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Ocwen Runs into Fresh Trouble, Shares Fall

Zacks Equity Research

Ocwen Financial Corp. (OCN) is now braced with fresh trouble. This has led the mortgage servicers’ share price to plunge nearly 35% year-to-date, with a decline of 6.98% on Feb 26 itself.

Benjamin Lawsky, the superintendent of New York’s Department of Financial Services (DFS), has raised concerns about Ocwen's business model. Lawsky questioned the conflict of interests between Ocwen and certain publicly listed affiliates.

Lawsky highlighted the fact that Ocwen’s Chairman, William Erbey, is also the largest shareholder in Altisource Asset Management Corporation, Altisource Residential Corporation (RESI), Altisource Portfolio Solutions S.A. and Home Loan Servicing Solutions, Ltd. (HLSS). Further, a recent regulatory filing from Altisource Portfolio Solutions stated that nearly 65% of its revenues in 2013 came from its business relation with Ocwen.

Notably, William Erbey’s role as a stakeholder in other companies could harm borrowers, mortgage investors and Ocwen’s shareholders. Moreover, there are chances that Erbey’s decisions, taken on behalf of management, could be intended to benefit the companies in which he has significant interests.

Consequently, Lawsky has sought additional information about the financial interests of Ocwen’s management and executives in all affiliated companies. The superintendent also demanded information and documents describing the extent and nature of the business relation between Ocwen and these four firms.

Notably, Ocwen stated that all the desired information was already in public domain. Nevertheless, the company is fully ready to cooperate and resolve all the concerns.

However, the company’s problems do not end here. Recently, Ocwen’s deal to acquire mortgage servicing rights (MSRs) from Wells Fargo & Co. (WFC) was restricted by Lawsky. This was driven by concerns over the mortgage servicer's ability to handle the increase in servicing volume.

Of late, Ocwen has grown significantly through acquisitions. At present, it is the fourth largest mortgage servicer in the country with a market share of roughly 5%. The faster-than-expected growth has given rise to the similar problems that borrowers faced in the period following the financial crisis.

Further, Ocwen is facing increased scrutiny over its practices after it announced a $2.1 billion settlement with the Consumer Financial Protection Bureau and other regulators, along with 49 states and the District of Columbia in Dec 2013.

We believe that if Ocwen does not address the above-mentioned in time, its creditability will suffer. This could lead to a further fall in the stock price as investors will lose their confidence about the company’s financial stability.

Currently, Ocwen has a Zacks Rank #5 (Strong Sell).

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Read the Full Research Report on RESI

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