Ocwen Financial Corporation is a leading asset manager and business process solutions provider specializing in loan servicing, special servicing, mortgage loan due diligence and receivables management services.
First the technicals - as noted above we had a 52 week high yesterday and has hit $9.20-$9.25 8 sessions in a row including today - an obvious ceiling. Today the stock has fallen back to just over the 20 day moving average (in the $8.60s) so I'm putting my first stake down in the $8.75-$8.76 range. We'll begin with a 1.4% stake. I want the stock to go lower to add more OR see a breakout north of $9.30 or so.... but I'd prefer lower first... the 50 day moving average is down at $7.90s which would fit very nicely with a huge batch of support in the $8.00-$8.20 range. So I threw a limit buy order down at $8.10 for now for the next batch. (to double the position)
This is a $550 Million market cap company which is slated to make 53 cents in fiscal 2008 and (we'll see) 80 cents in 2009. There is quite a bit of debt on balance sheet due to nature of the business... more importantly it sits at the heart of functions that shall be very needed in the 2009-2011 housing "recovery" as led by SuperObama.Instead of writing a long fundamental story, I am going to refer to an excellent piece in Seeking Alpha from this summer - no reason to recreate the wheel when someone else did it. Everything shaded in red below is not my writing but from the blogger I've cited below
Trade Radar Operator: Owcen Financial - Making the Best of a Hard Times
Ocwen Financial Corporation is a business process outsourcing provider to the financial services industry, specializing in loan servicing, mortgage fulfillment and receivables management services.
The company currently operates within two lines of business:
Ocwen Asset Management - comprised of the Servicing, Loans and Residuals and Asset Management Vehicles segments
The Servicing segment provides outsourced loan servicing for subprime loans but does not own the loans. Many of the loans are actually securitized and owned by trusts. The Loans and Residuals segment does hold loans for resale. Asset Management Vehicles holds loans as investments and does securitizations.
Ocwen Solutions - comprised of the Technology Products, Mortgage Services and Financial Services segments.
Technology Products comprises a set of systems that provide support for life of loan activities from origination to servicing to collections. Mortgage Services facilitates loan origination as an outsourcing provider. Financial Services provides debt collection and receivables management.
Risks
Delinquencies are up industry-wide. Delinquencies and foreclosures result in "advances" and other costs to the company.
During any period in which the borrower is not making payments, the company is required under most servicing agreements to advance funds to the investment trust to meet contractual principal and interest remittance requirements for investors. Luckily, as the servicer, Ocwen is obligated to advance funds only to the extent that they believe the advances are recoverable. In addition, for any advances that are not covered by loan proceeds, most of the pooling and servicing agreements provide for reimbursement at the loan pool level, either by using collections on other loans or by requesting reimbursement from the securitization trust. This at least limits Ocwen's exposure.
Ocwen is also required to pay property taxes and insurance premiums, to process foreclosures and to advance funds to maintain, repair and market real estate properties on behalf of investors.
The bottom line is that it costs the company money to finance these advances and there is a potential that some of the funds will not be recovered.
The company also has a host of derivatives, auction rate securities and various other financial vehicles that have seen some stress in the current environment.
Prepayments are another risk as they tend to reduce the amount of profit derived from the loans.
Ocwen's Advantages
The company has developed a set of proprietary software tailored to its business. This expertise in software helps make the company a low-cost competitor.
The company has long had a business segment focused on debt recovery. Ocwen last June acquired NCI, one of the largest collections companies in the U.S. With the difficulties in the mortgage market currently, there is no lack of business in this segment. Though recoveries may not be as large as in normal times, the increase in volume more than makes up for it.
Ocwen has used their systems and process expertise to ramp up collections operations offshore. This is further reducing costs for the company even as more collections agents are brought online.
Ocwen has focused on creating repeatable processes and models that can be taught to collections agents and has created flexible systems with scripting engines to ensure that collections processes are consistent.
As NCI is further integrated into Ocwen, NCI will be moved over to the Ocwen systems and the benefits of Ocwen's scripted approach will be used to reduce variability of collectors' performance, enhancing recovery.
Conclusion
Ocwen is a small cap company that is surviving the mortgage meltdown. Since they do originations, servicing and collections for other financial companies, they have been less hurt by the current environment. They expect to be able to pick up market share as other similar companies withdraw from the industry.
The strong technology segment and offshoring initiatives allow Ocwen to operate as a low-cost provider of business processes.
The company's strength in collections positions it well to benefit from the tough times and the struggles of lenders and borrowers alike.
The company is profitable and reasonably well financed for its size. It suffers by association with the financial sector in general. Given how out of favor financials are now, the stock can be acquired at a reasonable price even as Ocwen is positioning itself to come through the current troublesome environment as a stronger, more efficient company.
Some information from their last earnings report
- ...reported net income of $15.6 million for the third quarter of 2008, an increase of 161% as compared to the $6.0 million reported for the third quarter of 2007. Net income per diluted share for the third quarter of 2008 was $0.23. This compares to $0.09 per diluted share for the third quarter of 2007. For the three months ended September 30, 2008, pre-tax income before discontinued operations was $24.4 million compared to $10.1 million a year ago.
- Chairman and CEO William Erbey stated, ``The primary driver of our growth in pre-tax income was the Loan Servicing segment with $29.3 million as compared to $20.4 million for the same period last year. We continue to focus on being the highest quality and lowest cost provider.
- We continue to lead the industry in reducing delinquencies by working with distressed borrowers to make payments through forbearance and modification plans. We helped keep over 22,257 families in their homes with successful loan workouts this quarter, bringing the total to over 54,868 for the year. Every successful workout makes the loan cash flow again and avoids substantial losses that the investor would otherwise incur in a foreclosure -- loss severity is at an all time high now at 50%. This is truly a ``win - win'' for the borrowers and for investors. And by controlling delinquencies, our advance balances decreased by $147.2 million since June 30, 2008.
- We increased our cash balances from $148.8 million at June 30, 2008 to $162.3 million at September 30, 2008 due to asset sales and the reduction in advances. We continued to focus on our core business lines eliminating non-core assets which historically have resulted in volatile earnings. During the third quarter we generated $24.8 million of cash by liquidating holdings in loans, real estate owned and GSS Canada; reducing cash amounts held by indenture trustees; collecting receivables; and obtaining financing for receivables and one of our asset management vehicles.
- Loan servicing firm Ocwen Financial Corp (OCN) said it plans to spin-off its knowledge-based business process outsourcing operation, Ocwen Solutions. Ocwen Solutions will be a separate publicly traded company once the spin-off is complete, the company said, adding that it is targeting the second quarter of 2009 to complete the tax-free transaction.
- As an independent company, Ocwen Solutions will be better positioned to pursue business opportunities with other servicers, and will also have the option of offering its stock to potential acquisition targets, Ocwen Financial said.
- The default rate on residential mortgages that have been modified to lower payments at Ocwen Financial Corp (OCN), one of the largest subprime servicers, is less than half of an average cited by regulators, the company said on Thursday.
- Using data collected from some of the largest U.S. banks, the Office of the Comptroller of the Currency found 53 percent of borrowers re-defaulted within six months of receiving a modification, which can include lowering interest rates, longer forbearance, and reductions in principal.
- West Palm Beach, Florida-based Ocwen said its delinquency rate on modified loans after six months was 24.6 percent.
