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On Monday, U.S. Bankruptcy Court in Manhattan approved Ocwen Financial Corp’s. (OCN - Analyst Report) bid to acquire Residential Capital's (ResCap) mortgage-servicing rights (MSRs) in collaboration with Walter Investment Management Corp. (WAC - Snapshot Report). The deal value is estimated to be around $3 billion.  

The approval came amidst protestations by the individual mortgage holders, ResCap’s parent company, Ally Financial Inc., as well as the U.S government. The objections were raised in order to ensure that the sale would be carried forward only if Ocwen agreed to honor ResCap’s portion of a $25 billion legal settlement with the federal government and 49 state attorneys general. ResCap had filed for bankruptcy in May this year.

Moreover, the deal encountered another hurdle when Neighborhood Assistance Corporation of America (NACA), which provides housing assistance and counseling to financially troubled borrowers, argued that Ocwen’s policy of outsourcing would eventually move the taxpayers’ money overseas.

The judge approved the deal citing ResCap’s commendable efforts that led to the settlement of several objections. Further, ResCap has agreed to resolve the remaining objections at a later date. The details of all these would be available after a second hearing scheduled for November 20, 2012.

Earlier in October this year, Ocwen, along with Walter Investment won a bid to acquire ResCap’s business, which includes the rights to serve nearly 2.4 million mortgages with an outstanding value of $374 billion. The company faced 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 scenario 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. from WL Ross & Co. LLC. Beside this, in a span of one year, Ocwen 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 this deal would enhance Ocwen’s position as one of the biggest non-bank mortgage servicers in an industry dominated mostly by 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 employees of ResCap, whose jobs may be at risk, given Ocwen’s outsourcing practices.

Ocwen currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. ResCap deal is a major positive for Ocwen and it is likely to result in favorable earnings estimate revisions, which will help it to achieve the highest Zacks Rank. However, considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on the stock.


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