A day after reaching a $150 million regulatory settlement and the departure of its executive chairman, Ocwen Financial Corporation (NYSE: OCN) received yet another downgrade from Fitch Ratings, which downgraded the company’s bond rating from B to B-.
The downgrade of the long-term Issuer Default Ratings reflects increased uncertainty following the resignation of Founder and Executive Chairman William Erbey, who stepped down as a result of the settlement reached last week between Ocwen and the New York Department of Financial Services (NYDFS).
“Fitch views William Erbey’s announced resignation from OCN and its related entities as a key driver for the downgrade and Negative Outlook, as his departure introduces strategic uncertainty with respect to OCN and its affiliates,” Fitch stated in a release.
Also reflected in Fitch’s downgrade is the expectation of increased earnings pressure as a result of the heightened compliance standards Ocwen will be required to follow due to the terms of the settlement.
The ratings have also been removed from Rating Watch Negative and assigned a Negative Rating Outlook, reflecting the decrease of near-term risks associated with potential outsized fines or loss of servicing contracts.
“In place of these near-term concerns, however, are longer-term challenges in terms of strategic direction, leadership and financial performance under a heightened operation and governance framework, which together support the assignment of a Negative Rating Outlook,” Fitch stated.
Even beyond the immediate financial impact of paying out the settlement, Fitch expects that the costs for Ocwen to meet the greater compliance and governance standards will create a drag on operating margins.
This is the latest in a series of downgrades for Ocwen in the last four months. In September and October, both Moody’s Investors Service and Standard & Poor’s issued downgrades related to the company’s servicing capabilities, largely as a result of ongoing conflicts with federal regulators.
As part of its settlement, Ocwen won’t be allowed to acquire additional mortgage servicing rights, or begin to acquire them unless it receives approval from the NYDFS and meets benchmarks developed by an NYFDS-appointed independent monitor, which will provide on-site oversight to the company for up to an additional three years.
The same day of the announced settlement, Ocwen held a conference call, where CEO Ron Faris unveiled the plans for the company’s future direction.
Part of those plans include Ocwen’s intent to exit agency servicing, with plans to sell its entire portfolio of agency MSRs. While the sale of its agency MSRs will not be done in bulk, Faris indicated that this strategy has the potential to free up $200 to $300 million currently allocated to fund agency advances.
He did not comment directly on Ocwen’s reverse mortgage portfolio, but said the company is committed to its reverse mortgage business.
“[Ocwen’s] strong position in reverse mortgages is indicative of its strengths,” Faris said during the call.
Written by Jason Oliva