Home Loan Servicing Solutions, Ltd., an affiliate of the mortgage servicer Ocwen Financial Corp., said Monday it called off its proposed merger with New Residential Investment Corp. and instead will sell substantially all of its assets to New Residential for a lower price.

The asset sale is worth $17.08 per HLSS share, or approximately $1.2 billion, the companies said in a statement. That is a reduction from the price of $18.25 in the earlier merger agreement, which was announced in February.

The boards of the two companies have already approved the asset sale, which was concluded with the signing of the agreement, the companies said.

New Residential is affiliated with another large mortgage-servicing company, Nationstar Mortgage Holdings Inc. Nationstar, which is controlled by the large investment firm Fortress Investment Group LLC, has acquired billions of dollars of mortgage-servicing rights from Ocwen, which has run into serious regulatory problems over the past two years.

Ocwen, which had to consent to the transaction, has agreed to its terms, a company spokesman said.

Ocwen has been threatened with a delisting by the NYSE because it has missed several deadlines for filing its 2014 earnings statements. Ocwen has said that it has been trying to clear problems related to HLSS's financial status.

Ocwen said earlier that it is looking into whether HLSS has the "ability to continue to meet its obligations to fund new servicing advances." Ocwen also said earlier that "a failure by HLSS to fund new servicing advances could have a material negative impact on the company's financial condition."

In a separate statement Monday, Ocwen said it still needs more time before filing its required 2014 financial statements.

HLSS provides financing for Ocwen's mortgage servicing rights and advances it makes to mortgage securities investors.

In a significant step in Monday's announcement, New Residential said that it had agreed to extend the contracts allowing Ocwen to service the mortgage rights of HLSS and, on a two-year agreement, to not transfer servicing rights away from Ocwen.

Michael Nierenberg, chief executive officer of New Residential, said the extension would "help promote a mutually beneficial partnership between the two companies."

Write to James Sterngold at james.sterngold@wsj.com

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