NEW YORK, Feb 28 (IFR) - Embattled mortgage servicer Ocwen
Financial and at least one other US servicer are actively
working on new types of mortgage servicing rights (MSR)
securitizations, known as direct-debt prepayment-risk deals or
MSR IO (interest-only) trades.
The purpose of the deals is not to raise money - it is
purely to reduce earnings volatility by shedding prepayment risk
linked to MSRs associated with the GSEs. The non-bank servicers
want to continue to acquire agency servicing, but they want to
transfer the prepayment risk to private investors.
Several industry participants compared the transactions to
the recent risk-sharing trades from Fannie Mae and Freddie Mac.
Ocwen completed the first such deal, known as OASIS 2014-1
(Ocwen Asset Servicing Income Series) on February 25, and plans
US$1bn worth of deals this year. Another servicer - market
rumour is that its NationStar, but the company declined to
confirm - liked the execution of the Ocwen deal and is seeking
to mimic it. Ocwen did not return phone calls inquiring about
the new securitization program.
Ocwen and other servicers have been in the crosshairs of US
regulators in recent weeks as the government cracks down on
non-bank servicers that have bought up billions of dollars of
MSRs from traditional banks, who are shedding the MSRs because
of onerous Basel III requirements.
This week, New York's banking regulator said that executives
at Ocwen have ties to related mortgage companies that may give
them an incentive to push borrowers into foreclosure, according
And in early February, the same regulator halted Ocwen's
purchase from Wells Fargo of the servicing rights on 184,000
home loans with a total principal balance of US$39bn. The office
was concerned with Ocwen's ability to take on the additional
servicing load, Reuters said.
This recent headline risk - as well as the fact that the
deal was the first of its kind - led to diminished proceeds for
the OASIS trade (a final amount of US$123m versus the US$136m
that was intended), and wider yields. The fact that the deal
coincided with a negative news cycle was coincidental, however;
sources say Ocwen had been working on the transaction for more
Despite the bumpy pricing, hedge funds and REITs want more
of the product, as it "gives them a bit of a hedge against
interest rates rising," one investor told IFR. "If you're long
mortgage assets, these are good assets for the REITs."
These trades transfer earnings volatility on the excess
interest-only (IO) strip to third-party investors - protecting
the servicer from the possibility of the value of the IO
decreasing. The investor said that this is actually preferable
to Ocwen taking out another secured term loan to cover their
prepayment-related costs, which they would have to pay back.
On balance sheet risk
The bond was on balance sheet and was an obligation of
Ocwen, meaning that investors had to take on Ocwen credit risk -
yet another reason that there was a steep new issue concession.
This differs from the strategy employed by PHH Mortage Corp,
another non-bank servicer, which in November sold up to 50% of
its newly originated MSRs to Matrix Financial Services. That
off-balance-sheet sale also increased PHH's liquidity and
reduced its earnings volatilty, but unlike the Ocwen deal, it
was not syndicated to investors, and therefore does not have as
much scalability, according to observers.
The Ocwen transaction offered investors a 21bp IO strip - a
direct debt obligation of Ocwen - and was originally intended to
be sold at a 5.5 multiple. The 21bp figure is the servicing
value on the mortgages. And the multiple is what Ocwen views the
present value to be of the future servicing income attached to
the loans. Investors, however, were less optmistic and settled
on a multiple of five, which meant lower proceeds for Ocwen.
Even so, this was higher than the 3.1 multiple that Ocwen
actually has them marked at on its books. At the end of 14
years, Ocwen will pay back investors the initial purchase price
times the unpaid balance.
The 17 accounts that took down the Ocwen bonds were
dominated by hedge funds (three quarters of the investors) that
had in the past or currently invested in Ocwen's other debt,
according to people familiar with the transaction.
Specifically, the hedge funds that already had a view on how
Ocwen's US$1.5bn outstanding term loan trades in the markets
were the ones most interested in the securitization.
One hedge fund investor said that it had one desk analysing
and trading IO strips, and another that had expertise in
analysing Ocwen credit risk - making it particularly well suited
to invest in the deal.
Servicers such as Ocwen must hedge against the runoff from
their servicing portfolio due to prepayments; this can equal
about 15% of the servicing portfolio per annum, according to
Moody's. Origination volume, on the other hand, is not
sufficient to replenish that runoff; hence these MSR IO trades
must be completed to address the prepayment risk, Moody's
analysts told IFR.
From a regulatory accounting standpoint, traditional banks
who want to get their MSRs off balance sheet due to impending
capital constraints may pursue similar plans as the non-bank
lenders, according to Warren Kornfeld, a senior vice president
However, banks would be more likely to pursue the PHH sale
template rather than the structured-note template used by Ocwen,