The latest trouble for Ocwen Financial Corp. (OCN) – the leading non-bank servicer of subprime loans in the U.S. – unfolded in the form of downgrade of its mortgage servicer ratings by Fitch Ratings.
The rating agency downgraded Ocwen’s several U.S. residential mortgage servicer ratings, allotting a Stable Outlook and removing the company from Rating Watch Negative.
Why Downgrade
The agency cited the deteriorating financial condition of Ocwen as well as the senior management’s difficulties in working out operational deficiencies as the reason for the downgrade. The servicer ratings were cut to the second-lowest tier of level 4 on weak corporate governance and operational control framework.
The grade cut did not come as a surprise given the company’s track record since 2013-end, which reflects consistent tussles with regulators and bond investors.
Previous Rating Cuts
Prior to the latest downgrade, Fitch Ratings had lowered the ratings of Ocwen and its wholly-owned primary operating subsidiary, Ocwen Loan Servicing to 'B-' from 'B' with a Negative Rating Outlook in Dec 2014.
The grade cut was triggered by Ocwen’s settlement announcement with the New York Department of Financial Services (DFS) as well as the departure of its Executive Chairman. The second rating downgrade within two months could prove to be detrimental to the company’s goodwill, already dented by the rising regulatory issues and waning investors’ confidence.
Also, another global credit rating agency, Moody’s, downgraded Ocwen’s rating to ‘B3’ last month after the news of the California regulators considering suspension of the company’s mortgage license hit the market. Moody’s later affirmed the lowered rating even after the company settled the California mortgage compliance issue for $2.5 million, indicating profound difficulties now inherent in the company.
Impact on Ocwen
The rating downgrade is expected to increase default events in certain mortgage-bond agreements, which provide deal trustees and investors the option of transferring servicing. However, according to Fitch Ratings, default may be seen in less than 10% of all transactions.
Nevertheless, trustees and investors believe this downgrade to result in more defaults as observed previously when other graders had taken a similar call.
Our Take
Driven by Ocwen’s endless tryst with regulators, many loopholes in the company’s servicing systems and processes were uncovered. The regulatory investigation revealed unfair foreclosures, inadequately documented measures, omitted paperwork and inappropriately maintained records by the company.
This resulted in a severe plunge in the share price throughout 2014 and rolling into 2015 as well. Now with ratings cut by the global credit graders, the road to recovery for Ocwen with a tarnished reputation and bleak financials seems graver. Also, rising settlement charges have taken a toll on the company’s profitability.
Settlement and legal charges influenced the performance of several major U.S. banks like JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Citigroup Inc. (C) as witnessed in their latest earnings reports.
Currently, Ocwen holds a Zacks Rank #3 (Hold).
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