Ocwen to Enter Mortgage Lending Biz - Analyst Blog

By Zacks | October 04, 2012 AAA

In a bid to expand its operations, Ocwen Financial Corp. (OCN) is preparing to foray into mortgage origination business. The company has signed a definitive agreement to acquire Homeward Residential Holdings Inc. - an integrated mortgage firm with prime lending and mortgage servicing operations - from WL Ross & Co. LLC. The company will be paying about $588 million in cash and $162 million in Ocwen convertible preferred stock.

Homeward was formed by WL Ross in 2007 by combining the lending platforms of Option One Mortgage Co., American Home Mortgage Servicing and Citi Residential Lending - a unit of Citigroup Inc. (C). It currently services approximately 422,000 mortgage loans with the total unpaid principal balance of more than $77 billion.

Moreover, Homeward's mortgage originating operations comprise of correspondent and retail lending. As of September 30, 2012, Homeward had been issuing roughly $10 billion of loans on an annual basis.

Ocwen stated that the deal, still subject to customary regulatory approvals, is expected to close by the end of this year. Also, the company will not have to raise any additional capital to wrap up the acquisition and it would be immediately accretive to earnings (after taking into consideration transaction related costs).

At a time when major mortgage servicers are shying away from mortgage servicing business as a result of stringent regulations related to capitalization and balance sheet risk, Ocwen has been filling up this void by a string of acquisitions. Homeward is the latest deal for the company subsequent to the acquisitions of Saxon Mortgage Services Inc. - mortgage subsidiary of Morgan Stanley (MS) and Litton Loan Servicing from The Goldman Sachs Group, Inc. (GS), over the last one year.

Apart from these, Ocwen bought certain mortgage-servicing rights (MSRs) related to non-prime loans from JPMorgan Chase Bank, N.A. - the banking division of JPMorgan Chase & Co. (JPM) as well as residential MSRs from Bank of America, National Association (BANA) - a unit of Bank of America Corporation (BAC).

The acquisition of Homeward is expected to be a positive catalyst for Ocwen. The company will be able to further boost its mortgage serving operations and enter the lending market. This would, thus, provide a sustainable source of organic growth going forward.

Ocwen currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term 'Neutral' recommendation on the stock.

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