Update on Ocwen; Wells Fargo, FHA, and The False Claims Act
We've only just begun... Excellus BlueCross BlueShield reports cyber attackers have hacked its systems and that 10 million people have been affected. The company confirmed attackers may have gained access to names, dates of birth, Social Security numbers, mailing addresses, phone numbers, identification numbers, financial account information and claims information. And I am hearing that potential buyers of lenders are asking the lender pointed questions about recent cybercrime history and safeguards.
I am sometimes asked about "pure" residential lending company stocks. There aren't many since the big banks have so many other product lines. Lenders that jump to mind are Stonegate, Walter, Nationstar, and...Ocwen (OCN). In terms of headline news for these publicly held companies we know that Stonegate lost its CEO recently. But what has been happening with Ocwen?
An abbreviation of New Company is Newco, and Newco spelled backwards is... you get the point, and the origin of the name. Bose George with KBW writes, "OCN provided a financial update in a published investor slide deck on September 15th. The company now expects to generate a loss in 2015. The company also outlined its cost improvement strategy in more detail. It is expecting at least $150 million in cost cuts in 2016 vs 2015 with potential cost cuts to be as much as $368 million...The company now expects to generate a loss in 2015, due to lower revenue expectations and higher operating, interest, and tax expenses.
"Management divided cost cuts into two categories: 'automatic' and 'action required'. Automatic cost cuts will be realized through the smaller servicing portfolio and lower non-recurring expenses and range from $138m - $168m. Management actions could further reduce costs by $100-$200 million...Given the limited visibility on the longer term earnings power of the company, our price target is based on tangible book value and equates to roughly 1x current tangible book value. While tangible book value does not include the company's fair value estimate for the HLSS subservicing (which is valued at over $2 a share) and other potential fair value adjustments, we remain reluctant to add that to our valuation metric until the company's cost base falls by enough for the company to generate more normalized levels of profitability."
And Fred Small with Compass Point Research and Trading writes, "Ocwen filed a presentation with updated projections for FY15 and projected expense savings in FY16. The company now says that it expects to report a loss for FY15. The company continues to pay down its term loan and reduce corporate debt leverage. OCN expects to pay down an additional ~$424M in 2H15 after paying down ~$76M QTD. An additional $150M voluntary prepayment in expected this week. Our estimates assume $300M TL repayment in 3Q15, followed by $200M in 4Q15."
And there aren't many lenders not involved in various legal issues. In a Florida court Ocwen Financial won the dismissal of two securities class actions that arose from alleged compliance issues related to servicer agreeing to a $150 million settlement in 2014 with the New York's Department of Financial Services last December. One was by a class of Ocwen shareholders and another by a class of Altisource shareholders, alleging that Ocwen lied about its mortgage servicing operations, its conflict of interest policies, and its performance.
In capital markets news Freddie Mac recently sold via auction 5,208 deeply delinquent non-performing loans (NPLs) serviced by Ocwen Loan Servicing, from its mortgage investment portfolio on September 11. The transaction is expected to settle in October and servicing will be transferred post-settlement. The sale is part of Freddie Mac's Standard Pool Offerings. Freddie says these loans have been delinquent for approximately three and a half years, on average. The loans were offered as five separate pools of mortgage loans, and investors had the flexibility to bid on one or more pools, or bid on the aggregate of all five pools. Pools #1 and #2 were comprised of loans with CLTV between 50 and 110, and all other attributes are generally comparable except for pool size. Pools #3 and #4 were comprised of loans with CLTV greater than 110, and all other attributes are generally comparable except for pool size.
On the public relations front late in August Ocwen invited borrowers who need mortgage assistance to attend one of several upcoming housing events to "explore possible mortgage solutions that could help them stay in their homes. This effort is part of Ocwen's continued outreach, in partnership with community leaders and nonprofit housing organizations, to bring real solutions to struggling homeowners in the United States. Ocwen Home Retention Agents will be present at all the upcoming events to offer homeowners free, face-to-face, individualized advice on finding the right mortgage solutions. Ocwen borrowers will also have the opportunity to meet one-on-one with United States Department of Housing and Urban Development (HUD) approved financial counselors to discuss their unique situations."
And in other constructive news going back to June two statements were released related to June's Monitor report. "We are pleased that after more than one year of intense scrutiny and investigation by the Monitor, our original testing was substantially validated. The Monitor appears to have regained confidence in our Internal Review Group and our overall compliance with the National Mortgage Settlement."
The second dealt with consumer relief. "We are pleased with The Office of Mortgage Settlement Oversight (OMSO) first update on our progress towards the $2 billion in principal reduction that we committed to under the National Mortgage Settlement. Ocwen sought credit for approximately $881 million in through December 31, 2014, and OMSO fully validated this submission. With over two years left to meet our obligations, we have completed 44% of the required consumer relief, and we believe we have satisfied most if not all of the remaining principal reduction requirements."
And Ocwen recently received a Fitch Ratings upgrade in its rating outlook from stable to positive due to stronger risk management framework and management oversight. In February 2015, Ocwen experienced rating downgrades to stable due to weak corporate governance and operational control framework but a couple months ago the company's ratings were pushed up to positive as Ocwen strengthened its risk management framework and management oversight. One of the key rating drivers was Ocwen's commitment to alleviate governance and operational control weaknesses within the company, which include changes to its "three lines of defense" approach to risk management, expansion of regulatory compliance and compliance testing departments, and completion of a risk and control self-assessment (RCSA) process.
Another contributor to Ocwen's rating change was a shift in focus to PLS servicing where the company initiated a strategy to sell off a large portion of it mortgage servicing rights (MSRs). The company has closed or entered agreements to sell MSRs on about $90 billon in unpaid balance (UPB) of performing agency loans.
Although Ocwen's servicing operation has grown more than 300 percent in the past several years, their portfolio continues to decrease. Fitch found that the company has serviced 2,361,220 loans totaling $376.6 billion including 1,252,409 totaling $195.6 billion in non-agency residential mortgage-backed securities (RMBS) transactions as of March 31, 2015. Ocwen's portfolio also includes 4% non-agency first lien prime, 8% first lien Alt-A, 29% first lien subprime, 2% HELOC, and 2% closed-end second liens by loan count.
Turning to another large servicer, as the nation's leading correspondent lender whatever Wells Fargo Funding does tends to attract attention. As mentioned in this commentary Wells Fargo is raising minimum credit score requirements on FHA loans, part of the ongoing jockeying by large banks to limit lawsuits by the Justice Department for defective FHA loans. (Remember that the Justice Department has been using the Civil War-era False Claims Act to impart treble damages on lenders, so if the FHA takes a $60,000 loss on a loan and find an issue under the False Claims Act it can sue the lender for $180,000. Who needs to maximize their exposure to that kind of process?)
The change by Wells and others was a result of the FHA proposal regarding loan-level certification. That proposal, which reiterates current policy and is open for public comment until Nov. 2, would require that lenders certify that loans backed by the FHA do not have any mistakes or material defects and includes a provision that would require all lenders to certify that they have completed a review of all loans and that no deficiencies or defects were found to make the loans ineligible for FHA insurance. Such reviews must be conducted before FHA endorses the loans.
As Kate Berry with American Banker notes, "Banks have said the proposal lacks clarity and they want more assurances that they will not be sued by the Justice Department for minor defects in FHA loans. When a bank certifies that a loan is eligible for FHA insurance and the agency later finds a defect, a bank can be held liable for triple damages under the False Claims Act."
As this commentary has noted there is a lot going on with the FHA, especially after it lowered the insurance premiums by 50 basis points earlier this year. The FHA endorsed roughly 80,000 purchase mortgages in June - about double where things stood earlier this year for monthly numbers - and a good chunk of those are first time buyers and borrowers with low credit scores. The percent of FHA loans attributed to first time home buyers is sitting around 80%.
Most LOs will agree that borrowers with decent credit scores (like above 700-720) will go with a Freddie or Fannie loan whereas credit scores in the 600s or below will go with FHA. FHA programs do not have the loan level price adjustment hits that F&F have. And it is showing up in the numbers as its total endorsement of purchase loans in the 2nd quarter (199k) fell between what Fannie and Freddie acquired in terms of loans for purchases.
Wells' retail group is back to a minimum of 640, the same as its correspondent channel. At a Barclays conference Wells' CFO stated, "We will be adding back the credit overlays so we make fewer loans that are close to [the FHA's] most accommodative end of the credit spectrum... Those are the loans that are going to default and those are the defaults loans that we're going to be arguing about 10 years from now and we're not going to do that again."
Switching gears to the bond market, rates ended last week not much different than where they began. With the Fed's decision out of the way traders turned their attention elsewhere, and steep declines in global equity markets and oil prices encouraged the buying of U.S. government debt and European sovereign debt rallied in sympathy, with the 10-year German Bund yield declining 12 basis points to 0.66%. While gold is up sharply since the FOMC announcement, this is likely due to dollar weakness as long-dated Treasuries are showing little concern for upside inflation risks.
And we have a new week! We begin slowly with only August's Existing Home Sales. Tomorrow is the July FHFA Housing Price Index and a $26 billion 2-year note auction. Wednesday we only have the MBA app numbers and a $35 billion 5-year note auction. On the 24th are Initial Jobless Claims, August Durable Goods Orders, August New Home Sales, and a $29 billion 7-year note auction. We finish off the week with the third estimate of Q2 GDP and GDP Deflator, along with September's Michigan Sentiment.
For numbers we closed last week with the traditional benchmark 10-year yield sitting at 2.13% and this morning we're at 2.17% with agency MBS prices worse .125.
A true story: a mortgage broker and a CFPB officer find themselves on an African safari together and were witnessing a small antelope being chased by a cheetah. The CFPB officer told the broker, "If the antelope survives this you'll never have to worry about compliance trends putting you and your brethren out of business." At only 30 seconds Watch the Race.
Jobs and Announcements
Turning to something less negative, Florida Capital Bank Mortgage, a national lender headquarted in Jacksonville, FL, is seeking a Product Development Manager. Responsibilities include working with existing investors & the GSEs, signing up new investors, creating product descriptions, and developing pricing and marketing strategies for new product rollout. Interested parties should contact Joe Keel.
Three thousand miles away LendingHome, a San Francisco-based, well-capitalized mortgage lender, is seeking an Underwriting Manager to join its growing operations team. We're looking for someone who will use our technology platform to drive improved productivity and take an active role in employee development. The profile for this candidate has 5+ years in management and 10+ years in underwriting roles. Come help us build our company into the empire it is rapidly becoming! Contact Kate Elliott for inquiries; interested parties can also apply here.
Beginning now and running through TRID implementation, MB Financial Bank is providing complimentary webinar-style TRID training classes to its mortgage clients and loan officers. Classes are scheduled on multiple days and often several times each day. To arrange training, call or email your Area Manager to sign up for one of the sessions.