By Andrew R. Johnson
A regulatory crackdown on Ocwen Financial Corp. has started to
weigh on the mortgage servicer's financial results.
The Atlanta company on Thursday posted first-quarter earnings
that, while rising 68%, fell well short of analysts' estimates as
costs to comply with regulatory demands surged. Ocwen shares fell
7.4% to $35.08 in New York Stock Exchange composite trading, its
largest decline since February.
New York's top financial regulator, Benjamin Lawsky, earlier
this year halted a deal Ocwen struck to acquire a large
mortgage-servicing portfolio from Wells Fargo & Co. amid
concerns about the company's ability to handle more loans.
The Consumer Financial Protection Bureau and state regulators
reached a settlement with Ocwen in December over allegations that
the company mistreated borrowers. Ocwen neither admitted nor denied
the allegations.
Amid the scrutiny, Ocwen has ramped up spending on technology
and compliance.
Ocwen on Thursday said such costs helped fuel a 44% surge in
overall expenses during the quarter from the same quarter a year
earlier.
"The bar has been raised substantially because of the additional
activities and documentation now required," President and Chief
Executive Officer Ron Faris said during a conference call with
analysts on Thursday.
The quarterly results show how heightened regulatory scrutiny is
pressuring mortgage companies to revamp their systems to prevent
potential errors with borrowers, even if it eats into profit.
Mr. Faris said higher regulatory standards have raised Ocwen's
costs for servicing nonperforming loans by as much as $40 per loan
annually.
Ocwen and its largest nonbank competitor, Nationstar Mortgage
Holdings Inc., both doubled the size of their servicing portfolios
last year, making them the fourth- and fifth-largest mortgage
servicers in the U.S., respectively, according to industry
newsletter Inside Mortgage Finance.
They have benefited as large banks such as Bank of America Corp.
have sold servicing portfolios, driven in part by new capital
requirements that make that costlier for banks.
Executive Chairman William Erbey said during the conference call
that reputational risk tied to servicing delinquent loans also has
driven banks out of the business.
But while Ocwen's first-quarter revenue jumped 36% from the same
quarter a year earlier, the $551.3 million posted was less than the
$569.4 million that analysts surveyed by Thomson Reuters
expected.
Mr. Faris said revenue was "hampered" in the quarter as bad
weather slowed sales of foreclosed real estate.
The company has seen a "more substantial rebound" in such sales
so far in the current quarter, he said.
Ocwen's net income for the first quarter rose to $75.8 million,
or 54 cents a share, from $45.1 million, or 31 cents, a year
earlier.
Analysts surveyed by Thomson Reuters expected earnings of $1 a
share.
Ocwen and Nationstar have found themselves in the regulatory hot
seat in recent months. Mr. Lawsky, superintendent of the New York
Department of Financial Services, called the rapid growth of
nonbank mortgage servicers "eyebrow raising" in a March interview
with The Wall Street Journal.
He said he is concerned such companies aren't equipped to handle
the massive amount of loan volume they have taken on in recent
years as the industry consolidates.
Mr. Lawsky also has raised concerns about the relationships that
Ocwen and Nationstar have with affiliated businesses. Last month
his office sent a letter to Ocwen seeking information about its use
of a property auction website owned by Altisource Portfolio
Solutions SA, a company spun out from Ocwen in 2009. Mr. Erbey is
also chairman of Altisource and owns stakes in both companies.
"Going forward, we believe compliance and counterparty strength
will be among the most important factors determining long-term
success in the servicing business," Mr. Erbey said in a
statement.
Write to Andrew R. Johnson at andrewr.johnson@wsj.com
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