Ocwen Financial's termination as servicer of two residential mortgage securitizations has no immediate impact on the strength of the company, but it does set a "negative precedent" that could eventually lead to the servicer being fired from more deals, Moody's Investors Service warns.
In February Wells Fargo informed Ocwen that investors in two RMBS representing $264 million in unpaid principal had voted to transfer servicing to Select Portfolio Services, a unit of Credit Suisse. The vote followed Moody's downgrade of Ocwen's servicer rating, which triggered an event of default in these and eight other deals.
In a report published Friday, Moody's noted that 6,954 transactions serviced by Ocwen define certain events related to servicer quality as an "event of default." Over the last several years, 4,825 of these deals have experienced breaches, but in each these cases the trustee generally did not seek termination.
"However, more recent breaches of thresholds and related scrutiny could trigger more trustee requests for direction from holders," the report states.
Moody's also said that transferring servicing to SPS will not have material consequences for these transactions because "all participants have strong incentives to implement an orderly transfer of servicing responsibilities."
There is a possibility that cash flows could be disrupted because of features of the servicing agreement entitle Ocwen to all fees and advances before the transfer and because of uncertainty about the timing and stability of the transfer.
However, the capital structures of the two deals mitigate this risk through a strong interest shortfall reimbursement mechanism on the senior bonds.
Ocwen itself has described the terminations as "immaterial." But Moody's isn't the first to warn about the potential for fallout. Analysts at Barclays and Compass Point Research have both published reports discussing the increased risk that investors and trustees of other RMBS serviced by Ocwen could potentially terminate the servicer.
Ocwen is also facing up to $26 billion in damage claims by mortgage bondholders represented by law firm Gibbs & Bruns. The investors have accused Ocwen of poor recordkeeping and trust performance, and of using trust assets to resolve investigations into Ocwen's servicing practices.