Ocwen, Hands Tied by N.Y., Turns to 'Cleanup Calls' for Profits

Ocwen Financial, operating under a settlement with New York's banking regulator that restricts its servicing portfolio acquisitions, is looking at its old private-label mortgage securities as a new profit center.

Over the next two years, Ocwen plans to break up maturing securities where the remaining unpaid principal had fallen below 10% of its original unpaid principal balances. By exercising its cleanup call rights on the bonds, Ocwen can re-securitize the performing loans, work out the nonperformers and sell the repossessed homes.

"In these cases, we can call the bonds and re-securitize the performing loans almost immediately and recognize the gain," Ocwen chief executive Ron Faris said during a conference call Dec. 22.

Earlier that day, Ocwen revealed it had entered into a $150 million settlement with New York Department of Financial Services, under which the Atlanta company would be under the purview of an independent monitor for two years. As part of the settlement, former Ocwen executive chairman William Erbey was forced to step down. Also, acquisitions of mortgage servicing rights "will be subject to Ocwen meeting specified benchmarks as well as DFS approval," the company said.

In the flurry of events that day, little attention was paid to Faris' discussion about the cleanup calls.

But in an effort to show that Ocwen will remain a going concern, the CEO pointed out that using its mortgage-backed securities call options could be very profitable.

"We estimate we will execute approximately $5 billion of calls over the next two years and they can be worth two to three points of profit to the company," he said. That translates into a profit of around $100 million to $150 million.

"We expect to complete our first substantive transaction in the first half of 2015 and we will provide more information at that time," Faris said during the conference call.

From now on, the giant nonbank servicer is planning to sell off its Fannie Mae and Freddie Mac servicing and focus more on servicing nonagency loans. 

Ocwen serviced $411 billion in residential mortgages as of Sept. 30 and $176.6 billion or 42% were nonagency loans.  Fannie/Freddie loans make up 48% of the servicing portfolio and the rest are Federal Housing Administration and other government-insured loans.

Faris noted that servicing private-label mortgage has been more profitable than Fannie and Freddie servicing. Ocwen is also planning to expand its mortgage origination business too.

Back in July, Erbey noted that Ocwen owns the cleanup call rights on over $150 billion in private-label mortgage securities. And he talked about exercising cleanup calls on old PLS during a conference call on Ocwen's second-quarter earnings.

“The opportunity results from the arbitrage of the underlying loans and [real estate owned] being worth more that the securities. In other words, the whole is worth less than the sum of the parts," Erbey said.

One of Ocwen's competitors exercised a cleanup call involving $198.8 million in private-label loans in 2013. Nationstar Mortgage, based in Lewisville, Texas, securitized and sold $158.2 million of the loans and recognized a gain of $6.1 million, according to Nationstar's 2013 annual report.

"Nationstar Mortgage has completed several cleanup calls on PLS,” said company spokesman John Hoffmann.