Ocwen Financial Corporationās OCN stock price fell over 28% today. Itās a stock that many Gurus have owned including Kyle Bass, Howard Marks, Paul Tudor Jones, and Joel Greenblatt. Many of them sold out in the March 2015 quarter. At least one Guru, Seth Klarman (Trades, Portfolio), still holds shares. Per GuruFocus, Klarmanās Baupost Group owns 6.25% of OCNās shares outstanding. Baupost began accumulating in Q3 2014 and bought more in Q1 2015. From what we can tell, Baupost is sitting on a loss over 50%. Of course, we donāt know if the firm hedged with other financial instruments.
Why OCN Fell Today
- The company reported Q2ā15 earnings today and the market was disappointed.
- Both Sterne Agree and Bank of America downgraded the stock.
About the Company
From OCNās, 5/11/2015, 10-K:
Ocwen Financial Corporation is a financial services holding company and one of the largest mortgage companies in the U.S.. Revenues last year were $2.11B and market capitalization is $1.06B. OCN has offices through the U.S. and support operations in India and the Philippines. Ocwen has been servicing residential mortgage loans since 1988, have been originating forward mortgage loans since 2012, and reverse mortgage loans since 2013. The company leads the servicing industry in foreclosure prevention and loss mitigation that helps families stay in their homes.
āOcwen has been a leader in the U.S. Treasuryās Home Affordable Modification Program (HAMP) since the programās inception in 2009. According to data published by Making Homes Affordable (MHA) in December 2014, Ocwen has completed 20% of all HAMP-sponsored modifications, 45% more than the next highest servicer.ā
āFrom 2010 through 2013, our business grew rapidly via portfolio and business acquisitions.ā See table below:
| Counterparty | Ć | Acquisition Type | Ć | Date | Ć | Loan Count | Ć | MSR UPB (in billions) | ||
| Saxon (1) | Ć | Asset | Ć | May 2010 | Ć | 38,000 | Ć | $ | 6.9 | Ć |
| HomEq (2) | Ć | Platform | Ć | September 2010 | Ć | 134,000 | Ć | 22.4 | Ć | |
| Litton (3) | Ć | Platform | Ć | September 2011 | Ć | 245,000 | Ć | 38.6 | Ć | |
| Saxon (1) | Ć | Asset | Ć | April 2012 | Ć | 132,000 | Ć | 22.2 | Ć | |
| JPMorgan (4) | Ć | Asset | Ć | April 2012 | Ć | 41,200 | Ć | 8.1 | Ć | |
| Bank of America (5) | Ć | Asset | Ć | June 2012 | Ć | 51,000 | Ć | 10.1 | Ć | |
| Homeward (6) | Ć | Platform | Ć | December 2012 | Ć | 421,000 | Ć | 77.0 | Ć | |
| ResCap (7) | Ć | Platform | Ć | February 2013 | Ć | 1,740,000 | Ć | 183.1 | Ć | |
| Ally (8) | Ć | Asset | Ć | April ā August 2013 | Ć | 466,900 | Ć | 87.5 | Ć | |
| OneWest (9) | Ć | Asset | Ć | August 2013 ā March 2014 | Ć | 299,000 | Ć | 69.0 | Ć | |
| Greenpoint (10) | Ć | Asset | Ć | December 2013 | Ć | 31,400 | Ć | 6.3 | Ć | |
The Bear Case
The company has had a lot of bad news recently:
- OCN is under significant regulatory scrutiny as a result of investigations by the states of New York and California.
- A settlement with the New York Department of Financial Services (DFS) caused their former CEO, William Erbey, to resign earlier this year.
- The company canāt grow its servicing portfolio because of restrictions imposed by the NY DFS and CA Department of Business Oversight that effectively prohibits future acquisitions of servicing until certain conditions are satisfied.
- OCN was 2 months late in filing its 10-K this year.
- Open questions if other states will hit OCN with fines.
- On todayās conference call, management did not inspire investor confidence as they were unable to give guidance on when the company would resume growth.
- There are many complaints from borrowers who are dissatisfied with OCNās service.
The Bullish Thesis
Iāve read a number of optimistic articles related to OCN. I can summarize their points as follows:
- This company is in transition. Itās focused on cooperating with the NY DFS and CA DBO and getting past its legal problems.
- The companyās financials are in better shape than the stock market is giving it credit for.
- The company has competitive advantages because of its software platform and lower cost of operations in India and the Philippines. You could see these points as negative as well. Since they've been acquiring other companies, they have many separate software platforms. Having operations abroad also complicates their ability to service customers.
- Thereās heavy upside in the forward mortgage loan origination business.
- There is heavy short interest in OCN.
- If interest rates rise, that would help mortgage servicing companies.
Conclusion
- If you want to invest in OCN, this is a company where much more research needs to be done especially in understanding the magnitude of its legal problems. I wouldn't use stated headline numbers on their financials because of the acquisitions they made in recent years. Many adjustments would need to be made to assess their financial health and profitabliity.
- Seth Klarman (Trades, Portfolio) seeks opportunities in distressed situations that are difficult to understand and invests when there is a margin of safety.
- OCN is definitely a messy situation.
- I view companies with operational problems cautiously as it's difficult to assess how quickly performance can turn around.
- What do you think? Is OCN a stock that deserves further investigation?
