Ocwen Upgraded to Outperform

We have upgraded our long term recommendation on Ocwen Financial Corporation ( OCN - Analyst Report ) to “Outperform” from “Neutral”. The main reasons behind this raise are the company’s stable liquidity position and expected synergies from the recent servicing portfolio acquisitions that would support its financials.

We believe that Ocwen’s principal reduction programs are expected to significantly contribute to its loan modification ability. However, until capital and debt markets stabilize, the company’s bottom line would remain under pressure. Although the near-term economic outlook remains unpredictable owing to market volatility and a contraction in subprime mortgage-servicing rights (MSRs), the company remains committed to loan modifications.

Over the years, Ocwen has been growing through acquisitions and alliances. In the last few months, the company completed the acquisition of Litton Loan Servicing from Goldman Sachs Group Inc. ( GS - Analyst Report ) and announced its plan to buy Saxon Mortgage Services Inc. from Morgan Stanley ( MS - Analyst Report ) . Also, the company announced the purchase of certain mortgage servicing portfolio from JPMorgan Chase & Co. ( JPM - Analyst Report ) . Given the ongoing deterioration in home prices, we anticipate Ocwen to get even more opportunities to acquire distressed servicing portfolios at attractive prices.

Though the economic recovery is sluggish, the company continues to solve loan problems. Through its active participation in Home Affordable Modification Program (HAMP), which seeks to prevent foreclosures and make housing more affordable, Ocwen has converted its efforts into profitable financials. Going forward, modifying more loans faster will not only aid Ocwen improve customer retention and bring down the level of advances but also reduce costs.

Ocwen has been restructuring its business and operations to tap the growth opportunities in a changing economic scenario. The company has been disposing off its non-core operations, mainly focusing on key investments in the most profitable ventures available. Over the longer term, this growth strategy will help Ocwen enhance the operating leverage.

On the flip side, we believe fragile economic recovery in the equity and debt markets will continue to pressurize Ocwen’s bottom line in the medium term. Further, interest expenses are also expected to rise based on increasing funding requirements.

Additionally, Ocwen continues to face increased expenses due to legal and regulatory issues. The company will keep defending itself in a number of cases where its mortgage servicing practices have been challenged, a process that can be lengthy and distracting.

Ocwen currently retains a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ rating.