Last month, HousingWire pondered if there was a light at the end of the tunnel for Ocwen Financial after the nonbank posted another loss in the second quarter, with company executives stating a belief that the nonbank can return to profitability as it puts “legacy” issues behind it.
One of those issues that Ocwen can now move beyond is a threat that New Residential Investment could pull subservicing rights from Ocwen based upon Ocwen’s servicer rankings from Standard & Poor’s.
Last June, S&P downgraded the servicer rankings of Ocwen Loan Servicing from “average” to “below average,” citing a “deficient” internal controls environment that did not keep pace with the company’s growth.
Then, in October, S&P also lowered its ranking of Ocwen as a residential mortgage master servicer from “above average” to “below average,” correcting an “inadvertent oversight” that saw the ratings agency neglect to downgrade Ocwen’s residential mortgage master servicer ranking as it apparently intended to do in June.
That downgrade forced New Residential Investment to repay $2.5 billion of term notes issued by the Home Loan Servicing Solutions Servicer Advance Receivables Trust.
“The $2.5 billion HSART term notes became immediately due and payable as a result of, and solely as a result of, the master servicer rating downgrade of Ocwen Loan Servicing, LLC announced by Standard & Poor’s Rating Services on September 29, 2015,” New Residential said in a release at the time.
And if S&P held steady and didn’t upgrade Ocwen’s servicer rankings, there was a belief (as noted by Seeking Alpha here) that New Residential could pull its subservicing from Ocwen.
But that possibility isn’t going to come pass now, as S&P announced Tuesday that it is upgrading a number of Ocwen’s servicer ratings, citing a number of internal operational improvements undertaken at the nonbank.
In fact, S&P upgraded Ocwen Loan Servicing’s overall residential master servicer ranking from “below average” to “average” and established a positive outlook for the ranking as well.
Additionally, S&P also upgraded four of Ocwen Loan Servicing’s servicer rankings – as a residential mortgage prime, subprime, special, and subordinate-lien servicer – from “below average” to “average.” The outlook for all for of those rankings is “stable,” according to S&P.
As for the residential master servicer ranking, S&P said that the upgrade is due to the ratings agency’s view of Ocwen’s “master servicing operations' seasoned and experienced management and staff, solid servicer and subservicer oversight and compliance, thorough policies and procedures, appropriate default management, and continued year-over-year portfolio runoff.”
S&P also noted that Ocwen “changed the organizational reporting of the master servicing operations to the chief investment officer from the chief servicing officer of the primary servicer operations,” as well as replacing two senior managers that left the company with an internal “industry-experienced” vice president to oversee the day-to-day master servicing operations.
As stated above S&P also established a positive outlook for the residential master servicer ranking. The reasons: “organizational reporting changes to further the independence of the master operations from the parent's primary servicing operations, existing and tenured first and second lines of defense, improvements in the internal audit practices of the primary operations and annual reviews.”
As for the prime, subprime, special, and subordinate-lien servicer rankings, S&P noted that Ocwen has a “strengthened internal control environment,” as well as “good management and staff experience levels, manageable staff and management turnover rates, and improved non-reimbursable tax penalties.”
S&P also notes the continued monitoring that Ocwen is subject to from its various settlements with New York Department of Financial Services, the National Mortgage Settlement and the California Department of Business Oversight, although Ocwen is currently trying to buy its way out of the restrictions placed upon it by the CDBO.
Since our last review, Ocwen has improved its control environment, and it has reduced the number of high-risk internal audit findings,” S&P stated in its report.
While we continue to observe high- and medium-risk internal audit findings, the number and criticality of the findings, in our view, is now more consistent with other average servicers we rank,” S&P continued. “In addition, management says the NY DFS and CA DBO continue monitoring Ocwen's operations. Management did not disclose any issues to us regarding the NY DFS or CA DBO. We will continue to monitor any developments from both state regulators.”
S&P also noted more than a dozen “key” changes to Ocwen’s operations since it last reviewed the nonbank.
“We believe Ocwen has strengthened its internal control environment and reduced the number and criticality of internal audit findings, and we believe the first and second lines of defense will continue to season to provide adequate risk management,” S&P stated.
“In our view, Ocwen also continues to invest in staff, training, and technology to further develop its operations,” S&P continued. “The company's executive and senior management appears focused on the continued improvement of Ocwen's internal controls environment and loan servicing performance.”
Ocwen, unsurprisingly, is happy with S&P’s upgrades.
“We are pleased with Standard and Poor’s decision. We believe S&P’s conclusions reflect the significant progress Ocwen has made in enhancing our control functions, and strengthening the company’s governance and financial condition,” Ocwen said in a statement.
“We are committed to continuing to invest in our operational platform, risk and compliance management systems and service excellence,” Ocwen continued. “Ocwen will also continue to work with distressed borrowers to find the right loan modification solution where appropriate, to allow them to keep their homes while continuing to generate more income for loan investors than foreclosure.”
And Wall Street welcomed the news of the S&P upgrade as well, as Ocwen’s stock shot up after S&P’s report came out. Ocwen’s stock rose 15% in the immediate aftermath, and opened up Wednesday’s trading above $3.
Ocwen’s stock hasn’t opened above $3 per share since March 15.
