Shares of Ocwen Financial Corp. surged on news that it won $850 million in subperforming loans in a U.S. Department of Housing and Urban Development auction.
Shares rose $1.50 to $32.50 Tuesday, after the West Palm Beach, Fla., thrift and a joint venture partner, BlackRock Capital Finance LP, won the right in competitive bidding with other recovery specialists to nurse the loans back to health.
The shares continued to gain Tuesday, rising another $1.25 to $33.75, as investors vied to cash in on what they hope will be a second profitable purchase by Ocwen from the housing agency.
Investors are rewarding companies like Ocwen and Amresco Inc. that specialize in buying nonperforming assets that typically yield 15% to 20%.
"They have been quite successful at turning around asset pools and have a good feel for collateral and its potential in advance," said Ray Cabillot of Piper Jaffray.
"The size and the timing of the purchase are hugely significant," Rob Schwartzberg of Friedman Billings Ramsay & Co. said of Ocwen and BlackRock. "That they won in a highly competitive bidding situation says a lot about their servicing system."
Ocwen listed 5.35% of its $2.8 billion of assets as nonperforming. Yet it earns a 2.06% return on assets, about twice what a healthy thrift would make, and a 27.4% return on equity.
Nonperforming assets for other banks this size typically hover in the 1% range.
Ocwen, which went public in September, bought $1.5 billion of subperforming and nonperforming commercial and residential loans last year and prospered. Mr. Schwartzberg noted the new deal was the second between Ocwen and the housing department: Ocwen turned around $750 million of HUD loans it bought last April, the analyst said.
But some are not as keen about taking on this kind of risk.
One banker who decided not to bid in the HUD auction said that it takes about a year to 18 months to get returns from such loans.
"There continues to be some trepidation from investors about this being a recurring business, but (the recovery specialists have) diversified businesses to mitigate those risks," said John Coffey of Robinson-Humphrey.
"The biggest risk is that the loans turn out to be worth less than you price them for," he said. "But that's mitigated by track record and expertise of these companies."
Elsewhere Wednesday, bank and financial shares rose early in the day then drifted lower, even though the Federal Reserve decided not to act on interest rates. Analysts said the stocks were due to cool off after a long rally.
The Standard & Poor's bank index, which shot past the 500 mark for the first time early in the day, closed at 492.89, off 1.26%.