Goldman Unit May Be Big Win for Ocwen

Corrected, as Ocwen did not acquire Saxon Mortgage Services, but rather acquired a $6.9 Billion mortgage servicing portfolio from Saxon in 2010.Updated with the deal announced Monday between Goldman Sachs and Ocwen.

WEST PALM BEACH, Fla. ( TheStreet) -- Ocwen Financial's ( OCN) is purchase of Litton Loan Servicing from Goldman Sachs ( GS) is just another sign that these are the best of times for a company that specializes in servicing distressed mortgage portfolios.

Goldman Sachs announced Monday it had agreed to sell the Litton unit to Ocwen for $264 million in cash, but that the price didn't reflect certain assets that Goldman would retain.

Ocwen said that it would pay roughly $337.4 million "to retire a portion of the outstanding debt on an existing advance facility currently provided by an affiliate of Goldman to Litton, and will enter into a new facility to finance approximately $2.47 billion of servicing advances."

The new servicing advance facility covers servicing advances "not otherwise financed through the commitments of The Royal Bank of Scotland plc, Barclays Bank PLC and Bank of America, N.A. the main banking subsidiary of Bank of America ( NAC)."

Goldman Sachs acquired Litton Loan Servicing in December 2007, "at a purchase price of $428 million, plus repayment of $916 million of outstanding Litton debt obligations," according to the company's 2007 10-K filing with the Securities and Exchange Commission. During the first quarter of this year, Goldman recorded $220 million in impairment losses while reclassifying assets as held for sale, "primarily related to Litton Loan Servicing," and saying that it planned to sell the transferred assets within 12 months.

Goldman also said that Litton had received requests for information from federal regulators and state attorneys general, as part of the ongoing industry-wide investigations into mortgage loan foreclosure procedures and other servicing practices.

Ocwen previously acquired servicing rights on 38,000 in mortgage loans with unpaid balances of $6.9 billion from Saxon Mortgage Services in March 2010, and also purchased HomeEq Servicing from Barclays PLC ( BCS) in September, for servicing rights on about 134,000 residential loans with unpaid balances totaling $22.4 billion.

Ocwen specializes in servicing subprime mortgage loans, which were generally made to borrowers who didn't qualify under the underwriting guidelines of Fannie Mae ( FNMA) and Freddie Mac ( FMCC). The company obtains servicing rights by purchasing them from the owners of the mortgage pools and also by being contracted as a servicer. With continuing reports of weakening home prices, Ocwen may be seeing even more opportunities to pick up distressed servicing portfolios on the cheap.

Ocwen reported first-quarter net income of $22.1 million, or 21 cents a share, increasing from $20.9 million, or 20 cents a share, in the first quarter of 2010. The first-quarter results included $11.9 million in costs related to the $162.5 million partial prepayment of a senior secured term loan. That loan's remaining balance was $26.3 million as of March 31.

Excluding the prepayment costs "and a $0.9 million reduction in litigation accruals," Ocwen's first-quarter net income would have been $29.1 million, or 27 cents a share.

CEO Ron Faris said the company achieved "a quarterly record volume of 24,502 modifications, up more than 22% over the fourth quarter of 2010, and a large reduction in non-performing loans."

Ocwen's shares closed at $11.82 Thursday, returning 24% year-to-date. The shares trade for 9 times the consensus 2012 earnings estimate of $1.28 a share, among analysts polled by FactSet.

After the first-quarter earnings announcement in May, KBW analyst Bose George reiterated his "outperform" or "buy" rating for Ocwen's shares with a target price of $13.00, and increased his 2011 earnings estimate to $1.27 a share from $1.19. George estimates Ocwen will earn $1.44 a share in 2012.

After a "a solid quarter from an operating basis," George said the company remained "well positioned." Regarding the potential for further acquisitions, George said that Ocwen was "very under-levered so it should be able to fund meaningful mortgage servicing rights acquisitions without raising capital."

PiperJaffray analyst Robert Napoli is even more enthusiastic about Ocwen, with an "overweight" or "buy" rating and a price target of $16, saying in May that the company was "a very strong bidder for mortgage servicing rights due to its low-cost operating model and well above average ability to keep loans current and manage advances, and its access to capital."

Napoli said Ocwen was "well positioned to win the Goldman Sachs (Litton Loan) servicing portfolio, which we believe is roughly $45 billion," and added this important tidbit for investors: "Each $10 billion in additional servicing could add about $0.18 to our EPS estimates on a run-rate basis."

Goldman Sachs declined to comment for this article. A Call to Ocwen for comment was not immediately returned.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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