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Distressed Investing King Ross Loves the Mortgage Market: Exclusive

NEW YORK ( TheStreet) -- Ocwen Financial Corporation (OCN - Get Report) shares surged more than 18% following the announcement of a $588 million cash and $162 million convertible preferred stock acquisition of Homeward Residential Holdings--a mortgage servicing and origination platform put together through a series of acquisitions by WL Ross & Co.

In an interview with TheStreet, WL Ross chief Wilbur Ross cited the run-up in the stock following the deal's announcement as a confirmation of the success of the transaction.

The convertible shares, according to Ross, are "already seriously into the money and that was part of our theory. We thought [the] market would like the event and so unlike an IPO, which was our alternative, in an IPO we'd have sold a small fraction and had to keep the bulk of it. Here we've sold the bulk of it and are keeping a small fraction. But $162 million is still a pretty good-sized stake."

Shares of Ocwen , along with other mortgage servicers such as Nationstar Mortgage (NSM - Get Report) and Walter Investment Management Corp. (WAC) have been have been on a tear recently as independent servicers grow their businesses while big banks including Bank of America (BAC - Get Report)and JPMorgan Chase (JPM - Get Report) move out of the business due to new higher capital requirements and reputational headaches. Wells Fargo (WFC - Get Report), however, has remained committed to the business and Warren Buffet's Berkshire Hathaway (BRK-B) has also been bidding on assets. Ocwen is a subservicer for Wells Fargo, according to Ross.

Ross says he likes the mortgage servicing business because "it's a good cash flow generator and you can make a high rate of return on equity."

Shares of Nationstar, Ocwen's chief competitor among independent servicers, were down slightly following the deal's announcement but have since rebounded.

"This is not particularly good news for Nationstar," Ross said. "This is very much a scale business and as you get to gigantic scale you should be able to operate more efficiently that someone at a smaller scale and in addition as Ocwen stock gets a better multiple its cost of capital will be lower."

That lower cost of capital will give Ocwen an edge when the next auction of mortgage servicing rights comes up for bidding, Ross contends.

Ross argues reputational problems in the industry are vastly overblown.
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