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Moody's Downgrades Ocwen Servicer Rating, Citing Regulatory Risks

AUG 29, 2014 3:19pm ET
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Moody's Investors Service on Friday downgraded two servicer ratings for Ocwen Loan Servicing due to increased regulatory scrutiny and concerns about the its ability to ensure timely payments to bondholders.

The downgrades reflect heightened regulatory scrutiny of nonbank servicer Ocwen Financial by the Securities and Exchange Commission and by the New York Department of Financial Services, Moody's said.

Bill Fricke, a Moody's vice president and senior credit officer, said the downgrades were based on the regulatory uncertainty about "what's going to end up happening, whether there could be penalties, fines or nothing."

"These agencies could restrict Ocwen's activities, levy monetary fines, or take additional actions that could negatively affect the company's financial strength and servicing stability," Moody's said.

On August 18, Ocwen announced that it had received a subpoena in June from the SEC requesting documents related to two affiliates and a probe related to the interests of company executives. Benjamin Lawsky, the New York superintendent of financial services, sent a letter to Ocwen August 4 raising concerns about "potential conflicts of interest and potentially inconsistent statements and representations regarding corporate governance."

Ocwen's rating as a primary servicer of subprime loans and as a special servicer both dipped to SQ3+ from SQ2-, just a notch above "average," on a scale of 13 possible notches. Ocwen is now smack dab in the middle with the sixth-highest rating, down from fifth-highest. Moody's also put both assessments on review for further downgrade based on "continuing concerns about Ocwen's challenges integrating the acquired servicing platforms and managing the distressed loan portfolios."

In addition, Moody's lowered the Atlanta-based servicer's component assessment for loan administration to "average," from "above average." That downgrade was based on regulatory concerns regarding force-placed insurance fees and the role of an Ocwen spinoff, Altisource Portfolio Solutions, in a new force-placed insurance program.

Lawsky is the first regulator to question a move by Ocwen to essentially go around a ban on servicers accepting commissions on force-placed insurance from affiliates. Ocwen recently sold an insurance-agent affiliate to Altisource.

Moody's also noted that Ocwen has embarked on a year-long review of all "loan-related imaged documents."

Ocwen's servicing portfolio has grown 10-fold in recent years after it purchased billions in servicing rights from banks. The review is designed to identify duplicate documents and those documents not properly classified or that are illegible.

"In some cases, Ocwen may not have the documents and they are going through their entire portfolio to assess the documents that are available," said Gene Berman, a Moody's assistant vice president and analyst in its structured finance group. "It will be costly."

At 2 p.m. EDT August 29, shares of Ocwen Financial stock were up 1.5%, to $27.92. But shares are down 54% from its all-time high of $60.18 in November 2013.

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