy Ally Bank's MSRs

Ocwen Financial Corp. (OCN) has agreed to buy a majority stake in the portfolio of mortgage collection rights from Ally Bank – a unit of Ally Financial Inc. This is the latest addition to Ocwen’s long list of mortgage servicing rights (:MSR) acquisitions.

The stake buyout is estimated to be worth $585 million. The deal is subject to the approval of both Fannie Mae and Freddie Mac, according to Ally Financial.

As per the terms of the deal, the sale comprises MSRs pertaining to mortgage loans with an unpaid principal balance of $85 billion as of Jan 31, 2013. Also, an estimated $5 billion of agency MSR was generated on commitments made through the end of February.

Ally Financial may also sell the remaining stake in the portfolio to Ocwen under the terms of the deal. However, Ally Financial has received a lot of attention from other potential buyers and is considering those options before arriving at a final decision.

In Oct 2012, Ally Financial announced that it was looking to divest its MSR portfolio in order to reduce its exposure to the perilous mortgage business. The company, which failed the recent Federal Reserve’s Stress Test, received a $17.2 million bailout package from the government after it suffered massive losses during the 2008 sub-prime loan crisis. This deal will help it raise money to pay back the taxpayers.

For Ocwen, this deal will add to its already powerful growth trajectory. The company has been on an acquisition spree for quite some time now. In Nov 2012, in collaboration with Walter Investment Management Corp. (WAC), Ocwen won a bid to acquire Residential Capital's MSRs. Earlier in Oct 2012, Ocwen had announced to acquire Homeward Residential Holdings Inc. from WL Ross & Co. LLC.

Further, Ocwen has acquired Saxon Mortgage Services Inc. from Morgan Stanley (MS) and Litton Loan Servicing from The Goldman Sachs Group, Inc. (GS). In addition, the company bought certain MSRs related to non-prime loans from JPMorgan Chase Bank, N.A, as well as residential MSRs from Bank of America, National Association.

Amid a situation where major mortgage servicers are shying away from mortgage servicing business due to stringent regulations and balance sheet risk, Ocwen has been filling up this void through a string of acquisitions. Moreover, it is comparatively well- positioned than the other servicers since it focuses primarily on servicing operations unlike the others.

As delinquency rates continue to fall, mortgage servicing is turning out to be a lucrative business, much different from the situation 4 years ago, when majority of the companies were turning away from it. Hence, if Ocwen wins the bid to acquire the aforesaid MSRs, its financial performance would surely improve in the long term.

Ocwen currently retains a Zacks Rank #2 (Buy).

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