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Ocwen’s (OCN) Rating Downgraded by Moody’s, Outlook Negative


Moody's Investors Service, the rating services arm of Moody's Corporation MCO, downgraded the senior secured and unsecured debt ratings of Ocwen Financial Corporation OCN from Caa1 to Caa2. Additionally, the company’s corporate family rating was downgraded from B3 to Caa1.

Moody’s also downgraded the senior secured bank credit facility rating of Ocwen’s subsidiary, Ocwen Loan Servicing, LLC, from B2 to B3. The outlook for the company is negative.

Ratings have been downgraded to reflect the increased risk that the company is facing because of the Consumer Financial Protection Bureau’s (CFPB) lawsuit as well as the cease and desist orders from various states.

On Apr 20, 2017, the CFPB sued Ocwen alleging that the company’s mortgage loan servicing practices have led to significant consumer distress. The regulator accused the company of illegally foreclosing struggling borrowers’ homes, ignoring customer complaints as well as selling MSRs without disclosing the mistakes made in borrowers’ records.

Additionally, the North Carolina Commissioner of Banks and a consortium of 21 state mortgage regulators issued cease and desist orders. These state regulators seek to prevent Ocwen from acquiring new mortgage servicing rights and originating new residential mortgages. These actions are likely to negatively impact the company’s credit worthiness, thereby weakening its financial position further.

With an aim to solidify and enhance business efficiency, Ocwen, on May 1, announced its plan of signing an agreement with New Residential Corporation to divest MSRs. The proposed agreement pertains to roughly $117 billion in MSRs that will lead to conversion of New Residential's existing Rights-to-MSRs to fully-owned MSRs.

Though, Ocwen will receive an upfront payment of $425 million as part of the deal with New Residential making a 4.9% equity investment in the company, Moody’s expects that Ocwen will continue to face higher legal and regulatory expenses, which will adversely impact its profitability.

Moreover, with a negative outlook, chances of a rating upgrade are unlikely. However, the company’s outlook might improve from negative to stable if it is succeeds in decreasing expenses and improving profitability without a material loss in capital.

Though, the adverse impact of such regulatory probes into Ocwen’s financials remains a major concern, a strong balance sheet should support its financials in the near term. Shares of the company have surged 68.8% in the last one year, outperforming the Zacks categorized Mortgage & Related Services industry’s rally of 55.6%.

Currently, Ocwen carries a Zacks Rank #2 (Buy).

A couple of other stocks in the finance space worth considering include Walker & Dunlop, Inc. WD and Comerica Incorporated CMA.

The Zacks Consensus Estimate for Walker & Dunlop was revised 17.7% upward for the current year, in the last 60 days. The company’s share price increased significantly in the last one year. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Comerica witnessed an upward earnings estimate revision of 8.8% for the current year, in the last 60 days. Its share price increased 77.3% in the last one year. The company currently carries a Zacks Rank #2.

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