According to the regulatory documents flied on Monday, Ocwen Financial Corp. (OCN) stated that it had reached an agreement with Goldman Sachs Group Inc. (GS) to buy Litton Loan Servicing for $263.7 million. The acquisition is expected to close in the late third quarter or early fourth quarter of 2011.
As per the terms of the deal, Ocwen would pay Litton $2.47 billion upfront and give $337.4 million to retire a part of the debt, which Litton owes to Goldman. Further, Ocwen would also get $575 million of senior secured loan from Barclays Plc (BCS) in order to finance the deal.
Additionally, the transaction will provide Ocwen with $41.2 billion of servicing portfolio in the form of unpaid principal balance of primarily non-prime residential mortgage loans. Also, it would provide the company with the servicing platforms based in Houston and Dallas in Texas.
Goldman had acquired Litton in 2007 for $428 million from Credit-Based Asset Servicing and Securitization LLC, known as C-BASS, a subprime mortgage investment firm. However, the company’s strategy to acquire troubled mortgages at attractive prices and restructure the debts failed, and very few distressed loans came up for sale, with prices still higher.
Further, the financial crisis hit the servicing businesses badly due to the rapid growth of foreclosures and higher costs. Also, in the last several months, shoddy foreclosure methods and the discovery of flawed documentation halted the foreclosures. The foreclosure scam even attracted the attention of various regulatory bodies and the state attorney generals (AGs), who have started an investigation into the allegations.
Litton, along with other major U.S. mortgage servicers including JPMorgan Chase & Co (JPM) and Bank of America Corporation (BAC), is among the many mortgage-servicing businesses that are cooperating in the investigation procedure. These inquiries will expectedly lead to imposition of fines and penalties on the guilty.
Further, as a part of the deal, Ocwen stated that Goldman would be liable to pay any fines and penalties that could arise before the closure of the transaction as a result of the investigations.
Ocwen acquires servicing rights by buying them from the owners of mortgage pools and also by being contracted as a servicer. Therefore, with the ongoing deterioration of home prices, the company might get even more opportunities to acquire distressed servicing portfolios at low prices.
Ocwen currently retains a Zacks #4 Rank, which translates into a short-term “Sell” rating. However, considering the fundamentals, we maintain a long-term “Neutral” recommendation on the stock.
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