Now that the dust is beginning to settle on the $150 million settlement between Ocwen Financial (OCN) and the New York Department of Financial Services, the company has unveiled its plans for the future.
First and foremost, the company will be without departing chairman William Erbey, who was forced to resign as part of the NYDFS settlement. But in a conference call with investors, Ocwen Chief Executive Officer Ron Faris revealed Ocwen’s four-part plan for the future and said that Erbey’s departure isn’t the only big change for the nonbank.
Faris told investors that Ocwen is planning to exit agency servicing. “We are going to focus our servicing business primarily on non-agency servicing,” Faris said.
Faris said that Ocwen plans to sell off its entire portfolio of agency servicing. “We estimate the difference between our $1.1 billion book value and fair value of our agency MSRs is between $400 and $500 million dollars,” Faris said.
“In addition to potentially realizing these gains, we have the potential to free up $200 to $300 million currently allocated to fund agency advances,” Faris added. “This strategy has the potential to free up over $1.7 billion of capital to invest in new businesses, to reduce leverage, or to return to shareholders over time.”
But Faris said that the sales of its agency mortgage servicing rights portfolio will not be done in bulk. “Given the current environment, we believe it is unlikely that you will see large bulk transactions like we have seen in recent years,” Faris said. “We expect to be in a position to execute this strategy with smaller transactions.”
Faris said that private-label servicing has proved to be a much more profitable business for Ocwen in the past.
“Over many years, we developed a differentiated capability to service mortgages in private-label securities,” Faris said. “This capability was founded on a technology platform that integrated well with a social science-based dialogue engine and statistical decision models.
“The result when combined with our human resources was an operating platform able to deliver best in class servicing for homeowners, better cash flow for residential mortgage-backed security bond holders and strong operating margins for the business and our shareholders.”
Faris said that the company’s precipitous growth over the last few years has included “significant” amounts of agency servicing, but the margin on agency servicing was much smaller, because “our competitive advantages proved to be less distinctive in agency servicing.”
Faris said the expected injection of capital from the agency MSR sales will be used to grow two “opportunities,” which Faris said the company believes are “attractive.”
First, Faris said that Ocwen plans to grow as a mortgage originator. “As we have said in the past, it is our aspiration to become a more profitable originator,” Faris said. “We believe that we can deliver and develop a lending operation that builds upon our core skills and capabilities.”
Faris said that the company plans to invest in its technology platform, as well as its “decision frameworks and operating processes,” with the objective of targeting markets that are “both high quality and underserved.”
Faris said that Ocwen also plans to begin utilizing the RMBS call rights it owns as the servicer of approximately $200 billion in unpaid principal balance on private-label mortgages.
“There are multiple elements to this strategy and our first priority is to execute on what we call premium calls, where the value of the underlying collateral is worth more than the cost to call the bond,” Faris said.
“In these cases, we can call the bond and re-securitize the performing loans almost immediately and recognize a gain. We estimate that we will execute approximately $5 billion of calls in the next two years and they could be worth two to three points of profit to the company.”
Faris said that he expects to complete its first “substantive” transaction in this area in the first half of 2015.
Faris also said that no part of its settlement payment with the NYDFS is tax deductible, which is not what the company expected when it booked a $100 million charge for a potential settlement with the NYDFS in its third-quarter earnings.
“We will reflect the additional $50 million in our fourth-quarter earnings,” Faris said. “And the payments (to the NYDFS) will be made before the end of the year.”
Faris said that despite the news of the week, he is “very excited” about Ocwen’s future.
“Ocwen is committed to a culture of integrity, transparency and accountability,” Faris said. “We will continue to change lives by helping homeowners in all that we do. We have learned from our challenges and look forward to restoring everyone’s confidence in Ocwen as we move into 2015 and beyond.”
