Ocwen Financial Corp., the mortgage servicer under attack for its handling of home loans, slumped the most in more than a month after receiving notices that it was being fired from overseeing debt backing two bond deals.
The company's shares dropped 13% to $8.51 as of 12:48 p.m. in New York trading, the most since Jan. 23. Wells Fargo & Co., the trustee for the transactions, said in letters to investors this week that a majority of bondholders had directed it to terminate Atlanta-based Ocwen from working on the deals, which include about $260 million of loans, or less than 0.2% of its business related to mortgages without government backing, according to data compiled by Bloomberg.
While the immediate financial impact is likely to be small, the action signals a risk of additional moves to fire Ocwen by investors or trustees, according to reports by Keefe Bruyette & Woods Inc. and Compass Point Research & Trading analysts. Servicing transfers can be disruptive, though it's often worse for owners of mortgage-backed securities if they occur after a firm collapses, said Thomas Adams, who worked in groups that backed mortgage debt at two bond insurers.
"MBS investors shouldn't want to be the last ones left to turn the lights out," Adams, now a lawyer with Paykin Krieg & Adams, said in an email.
Margaret Popper, a spokeswoman for Ocwen at Sard Verbinnen & Co., declined to comment Thursday on the termination notices by Wells Fargo, as did Jen Hibbard, a spokeswoman for the bank.
Home Loan Servicing Solutions Chief Executive Officer John Van Vlack said on a conference call this week to discuss
"There are adverse effects with servicing transfers on the bondholders and on the borrowers as well," he said.
HLSS owns the servicing rights for $165 billion of mortgages without government backing overseen by Ocwen, the largest firm handling billing and collections on such loans, according to slides from a presentation on New Residential's website. Ocwen indemnifies HLSS against losses related to such action, "so small servicing transfers should not have an economic impact on HLSS," KBW analysts led by Bose George wrote in a report.
The terminations followed downgrades of Ocwen's servicing ratings that last year triggered technical defaults on some mortgage bonds and prompted Wells Fargo to solicit instructions from investors on what to do next. The two transactions were also among deals about which some bondholders had accused Ocwen of "imprudent and improper servicing practices."
The company has rejected as "groundless" the claims made last month by the bondholder group including Pacific Investment Management Co. and BlackRock Inc., which alleged the servicer's practices also created defaults on a total of 119 deals.
The termination notices this week raised the odds of Ocwen experiencing an "adverse scenario" in which all of its nonagency servicing gets pulled, Compass Point analysts Kevin Barker and Jesus Bueno wrote in a report. In that case, the company could "service its debt via cash generated from asset sales and thereby, continue operating as a going concern, but would be close to liquidating most assets."
The analysts downgraded the stock to a "sell," setting a $7 price target, on Friday also because of the $26 billion of alleged damages cited by the investor group and potentially increased costs tied to the HLSS acquisition and operational changes required by regulators.
The company's shares were down 73% in the 12 months through Thursday.
