Ocwen Financial Corp.’s long-term Issuer Default Rating (IDR) has been downgraded by Fitch Ratings, while keeping Rating Watch Negative on the same. Now, the long-term IDR stands at 'B’, down from the previous rating of 'B+’. Moreover, the rating agency has put the company’s short-term IDR on Rating Watch Negative.
The downgrade by Fitch follows Ocwen's continued acquisitions in mortgage servicing over the last months. Moreover, the agency took the step on the assumption of negative impact of this acquisition strategy on the company's financial metrics, integration risks associated with the acquisitions and operational flexibility.
Last month, Ocwen announced that it is going 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 for this buyout.
Later in the month, Ocwen also won a bid to acquire Residential Capital's (ResCap) mortgage-servicing rights (MSRs) in collaboration with Walter Investment Management Corp. for a sum of $3 billion. The offer needs to be approved by the bankruptcy court in a hearing scheduled for November 19.
On approval, the deal states that Ocwen will take over ResCap’s business, which includes nearly $830 million of mortgage servicing rights, master servicing and subservicing contracts, along with $1.63 billion of advances. On approval, a part of the ResCap transaction is anticipated to be funded by the amount received on selling a portion of Ocwen's servicing assets to Home Loan Servicing Solutions Ltd. The remainder is expected to be funded through an issuance of senior secured debt.
According to Fitch, despite these acquisitions being a strategic fit for Ocwen’s current operations, the near-term execution and integration risks could lead to disruption in servicing the loan portfolios. This in turn, would adversely impact the financials of the company. Further, the regulatory scrutiny of the mortgage servicing sector will weigh on Ocwen’s risk profile.
Additionally, the rating agency expects the resolution of the Rating Watch will be based on the successful integration of the ResCap and Homeward acquisitions as well as the impacts of these on Ocwen’s balance sheet. The Rating Watch will also be dependent on the company’s future acquisitions.
Yet, Fitch believes that the rating could be affirmed if Ocwen sustains sufficient liquidity over a period of time. Progress in its operating performance may result in a ratings affirmation as well.
At a time when major mortgage servicers are shying away from mortgage servicing business owing to stringent regulations and balance sheet risk, Ocwen has however made a series of acquisitions. Although the company will have to comply with the regulations related to mortgage servicing, it is better positioned than its peers as it focuses only on servicing operations unlike the others. However, we remain concerned about the integration-related risks and the regulatory scrutiny.
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.