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After announcing a deal to acquire Homeward Residential Holdings Inc., Ocwen Financial Corp. (OCN - Analyst Report) is now planning a $2.5 billion bid for Residential Capital's (ResCap) mortgage-servicing rights (MSRs) in collaboration with Walter Investment Management Corp. (WAC - Snapshot Report). This was reported by The New York Post on Thursday.

Ocwen, in partnership with Walter Investment, will be putting the bid on October 23 in the ResCap bankruptcy auction in New York. Apart from Ocwen and Walter Investment, other bidders include Nationstar Mortgage Holdings Inc. (NSM - Snapshot Report), IBM Corporation’s (IBM - Analyst Report), mortgage servicer Seterus as well as Berkshire Hathaway Inc. (BRK.A - Snapshot Report) (BRK.B - Analyst Report), in partnership with a small firm.

ResCap, a subsidiary of Ally Financial Inc., had filed for Chapter 11 bankruptcy in May. Further, as per a bankruptcy filing by ResCap, the bidder needs to win the confidence of the Government Sponsored Entities (GSEs) – Freddie Mac (FMCC), Fannie Mae (FNMA) and Ginnie Mae – as they own, insure or guarantee nearly 68% of loans in the servicing portfolio.

At a time when major mortgage servicers are shying away from mortgage servicing business as a result of stringent regulations and balance sheet risk, Ocwen has been filling up this void by a string of acquisitions. However, it is not that the company will not have to follow regulations related to mortgage servicing, but it is better positioned than the other servicers as it focuses only on servicing operations unlike the others.

Over the last one year, Ocwen has acquired Saxon Mortgage Services Inc. – mortgage subsidiary of Morgan Stanley (MS - Analyst Report) and Litton Loan Servicing from The Goldman Sachs Group, Inc. (GS - Analyst Report), Also, the company bought certain MSRs related to non-prime loans from JPMorgan Chase Bank, N.A. – the banking division of JPMorgan Chase & Co. (JPM - Analyst Report) as well as residential MSRs from Bank of America, National Association – a unit of Bank of America Corporation (BAC - Analyst Report).

As delinquency rates continue to fall, mortgage servicing is turning out to be a lucrative business unlike the situation four year ago, when majority of the companies were turning away from it. Hence, if Ocwen, in partnership with Walter Investment, wins the bid to acquire the aforesaid MSRs, then it would definitely improve its financial performance in the longer term.

Ocwen currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.

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