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In a deviation to Ocwen Financial Corp.’s (OCN - Analyst Report) usual method of driving growth by aggressive acquisition of mortgage servicing rights (MSRs), the company has launched a bond deal backed by MSRs instead. The news was confirmed by a report in the Financial Times.

The deal named “oasis” is the first of its kind in Ocwen’s history and is worth $136 million. Moreover, it will primarily target investors seeking fixed income.

Now here lies our major concern as most MSRs related to the aforementioned bond are tied to subprime assets. The targeted fixed income investors group usually avoids risky ventures with lower credit ratings. Hence, we are not that confident about the success of the aforementioned deal.

Nevertheless, we observe that there has been an improvement in the subprime market and investors are gaining confidence. Therefore, Ocwen could benefit if the market continues to stabilize at the same pace.  

On the other hand, of late the situation is turning out to be sticky for Ocwen. As per a recent Financial Times report, investors are contemplating on filing a lawsuit against Ocwen over its mortgage servicing practices and loan modifications. The investors’ group includes Pimco and BlackRock, Inc. (BLK - Analyst Report).

Moreover, earlier this month, New York's Department of Financial Services restrained Ocwen from acquiring residential mortgage-servicing rights worth $2.7 billion from Wells Fargo & Co. (WFC - Analyst Report). The decision was driven by concerns over the mortgage servicer's ability to handle the increase in servicing volume.

Therefore, we can see that this Zacks Ranks #5 (Strong Sell) mortgage servicer’s business model requires immediate attention.

Ocwen’s efforts to remodel its mode of business are in nascent stage wherein it plans to invest in MSRs tied to prime assets instead of subprime assets. However, the company requires capital to implement this change successfully.

Until recently, Ocwen specialized in servicing subprime mortgages. It had acquired MSRs from several large banks including Morgan Stanley (MS - Analyst Report), The Goldman Sachs Group, Inc. (GS - Analyst Report) and JPMorgan Chase & Co. (JPM - Analyst Report). Therefore, these subprime MSRs are of one the primarily sources of capital inflow for the company.

Moreover, apart from generating cash flow for boosting long-term growth prospects, the bond sale will help Ocwen reduce the prepayment risks related to MSRs.

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