Ocwen Financial Corp., best known for servicing subprime mortgages, is looking to buy servicing rights for Federal Housing Administration loans, underscoring the pivotal role the agency has come to play in the industry.
The West Palm Beach, Fla., company had not serviced many FHA loans since the late 1990s, its president, Ron Faris, said Thursday on a conference call to discuss first-quarter results.
This was largely because FHA's market share was declining during the housing bubble. But now that the bubble has burst, "that product has really taken over the gap left by subprime, and that's a main driver of why we're exploring opportunities to pick up [FHA] servicing," he said.
FHA borrowers tend to have lower credit scores, higher delinquencies and slower prepayments compared with prime borrowers, "which fits with us," Faris said.
Analysts said a return to servicing FHA loans could reignite Ocwen's growth after more than a year of being unable to add servicing rights because the subprime market has vanished. "One of the challenges they had is, their core market was servicing subprime mortgages and there were no fresh subprime mortgages being originated," said Robert Napoli at Piper Jaffray & Co.
In February, Freddie Mac hired Ocwen to service 5,000 low-documentation loans that were at least 60 days delinquent.
"To the extent they're doing satisfactory work with Freddie Mac, that would be a significant advantage in helping them work with FHA," Napoli said.
Faris said Ocwen executives have "reached out" to FHA to acquire loans directly from the agency that may be "challenged." The company also is looking to acquire FHA loan pools or platforms from other servicers, he said.
Ocwen's total servicing portfolio grew 1.5% from the end of last year, to $40.8 billion at March 31. It cited the Freddie contract and a purchase of servicing rights during the quarter. It was the company's first portfolio growth since the third quarter of 2007.
Another reason the portfolio had been shrinking was liquidity constraints. But last quarter Ocwen renewed $200 million of credit facilities for making servicing advances (money it fronts to mortgage investors, typically when a borrower misses a payment) and raised $49 million in a private placement. It now has $640 million of unused borrowing capacity.
Paul Koches, Ocwen's general counsel, said in an interview Thursday that it had withdrawn its application, submitted in November, to convert to a bank holding company by purchasing the $15.1 million-asset Kent County State Bank in Jayton, Texas.
"We have sufficient funding sources and diversification of advance financing at cost-efficient rates to soothe the need for pursuing a bank," Koches said, "so it was reconsidered earlier this year."
Ocwen said the Federal Reserve's Term Asset-Backed Securities Loan Facility has "greatly increased" its prospects for additional financing, since servicer advances are now eligible. William Erbey, Ocwen's chairman and chief executive, said on the call that increased access to liquidity will let it "judiciously acquire servicing platforms" and that it is "in discussions with a number of players."
Though most servicers' costs have been rising due to the additional work created by souring loans, Ocwen said it cut operating expenses by 18% from a year earlier, to $72 million last quarter, partly through staff cuts. The company said it has been automating processes. All told, profit tripled from a year earlier, to $15.1 million, or 24 cents a share.