Ocwen delinquencies flat to down, on modified loans

By Al Yoon

NEW YORK (Reuters) - Ocwen Financial Corp., a large subprime mortgage servicer, on Thursday said delinquency rates on loans it manages held flat, or fell, since May in a reprieve from the subprime crisis.

Ocwen (OCN.N) said falling delinquencies on loans it serviced follow so-called loan modifications, which can include cutting interest rates or forgiving principal to levels that create affordable payments. The practice is controversial among many investors but has been pushed by regulators who have claimed servicers are too slow to curb the foreclosures that are worsening the U.S. housing slump.

Easing delinquencies are the first sign of stability for Ocwen-serviced mortgages since the subprime crisis flared in 2007, said the West Palm Beach, Florida-based company. Profits at Ocwen, which collects and distributes payments on about 350,000 loans, have tumbled partly on costs of advancing payments on delinquent loans to bondholders.

"This represents a welcome reversal of spiking delinquencies," Ronald Faris, Ocwen's president, said in a statement. It was too soon to call an end to the subprime crisis, however, he said.

While they are becoming prevalent, modifications are causing angst for subprime bond investors scraping for returns, even if it means foreclosure. Bondholders whose cash financed the easy-lending boom may now object to terms of new contracts, or dispute the fairness of cash flows, analysts said.

Many borrowers re-default, and "blanket" modification programs would likely worsen that statistic, Barclays Capital analysts said in an Aug. 25 research note. A re-default can result in larger losses for bondholders than if the property had been foreclosed sooner, they said.

Ocwen said its models determine whether an investor would be better off under a loan modification or foreclosure. They produce a "win-win" situation by maximizing the market value of the loan while keeping the borrower in the home, it said.

Investors also balked after a swift increase in modifications by Ocwen in April resulted in the trustee stripping costs of principal write-downs from a pool meant for interest payments. This created interest shortfalls for senior investors instead of applying the loss to junior investors that were paid to take greater risks.

The cost often includes the reimbursement for servicers for costly advances to bondholders while the loan was delinquent, the Barclays analysts said.

The trustee corrected the April interest shortfalls, but the problem resurfaced in August when holders of a UBS-issued bond failed to receive any interest due to Ocwen modifications, according to JPMorgan Chase & Co. Write-downs were not treated as realized losses by a trustee, JPMorgan said.

Ocwen's program includes many features that will mold the sweeping modifications of IndyMac mortgage-holders by the Federal Deposit Insurance Corp., which took control of the failed California lender in July, Faris said. The FDIC program is setting a useful precedent for the industry, he added.

The FDIC may push for modifications wherever possible, which "can be dangerous" for investors, Barclays said.