BlueMountain Capital Management, the $20 billion investment firm, said "misconduct" by Ocwen Financial Corp. triggered a default in securities issued by an affiliate of the mortgage servicer.
The bonds, backed by payments related to delinquent home loans, totaled about $1.2 billion when they were issued in 2012 and 2013 by Home Loan Servicing Solutions, according to data compiled by Bloomberg. The company buys servicing rights from Ocwen and hires it to oversee the loans. BlueMountain also "has directed the trustees of certain" mortgage bonds to "investigate and/or take action with respect to Ocwen," according to its statement Friday.
Shares of Home Loan Servicing fell as much as 20% while Ocwen dropped as much as 12%. The stocks have plunged over the past year amid investigations into Ocwen and related companies by states including New York and California and regulators. BlueMountain said in the statement that it owns the Home Loan Servicing debt, known as servicing advance bonds, and mortgage-backed securities, while it’s also betting against the shares of the two companies.
Ocwen settled with New York last month after the state criticized it for funneling foreclosure-related business to affiliated entities and citing examples where the company backdated letters to borrowers that made it more difficult for the homeowners to modify their mortgages. California has said it's seeking to suspend Ocwen after the company failed to provide information needed to assess its compliance with a state law.
"These (and other) agencies' findings and enforcement actions demonstrate Ocwen's systemic, long-standing and continuing servicing failures and disregard of applicable and analogous laws," Erik Haas, a lawyer for BlueMountain at Patterson Belknap Webb & Tyler LLP, said in a letter to the trustee attached to the statement.
The deals' terms require Ocwen to comply with applicable laws and operate in line with standards being used by "prudent" servicers, he said.
BlueMountain said that the default triggers a need for the debt to be paid down more quickly and for its interest rate to be increased by 3%. The debt is backed by money owed to Home Loan Servicing for advances made in connection to delinquent loans, such as cash sent to bondholders to cover borrowers' missed payments or used to pay property taxes. The funds get recouped from proceeds of foreclosures or when homeowners catch up.
James Lauter, Home Loan Servicing's chief financial officer, didn't immediately return a telephone message seeking comment. David Millar, a spokesman for Ocwen at Sard Verbinnen & Co., declined to comment.
Keefe Bruyette & Woods Inc. analysts led by Bose George wrote in a report Friday that "there are likely to be strong legal defenses to the argument being put forward by BlueMountain."
Trustees for numerous mortgage bonds with loans overseen by Ocwen told investors from October through December that default events had occurred as a result of downgrades to its servicer ratings, and in some cases asked holders of the debt whether to fire the company, according to Nomura Holdings analysts.
"In the current environment, we do not expect that bondholders have a strong incentive to transfer servicing based on" the notices, "as it is not obvious that a group of investors can agree that there is a better servicing alternative," Nomura analysts including Paul Nikodem wrote in a Jan. 9 report. "This calculation could change if Ocwen's financial situation worsens meaningfully."
William Erbey, who founded Ocwen and Home Loan Servicing, agreed to step down from his positions at Ocwen and related companies in its settlement with New York regulators. Ocwen recently turned over the information requested by California and expects that its "ongoing cooperation will result in a satisfactory outcome for all parties," the Atlanta-based firm said in a Jan. 13 statement.
