Ocwen Rushes In Where Wall Street Fears to Tread

NEW YORK ( TheStreet) -- Just as investment banks like Morgan Stanley ( MS) and Goldman Sachs ( GS) are ridding themselves of the subprime mortgage business, Ocwen Financial ( OCN) is jumping in head first.

It's a risky strategy for Atlanta-based Ocwen: Wringing a profit out of distressed subprime customers that nearly felled some of the largest New York banks.

On Monday, Ocwen said it would buy Morgan Stanley unit Saxon Mortgage Services for $ 59.3 million plus about $1.4 billion for servicing advance receivables.

It marked the third such acquisition for Ocwen in the last 18 months. In August, the firm acquired Litton Loan Servicing from Goldman Sachs for $263.7 million. In May 2010, it acquired a mortgage servicer from Barclays ( BCS) for about $1.3 billion.

Ocwen's residential servicing portfolio stood at $106.1 billion in unpaid balances as of September 30, boosted by $38.6 billion in unpaid principal balances acquired through the Litton deal.

The latest acquisition of Saxon, expected to close in the first quarter of 2012, would provide Ocwen $26.6 billion in unpaid principal balances servicing rights, $10.9 billion of which Ocwen already subservices.

"We believe mortgage servicing portfolio (MSP) growth opportunities for non-prime servicers have significantly accelerated as some large banks effectively acknowledged they are unable to service high-risk loans in a cost effective and compliant manner," Piper Jaffrey analyst Michael Grondahl wrote in a report ahead of the results. "We believe there is approximately $1.4 trillion in distressed mortgage assets in the US, all of which need servicing, and potentially up for grabs. As such, OCN is in a unique position to benefit as a proven servicer of subprime mortgages."

Bankrupt Lehman Brothers won a court approval last year to sell or liquidate its Aurora Bank FSB unit, which includes a mortgage servicing arm, according to Bloomberg News. That could be the next tasty subprime morsel for Ocwen.

Grondahl believes that Ocwen's history of efficiently integrating prior acquisitions makes it positioned for "sustained growth and profitability over the next 3-5 years."

Shares of Ocwen have risen 55% over the past one year and enjoys a bullish rating from all five analysts covering the stock, according to Bloomberg data.

The company said on Monday that it swung to profit in the third quarter , reporting a net income of $20.28 million or 19 cents per share compared to a year-ago loss of $8.8 million or 9 cents per share. Revenue for the third quarter was $122.5 million, up 28% compared to the third quarter of 2010.

--Written by Shanthi Bharatwaj in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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