Shares of Ocwen Financial Corp. (OCN) have risen nearly 6% since the company took the initiative to provide a clearer picture of its present financial standing and updates regarding the ongoing regulatory issues last week. The price rise is a relatively small consolation given that the company lost nearly 73% in the previous year alone followed by continuous decline since the beginning of 2015 on the back of consistent tussles with regulators.
With the credit rating agencies downgrading mortgage servicer ratings to residential mortgage backed security investors alleging trust agreements default, troubles for Ocwen continue to pile up. However, the positive market sentiments witnessed subsequent to Ocwen’s endeavour to come out clean regarding the issues weighing on its profitability as well as goodwill indicated a good move. (Read: Will Ocwen's Rating Downgrade Have a Lasting Impact?
Here are the key points from the regulatory filing released by Ocwen:
Regulatory Front
- As of Dec 31, 2014, Ocwen was aware of 21 pending regulatory examinations in 15 states.
- Further, the company does not expect any material fines, penalties or settlements from the pending state examinations. However, the company looks forward to resolving two open legacy matters for less than $1 million.
- Also, the company discussed the previously disclosed settlements reached with the New York and California regulators. The investigations were regarding unfair foreclosures, inadequately documented measures, omitted paperwork and inappropriately maintained records along with many loopholes in the company’s servicing systems and processes.
Liquidity Front
- In late December, Ocwen entered into a new revolving advance financing line to get a bank loan of $125 million.
- Moreover, the company holds $249 million in cash as of Feb 3, 2015 with expectations of robust liquidity going forward.
- Also, transactions related to sale of GSE Mortgage Servicing rights are expected to close soon, while sales of $5 to $20 billion of UPB per month are predicted through the end of the year.
Factors to Impact Fourth-Quarter Results
- Ocwen’s fourth-quarter 2014 earnings results (to be released on Feb 26) will include an additional expense of $50 million incurred to meet the $150 million settlement with the New York Department of Financial Services (DFS). The remaining amount was paid from the reserve kept aside in the third quarter in anticipation of the same.
- Expenses of around $64 million related to uncollectable receivables and other servicing expenses will be recorded in the fourth quarter.
- With legacy issues associated with acquisitions and other servicing transfers largely cleared out, such expenses are expected to decline in 2015.
- Further, monitoring costs of roughly $13 million are estimated in the fourth quarter.
- The company expects to record a loss in the fourth quarter and for the full year 2014 due to an elevated expense level.
Our Take
With Ocwen’s endless tryst with regulators and rising settlement charges taking a toll on profitability, loss in the upcoming release will not come as a surprise. However, the company’s better-than-expected liquidity and positive outlook to continue to have adequate liquidity for its business going forward will surely compel investors to rethink about the company’s future prospects.
Latest earnings reports of several major U.S. banks like JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC) and Citigroup Inc. (C) reflected settlement and legal charges influencing their performance.
Currently, Ocwen carries a Zacks Rank #3 (Hold).
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