Can Ocwen Turn Itself Around With This Sale?

Ocwen Financial Corp. (NYSE: OCN) announced Monday morning that its subsidiary, Ocwen Loan Servicing, and Nationstar Mortgage Holdings Inc. (NYSE: NSM) have signed an agreement for the sale by Ocwen of residential servicing rights on a portfolio consisting of roughly 81,000 performing loans. These loans are owned by Freddie Mac and have a total principal balance of about $9.8 billion.

The transaction is set to close by March 31, 2015, and the loan servicing would transfer in April.

According to Ocwen CEO Ronald Faris:

This transaction represents the first step in the execution of our previously-announced strategy to transfer certain types of non-strategic servicing. We look forward to exploring additional MSR transactions with Nationstar.

Recently the company has settled up with California and agreed to pay $2.5 million in the dispute. Prior to this, Ocwen had reached a comprehensive settlement with the New York Department of Financial Services regarding its recent investigation.

The company insists that it is not as broken as investors think. In a poignant open letter to the Gibbs & Bruns law firm:

We note that your clients’ ill-conceived effort to push foreclosures and stop principal reduction is not directly solely at Ocwen but is part of their ongoing industry-wide pro-foreclosure campaign, which has been roundly criticized by numerous national housing, consumer protection and civil rights groups as anti-consumer and contrary to good public policy.

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It would appear now that Ocwen has reached a point where it must start liquidating its portfolio in order to stay afloat and make its payments. The question remains, how long can Ocwen keep this up?

Shares of Ocwen were briefly halted in the first half of Monday’s trading due to volatility. Prior to the halt, shares were down as much as 10% at $8.63. After shares resumed trading, they leaped 6.5% to $10.24. The stock has a consensus analyst price target of $13.79, and a 52-week trading range of $5.66 to $41.94.

We have already seen one analyst comment on this matter. Sterne Agee’s Henry Coffey said:

The re-rally in Ocwen shares is tied to comments made on the New Residential Investment Corp. and Home Loan Servicing Solutions call that they will not be looking to move servicing away from Ocwen. In addition to language in the agreement that would prevent any change in servicing relationship prior to the close, it is clear from listening to the tone of the call that the focus is on building a working partnership between the post acquired Home Loan Servicing Solutions and New Residential Investment Corp. companies and Ocwen. Not, as we and others had feared, on moving servicing away from Ocwen.

Nationstar Mortgage shares also jumped, up 8% to $30.21, at the announcement. The consensus price target is $23.14, and the 52-week trading range is $22.94 to $37.95.

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