Ocwen's $150M Settlement: A Clean Slate or a New Burden?

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Shares of Ocwen Financial Corp. OCN hit a 52-week low of $15.04 after the company announced the resignation of its executive chairman as well as a $150 million fine as part of the settlement with the New York Department of Financial Services DFS. The stock closed the session at $16.01, reflecting a year-to-date decline of 70.8%.

Regulatory Troubles

Ocwen's run-in with regulators has been going on for almost a year now. In Feb 2014 Benjamin Lawsky, superintendent of New York's DFS, halted Ocwen's deal to buy residential mortgage-servicing rights (MSRs) from Wells Fargo & Co. WFC. The deal, which was later cancelled in Nov 2014, was put on hold indefinitely at regulator's request driven by concerns over the mortgage servicer's ability to handle the increase in servicing volume.

Since then, the financial regulator has been keeping a close watch on Ocwen, which helped uncover many loopholes in its servicing systems and processes. The regulatory investigation on Ocwen revealed unfair foreclosures, inadequately documented measures, omitted paperwork and inappropriately maintained records.

In Oct 2014, Lawsky accused Ocwen of backdating the foreclosure correspondences of borrowers. Lawsky alleged that the company has harmed thousands of borrowers by denying them a chance to save their homes from being foreclosed.

Settlement

The New York regulator finally reached a settlement with Ocwen to resolve the abovementioned allegations and prevented the latter from acquiring MSRs till necessary improvements have been made.

Moreover, per the consent order, Ocwen's co-founder William Erbey will have to resign as the company's executive chairman as well as the chairman of four related companies – Altisource Portfolio Solutions, Altisource Residential Corp., Altisource Asset Management Corp. and Home Loan Servicing Solutions, Ltd. HLSS effective Jan 16, 2015.

Further, out of the $150 million settlement, $100 million has to be paid by Ocwen by Dec 31, 2014, which will be utilized for housing, foreclosure relief and community redevelopment programs. The remaining amount has to be paid as compensation in the form of $10,000 to each homeowner whose home was wrongfully foreclosed by Ocwen.

The company already recorded a $100 million charge in the third quarter of 2014 in anticipation of the settlement. Thus, an additional $50 million charge will be recognized in the fourth quarter.

Our Take

Regulatory probes and litigations have become an integral part of the major U.S. banks such as Wells Fargo and Bank of America Corporation BAC. The increasing regulatory burden has overshadowed the growth potential of Ocwen – the leading non-bank servicer of subprime loans in the U.S. Also, the escalating legal expenses have started taking a toll on the company's profitability.

To further add to Ocwen's troubles, Moody provided a negative outlook for the company considering the after-effects of recent events and the uncertainty prevalent in the market.

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


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OCWEN FINL CORP OCN: Free Stock Analysis Report

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HOME LOAN SERVC HLSS: Free Stock Analysis Report

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