Sterne Agee analysts Henry J. Coffey, Jr.,Kenneth James, and Calvin Hotrum weigh in on the recent Ocwen Financial Corp (NYSE:OCN) news.

Ocwen

The NY DFS is obviously grandstanding here, at least that is what his techniques suggest….at some point we would expect the Lawsky to state specifically what he wants from Ocwen Financial Corp (NYSE:OCN) or to identify what real harm has been done to homeowners in the state of New York by Ocwen Financial Corp (NYSE:OCN) or other special servicers.

As indicated in a news item released by Bloomberg, Benjamin Lawsky, head of the New York Department of Financial Servicers (DFS) has sent a letter to OCN’s general counsel, Timothy Hayes, concerning conflicts of interest between Altisource Portfolio Solutions S.A. (NASDAQ:ASPS) and Ocwen. ASPS provides a variety of services for Ocwen Financial Corp (NYSE:OCN), such as appraisals, vendor management, and other services related to loan modification and processing foreclosures. A copy of the letter can be found at the link below (@ 1:30 ET just going to DFS’s website will not get you the letter)
http://www.dfs.ny.gov/about/press2014/pr140226-letter.pdf

Relationship between Ocwen and ASPS

Lawsky seems concerned that the relationship between Ocwen Financial Corp (NYSE:OCN) and ASPS gives the two companies a perverse incentive to foreclose on more borrowers. He does cite in a letter concerns that Altisource Portfolio Solutions S.A. (NASDAQ:ASPS) and Ocwen Financial Corp (NYSE:OCN) were using the same Chief Risk Officer, a situation which has been corrected.

Observations

1. We still do not know what the DFS wants and if he actually has specific instances of harm that is concerning him. NY is a judicial state with unusually long foreclosure time lines and all foreclosures must be reviewed by a court.

2. Outside of the reach of his “bully-pulpit,” the initial agreement with Ocwen Financial Corp (NYSE:OCN) surrounding the Litton deal, we have no evidence that the DFS is in any position to regulate OCN outside of its authority over mortgage activity in the state on New York

3. Historically Ocwen Financial Corp (NYSE:OCN) pursues significantly more loan modifications than foreclosures. If using ASPS in the process is found to be at fault, than OCN can rectify this matter.

4. These issues obviously call into question the higher PE (price/earnings ratio) accorded ancillary servicer providers and could call into question to growth expected from and higher valuation accorded Nationstar’s (NSM) ancillary servicer provider, Solutions Star.

In our best assessment, the DFS is going to continue to harp on this issue until some specific settlement is reached.