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Recently, Ocwen Financial Corp. (OCN - Analyst Report) won a bid to acquire Residential Capital's (ResCap) mortgage-servicing rights (MSRs) in collaboration with Walter Investment Management Corp. (WAC - Snapshot Report) for a sum of $3 billion, higher than the initial valuation of $2.5 billion. The offer needs to be approved by the bankruptcy court in a hearing scheduled on November 19.

Ocwen will take over ResCap’s business (subject to the pending approval), which includes the rights to serve nearly 2.4 million mortgages with an outstanding value of $374 billion. The company faced a serious competition from Nationstar Mortgage Holdings Inc. (NSM - Snapshot Report) at the ResCap bankruptcy auction in New York. Nationstar acted as the stalking horse bidder for the auction. For this, Ocwen will pay Nationstar a break-up fee of $24 million, which was included in its final bid amount.

Amidst a situation where major mortgage servicers are shying away from mortgage servicing business due to stringent regulations and balance sheet risk, Ocwen has been filling up this void by a string of acquisitions. Moreover, it is better positioned than the other servicers since it focuses only on servicing operations unlike the others.

Recently, Ocwen announced a deal to acquire Homeward Residential Holdings Inc. – an integrated mortgage firm with prime lending and mortgage servicing operations – from WL Ross & Co. LLC. The company will be paying about $588 million in cash and $162 million in Ocwen convertible preferred stock. This marks its foray into mortgage origination business.

Besides this, in a span of one year, Ocwen has acquired Saxon Mortgage Services Inc. – the 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).

We believe that the deal, if approved, would enhance Ocwen’s position as one of the biggest non–bank mortgage servicers in an industry dominated mostly by the banking giants. Further, as delinquency rates continue to slump, the company stands to benefit from the purchase of MSRs going forward.

However, we remain concerned about the possible objections raised by the creditors of ResCap regarding the takeover of liabilities as a part of the sale. Also, employees of ResCap may be in the danger zone, given Ocwen’s outsourcing practices.

Ocwen currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. However, considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on the stock.
 

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