April 24, 2017 / 7:30 PM / 8 months ago

Fitch Places Ocwen's 'B-' Ratings on Watch Negative

(The following statement was released by the rating agency) CHICAGO, April 24 (Fitch) Fitch Ratings has placed the ratings of Ocwen Financial Corporation (OCN) and its wholly-owned, primary operating subsidiary, Ocwen Loan Servicing, LLC (OLS) on Rating Watch Negative. The entities have a long-term Issuer Default Rating (IDR) of 'B-'. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS IDRS AND SENIOR DEBT The Negative Rating Watch follows two separate regulatory actions filed by the Consumer Financial Protection Bureau (CFPB) and the Multi-State Mortgage Committee (MMC), on April 20, 2017, alleging material weaknesses in the company's servicing practices. Fitch views elevated regulatory scrutiny and compliance risk, coupled with the potential earnings pressure associated with any fines and compliance costs as key rating risks for OCN. The CFPB complaint alleges continued material weaknesses in the company's servicing practices, which call into question OCN's corporate governance and operational framework. Separately, the cease and desist order by the MMC alleges that OCN was unable to properly manage consumer escrow accounts and was conducting unlicensed activity in certain states. As a result of the MMC order, OCN is prohibited from acquiring new mortgage servicing rights (MSRs) and acquiring or originating new residential mortgages until an accounting of all escrow accounts is provided. These allegations raise critical questions as to OCN's ability to perform its core function of servicing loans, and the ability for the company to address these concerns following years of monitoring by previous regulatory actions. While OCN denies all accusations and has stated its intention to defend itself against all claims, Fitch believes the legal actions and procedural overhang are likely to impact the firm's profitability and strategic execution. Facing earnings pressure from portfolio runoff and elevated costs, OCN expects to record a loss in 2017. The company has actively worked to reduce costs within its servicing segment, as well as corporate overhead over the last year. Overall expenses were 17% lower in 2016 compared to 2015, reflecting progress in the company's cost improvement initiatives. Nevertheless, Fitch believes that elevated compliance costs resulting from regulatory fines and/or material restrictions on business activities will pressure operating margins and negatively impact OCN's profitability in the near term. New Residential Investment Corp. (NRZ) is a publicly traded REIT externally managed by an affiliate of Fortress Investment Group LLC, which currently owns rights to MSRs on $118.7 billion of unpaid principal balances (UPB) that are currently serviced by OCN. Should OCN's servicer ratings be downgraded below a specified threshold, NRZ has the right to direct a transfer of affected servicing agreements to another party, upon the receipt of third-party consents, which means OCN would no longer be entitled to receive servicing fees on a meaningful the corresponding notional amount of the applicable affected servicing agreements in its total non-Agency servicing portfolio. Fitch believes a transfer of servicing duties due to the termination of the servicing contract from initiated by NRZ would drive negative rating actions for OCN. Leverage, as measured by total debt to tangible equity, amounted to 4.42x on a standalone and 5.86x on a consolidated-affiliate basis, as of Dec. 31, 2016. Fitch calculates the consolidated leverage metric including the debt from Altisource Portfolio Solutions S.A. which provides technology, servicing software, and short sale and REO management to OCN, and holds the servicing advance financing facilities related to the rights to MSRs held by NRZ. OCN's current leverage is appropriate for the current ratings, but the metrics have increased over the last several years, as net losses have eroded retained earnings. A sustained increase in balance sheet leverage on a consolidated basis could also drive negative rating actions over time. The 'B-/RR4' rating assigned to OLS's senior secured term loan reflects equalization with the long-term IDRs assigned to OLS and OCN, given average recovery prospects in a stressed scenario based upon available collateral coverage for the term loan. The debtholders benefit from a first-priority lien in selected unencumbered assets of OCN and a pledge of capital stock of its guarantor subsidiaries. The 'CCC/RR5' rating assigned to OLS's senior secured notes reflects a one-notch differential from the long-term IDRs assigned to OLS and OCN, given average recovery prospects in a stressed scenario based upon available collateral coverage for the bond. The bondholders have a second-priority, junior interest in the same assets that secure the first-lien senior secured term loan, pursuant to an inter-creditor agreement. OCN's senior unsecured notes are rated 'CC/RR6', which represents a two-notch differential from the IDR assigned to OCN, and reflects the company's predominately secured funding profile, the modest level of unencumbered assets available to support the unsecured noteholders and the expectation of poor recovery prospects in a stressed scenario. RATING SENSITIVITIES IDRS AND SENIOR DEBT Resolution of the Negative Watch will be dependent upon the receipt of more clarity on the magnitude of any potential fine from the CFPB, as well as the impact of the MMC's cease and desist order on OCN's overall operational, governance and financial profile. Should settlements result in a meaningful fine or the imposition of business restrictions or required servicing and operational enhancements which impair the firm's earnings prospects and, therefore, its leverage profile, ratings could be downgraded by one or more notches. Furthermore, a downgrade in the firm's servicer rating that leads NRZ to move servicing away from OCN could also lead to a rating downgrade of one or more notches, given the degradation on the firm's earnings prospects. Fitch does not envision positive rating momentum for OCN at this time. The ratings could be removed from Negative Watch if the regulatory actions prove to have no material impact on OCN's operational, governance or financial position. If and when the Negative Watch were to be resolved, it could potentially be replaced with a Negative Rating Outlook reflecting longer-term regulatory headwinds and uncertainty surrounding OCN's business model. Material deterioration in financial performance resulting from a reduction in operating cash flow generation and/or available liquidity, sustained increase in balance sheet leverage, and/or aggressive capital management could also result in a downgrade of OCN's ratings. The ratings assigned to the senior secured term loan, senior secured notes and senior unsecured notes are primarily sensitive to changes in OLS and OCN's Long-Term IDRs, as well as changes in collateral values and advance rates under the secured borrowing facilities, which ultimately impact the level of available asset coverage for each class of debt. Fitch has placed the following ratings on Rating Watch Negative: Ocwen Financial Corporation --Long-Term IDR 'B-'; --Short-Term IDR 'B'; --Senior unsecured debt 'CC/RR6'. Ocwen Loan Servicing, LLC --Long-term IDR 'B-'; --Senior secured term loan 'B-/RR4'; --Senior secured note 'CCC/RR5'. Contact: Primary Analyst Johann Juan Director +1-312-368-3339 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Chelsea Richardson Associate Director +1-212-612-7899 Committee Chairperson Justin Fuller, CFA Senior Director +1-312-368-2057 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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