Moody’s: Ocwen Governance Challenges A Credit Negative

The relationship between Ocwen Financial Corp., Home Loan Servicing Solutions and Altisource Portfolio Solutions, also known as the ‘Ocwen family’ of companies, has recently come under scrutiny by the New York Department of Financial Services (NY DFS). As a result, Moody's Investor Service recently issued a report saying corporate governance concerns arising out of the NY DFS investigation are credit negative for the companies.

In the report, Moody's says the Ocwen family of companies have operated as ‘independent legal entities,’ with ‘separate operations in non-bank service,’ for the past five years.

‘As such, the companies retain significant management ties, business interdependencies, a high level of related-party transactions, and a common chairman with meaningful ownership stakes in all five companies,’ Moody's says in the April 15 report – an exceprt of which is included in its recent ResiLandscape newsletter. ‘These issues raise corporate governance concerns.’

The report points out that Ocwen has recently come under increased regulatory scrutiny, in particular from the NY DFS, ‘because of its high growth rate and potential conflicts of interest.’

In February, the NY DFS placed an indefinite hold on Ocwen's planned $2.7 billion deal to purchase mortgage servicing rights on $39 billion of unpaid principal balance from Wells Fargo, due to concerns that Ocwen was growing too fast and lacked the capacity to handle the additional business. Later that same month, the NY DFS outlined in a letter its concerns over potential conflicts of interest between Ocwen and its related parties.

‘This regulatory attention could accelerate an eventual shift in the companies' business models to areas with even greater operating risk and financial volatility which, is credit negative for the companies,’ Moody's says in its report.

Moody's says although ‘each of the five Ocwen family companies focuses on a different area of the U.S. residential mortgage and housing marketâ�¦ they have close working relationships." In addition, many senior managers have overlapping management roles and "some also retain ownership interests in multiple Ocwen family companies.’

‘Furthermore, the companies often depend on each other for a significant portion of revenue,’ the report states. ‘For example, 100 percent of HLSS assets have been purchased from and are serviced by Ocwen, and approximately 65 percent of Altisource's revenues are earned from business with Ocwen.’

The report also points out that William Erbey, common chairman of the companies, holds a ‘meaningful portion of the shares in the Ocwen family of companies’ and ‘has close working relationships with many board members of long tenure,’ which, in the ratings firm's opinion, ‘limits independent oversight of the company on matters of growth and strategic direction.’


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