Ocwen Financial Corp., a servicer of subprime mortgages, said Tuesday that it has buttressed its liquidity position and is actively looking to buy servicing portfolios in partnership with private-equity firms and hedge funds.
William Erbey, Ocwen's chairman and chief executive, said on an earnings conference call that his West Palm Beach, Fla., company is "laying the groundwork" for growth. So far this year it has increased its loss mitigation staff by 381 positions, or 50%, he said.
Ocwen "is trying to push hard to strike relationships" with companies that can finance the acquisition of servicing rights, he said. "We see some offers for us to buy servicing and we would do that in conjunction with hedge funds that we have relationships with."
Ocwen's experience with handling troubled loans is in demand because holders of subprime loans now stand to lose as much as 59% of their investment in the event of default, Mr. Erbey said. Many portfolios are "parting like the Red Sea" as a large portion of the loans turns delinquent.
"We're trying to get the borrower to pay as much money as they possibly can afford," he said. "We need to keep people in their homes from a social-issue perspective, because if you start foreclosing on these properties, the investor is just going to get hammered."
Ron Faris, Ocwen's president, said on the call that the company has been "purposely conservative" about acquiring mortgage servicing rights to protect the liquidity of its balance sheet. As of June 30 it serviced $44.8 billion of loans, about 16% less than a year earlier.
Ocwen completed 20,703 loan modifications in the second quarter. The company has done so many modifications this year that it led to problems for some investors.
Wells Fargo & Co., a trustee on some of the securitizations Ocwen serviced, was unable to determine whether the modifications were principal writedowns, which typically would only affect subordinated bondholders, or interest rate reductions. The San Francisco banking company inadvertently lowered interest payments to senior bondholders in May, causing an outcry from those investors.
"It had nothing to do with any actions by Ocwen," Mr. Erbey said Tuesday. "The cash flow was misapplied to investors in the different tranches. It has been corrected by the third party doing that work."
Completing a modification entitles a servicer to get reimbursed for principal and interest payments to bondholders and for other expenses it advanced while a loan was delinquent. Outstanding advances dropped 6% from March 31, to $1.35 billion, but the company said this was mainly due to the decline in the unpaid principal balance of loans serviced. A stabilization of delinquency rates also resulted in declining advances.
The company also closed on a new $300 million credit facility to replace financing that had expired. At midyear it had $334.2 million more than it needed to fund servicing advances.
David Gunter, Ocwen's chief financial officer, said on the call that it is working with its main lender, JPMorgan Chase & Co., to renew a $355 million facility scheduled to expire Aug. 13.
Mr. Erbey said servicing firms are starting to consolidate. "As institutions have difficulty, additional platforms and servicing rights will come on the market," he said.
Ocwen's second-quarter revenue climbed 12%, to $131.2 million, and operating expenses fell 6%, to $83.8 million, their lowest level in nearly two years. But net income was almost wiped out by paper losses on financial assets, including auction-rate securities and subprime residuals, and by a $5 million loss at its Berlin banking subsidiary, Bankhaus Oswald Kruber GmbH & Co. The company cleared just $111,000, negligible on a per-share basis. A year earlier, Ocwen made $27.2 million, or 39 cents a share.
Ocwen bought Bankhaus Oswald for $5.9 million in 2004, shortly before it turned in its U.S. thrift charter. Mr. Erbey told analysts Tuesday that Ocwen had invested an additional $5 million in the bank and had originally planned on using it as a financing vehicle for core assets, but was unable to do so because German regulators "changed their mind" and only allowed funding of German assets.
"That facility has very limited value for us," he said. The unit is now for sale.