Shares of Ocwen Financial Corp. (OCN) declined nearly 4.5% to close at $25.16 following the announcement of restating its results. The company plans to restate its 2013 and first-quarter 2014 results owing to certain accounting issues.
The accounting weakness stemmed from a certain transaction between Ocwen and Home Loan Servicing Solutions, Ltd. (HLSS). There were changes pertained to as to how Ocwen recorded the value of $634 million worth of mortgage-servicing rights (MSRs) sold to Home Loan Servicing.
As a result of this change, Ocwen anticipates pre-tax income to increase by $17 million for 2013, while the first-quarter 2014 pre-tax income would decline by the same amount. Notably, the company does not expect any change in its second-quarter 2014 results.
Ocwen plans to file revised results by Aug 18, 2014.
Trouble Brewing for Quite Sometime
Since the beginning of 2014, Ocwen has been facing several inquiries related to its business operations with several affiliate firms including Home Loan Servicing, Altisource Portfolio Solutions S.A. (ASPS) and Altisource Residential Corporation. Home Loan Servicing was a subsidiary of Ocwen before it went public in 2012.
Notably, Ocwen’s Chairman, William Erbey, is the largest shareholder in Home Loan Servicing and Altisource Portfolio Solutions. This raised concerns from Benjamin Lawsky, the superintendent of New York’s Department of Financial Services, about Ocwen's business model. Lawsky questioned the conflict of interests between Ocwen and certain publicly listed affiliates.
Further, Lawsky restricted Ocwen’s deal (announced in February) with Wells Fargo & Co. (WFC) to acquire latter’s MSRs. This was prompted by doubts over the mortgage servicer's ability to handle the increase in servicing volume.
Moreover last week, Lawsky started investigations against Ocwen for directing $65 million in fees to Altisource Portfolio Solutions. The company allegedly paid questionable fees to Altisource Portfolio Solutions for purchase of force-placed insurance from Southwest Business Corp, the San Antonio, TX-based diversified financial services firm.
All these probes have significantly dampened investors’ confidence in the stock. Ocwen’s share price has declined more than 55% year-to-date.
We believe that if Ocwen does not address all these issues on time, its creditability will continue to suffer. This could lead to a further fall in the stock price as investors will lose their confidence about the company’s financial stability and risk management capabilities.
Moreover, taking into account all these investigations and concerns, analysts have been bearish about Ocwen’s future prospects. Hence, over the last 30 days, the Zacks Consensus Estimate has declined 18.7% to $2.78 per share for 2014. As a result, Ocwen currently carries a Zacks Rank #5 (Strong Sell).
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