Skip to main content

Ocwen Financial - making the best of hard times

Everyone knows the current environment has been hard on financials, especially those that have any involvement in residential mortgages.

There are a few firms that are managing to use certain company-specific advantages to hold their own and even prosper. Ocwen Financial (OCN) may be one of these.

Background --

Ocwen Financial Corporation is a business process outsourcing provider to the financial services industry, specializing in loan servicing, mortgage fulfillment and receivables management services.

The company currently operates within two lines of business:

Ocwen Asset Management - comprised of the Servicing, Loans and Residuals and Asset Management Vehicles segments

The Servicing segment provides outsourced loan servicing for subprime loans but does not own the loans. Many of the loans are actually securitized and owned by trusts. The Loans and Residuals segment does hold loans for resale. Asset Management Vehicles holds loans as investments and does securitizations.

Ocwen Solutions - comprised of the Technology Products, Mortgage Services and Financial Services segments.

Technology Products comprises a set of systems that provide support for life of loan activities from origination to servicing to collections. Mortgage Services facilitates loan origination as an outsourcing provider. Financial Services provides debt collection and receivables management.

Risks --

Delinquencies are up industry-wide. Delinquencies and foreclosures result in "advances" and other costs to the company.

During any period in which the borrower is not making payments, the company is required under most servicing agreements to advance funds to the investment trust to meet contractual principal and interest remittance requirements for investors. Luckily, as the servicer, Ocwen is obligated to advance funds only to the extent that they believe the advances are recoverable. In addition, for any advances that are not covered by loan proceeds, most of the pooling and servicing agreements provide for reimbursement at the loan pool level, either by using collections on other loans or by requesting reimbursement from the securitization trust. This at least limits Ocwen's exposure.

Ocwen is also required to pay property taxes and insurance premiums, to process foreclosures and to advance funds to maintain, repair and market real estate properties on behalf of investors.

The bottom line is that it costs the company money to finance these advances and there is a potential that some of the funds will not be recovered.

The company also has a host of derivatives, auction rate securities and various other financial vehicles that have seen some stress in the current environment.

Prepayments are another risk as they tend to reduce the amount of profit derived from the loans.

Ocwen's Advantages --

The company has developed a set of proprietary software tailored to its business. This expertise in software helps make the company a low-cost competitor.

The company has long had a business segment focused on debt recovery. Ocwen last June acquired NCI, one of the largest collections companies in the U.S. With the difficulties in the mortgage market currently, there is no lack of business in this segment. Though recoveries may not be as large as in normal times, the increase in volume more than makes up for it.

Ocwen has used their systems and process expertise to ramp up collections operations offshore. This is further reducing costs for the company even as more collections agents are brought online.

Ocwen has focused on creating repeatable processes and models that can be taught to collections agents and has created flexible systems with scripting engines to ensure that collections processes are consistent.

As NCI is further integrated into Ocwen, NCI will be moved over to the Ocwen systems and the benefits of Ocwen's scripted approach will be used to reduce variability of collectors' performance, enhancing recovery.

Conclusion --

Ocwen is a small cap company that is surviving the mortgage meltdown. Since they do originations, servicing and collections for other financial companies, they have been less hurt by the current environment. They expect to be able to pick up market share as other similar companies withdraw from the industry.

The strong technology segment and offshoring initiatives allow Ocwen to operate as a low-cost provider of business processes.

The company's strength in collections positions it well to benefit from the tough times and the struggles of lenders and borrowers alike.

The company is profitable and reasonably well financed for its size. It suffers by association with the financial sector in general. Given how out of favor financials are now, the stock can be acquired at a reasonable price even as Ocwen is positioning itself to come through the current troublesome environment as a stronger, more efficient company.

Disclosure: author is long OCN at time of writing

Comments

Popular posts from this blog

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position. This first post in the series starts at the beginning: getting good investment ideas. Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets. As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street profess

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing wh

Interactive Ads - Google one-ups Yahoo again

Google's ( GOOG ) press release describing the expansion of a beta program for what are being called Gadget Ads has again shown that Google is unparalleled at melding technology and advertising to benefit its bottom line. Gadget Ads are mini-web pages or "widgets" that can be embedded within publisher pages. I have written in the past on Yahoo's ( YHOO ) Smart Ads and how, by more precisely targeting site users and adjusting ad content accordingly, they provide a much desired evolution of the banner or display ad format. Though Smart Ads and Gadget Ads are not really the same, I think it is fair to say that Google has seen the challenge of Smart Ads and has chosen to leapfrog Yahoo by rolling out its own update to the display ad format. The evolution of the Gadget Ad -- One of the trends on the Internet over the last year or so involves software developers creating "widgets" which can be hosted within web pages and blogs. Widgets can be pretty much any