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Analyst Blog

On Nov 26, 2013, we downgraded our long-term recommendation on Ocwen Financial Corp. (OCN - Analyst Report) to Underperform from Neutral due to the company’s disappointing third-quarter 2013 results. Further, mounting expenses, regulatory pressures, market volatility and contraction in the subprime Mortgage Servicing Rights (MSR) market remain concerns.

Why Downgrade?

Although Ocwen has been growing through acquisitions, this strategy has subjected the company to many obligations. The acquisitions have accrued one-time expenses for the company and increased its burden of losses – as incurred by the acquired companies – along with integration costs.

Further, sluggish recovery of the credit and capital markets will not be able to abate pressure on Ocwen’s bottom line in the near-to-medium term. Until the markets rebound and stability is regained, these factors will continue to adversely impact the company’s operations.

Ocwen has been witnessing speedy prepayment over the past few quarters. Though speedy prepayment pushes the float income, it eventually leads to lower revenues, higher amortization expenses and impairment charges related to the MSRs, which will impact the company’s financial position.

The Zacks Consensus Estimate for 2013 declined 36.5% to $2.24 per share over the last 30 days. Further, for 2014, the Zacks Consensus Estimate decreased 6.5% to $5.28 per share over the same time period. Due these revisions, Ocwen now carries a Zacks Rank #5 (Strong Sell).

Other Stocks Worth Considering

Better-ranked financial organizations include BofI Holding, Inc. (BOFI - Snapshot Report), Preferred Bank (PFBC - Snapshot Report) and Sierra Bancorp (BSRR - Snapshot Report). All these stocks have a Zacks Rank #1 (Strong Buy).

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