The New York Department of Financial Services has requested that Ocwen Financial Corporation indefinitely suspend its previously announced purchase of a mortgage servicing rights portfolio with an unpaid principal balance (UPB) of $39 billion from Wells Fargo Bank, N.A. However, this announcement will not affect Ocwen's current corporate and servicer ratings, according to Fitch Ratings.
The purchase consists of a mortgage servicing rights portfolio of primarily private label securities totaling approximately 184,000 loans. The transaction was previously expected to close during 2014.
The request to halt the servicing transfer was made due to the state regulator's concerns regarding Ocwen's portfolio growth and the company's capacity to service additional loan volume from the acquisition, while maintaining appropriate servicing standards. Ocwen indicated that it will work closely with the NY DFS to resolve its concerns, though it is unclear whether the transaction will be cleared to proceed at a later date.
Over the past two years, Ocwen's servicing portfolio has grown by more than 300% due to sizeable portfolio and servicing business acquisition activity. Ocwen is currently the largest nonbank servicer in the U.S., and fourth largest overall, with approximately $430 billion of UPB serviced, including $201 billion of private-label securities.
The financial and operational risks associated with Ocwen's aggressive acquisition strategy and high concentration of off-shore servicing operations utilized for non-agency RMBS loans are incorporated into Fitch's ratings, and are reflected in the Negative Outlook.
Fitch believes a pause in the pace of Ocwen's acquisitions would help the company to fully complete its integration of its recent acquisitions, while the company works to maintain servicing standards in all areas.
Ocwen currently has a long-term issuer default rating (IDR) of 'B'. The IDR reflects good operating performance, stress tests indicating sufficient operating cash flow generation to support debt holders, and appropriate capitalization and leverage for its current ratings. Rating constraints reflect the company's potential leverage, integration, and balance sheet risk associated with its growth strategy in the near to medium term, as well as the sustainability of growth in the longer term. Fitch believes ratings could come under pressure due to continued consolidation and the declining size and finite universe of nonprime servicing. Should Ocwen pursue adjacent lending businesses that would result in a significant use of balance sheet leverage and/or a shift in strategy away from its core competencies, it could be viewed negatively by Fitch.
Fitch rates Ocwen as a three level servicer. Ocwen's servicer ratings were downgraded to level three in December 2011 from level two after being placed on Rating Watch Negative in June 2011. As a level three servicer, Fitch considers Ocwen to adequately perform its responsibilities.
Fitch believes that potential costs and constraints associated with evolving regulatory compliance and the potential for service disruptions may pressure Ocwen's operating performance or adversely affect the company's overall business.
