|Berkshire Hathaway Chairman Warren Buffett. Berkshire's attorneys say Ally may be open to claims it wants a "quick and easy divorce through bankruptcy" from ResCap and its mortgage liabilities.|
NEW YORK ( TheStreet) -- Ocwen Financial ( OCN)'s CEO sees "plenty of room to participate" in bidding on ResCap's $2.6 billion mortgage origination and servicing business, though creditors including Berkshire Hathaway ( BRK-B) are seeking a broad-ranging investigation that could torpedo the sale process. ResCap, the long-struggling mortgage division of Ally Financial and the nation's fifth-largest mortgage servicer behind Wells Fargo ( WFC), Bank of America ( BAC), JPMorgan Chase ( JPM) and Citigroup ( C), filed for Chapter 11 bankruptcy protection May 14. Simultaneous with the filing, ResCap proposed to sell its "primary and most valuable assets," for a total of $3.9 billion, including a legacy loan portfolio valued at $1.3 billion in addition to the origination and servicing business.
ResCap selected Nationstar Mortgage Holdings ( NSM) as a "stalking horse bidder" for the origination and servicing assets, essentially meaning it is the bid backed by ResCap's management. Meanwhile, it proposes to sell the legacy loan portfolio back to Ally. But speaking to investors Tuesday at the KBW Mortgage Finance Conference in New York City, Ocwen CEO Ron Faris made it clear he hasn't given up on the origination and servicing assets, which include servicing rights for 2.4 million homes. "I don't think I've had one person talk to me in the last few days without asking about ResCap," Faris told the audience, comprised largely of institutional investors. "It looks like the deal on the table is at a level where other players-- Ocwen, potentially others--are likely to come in and try to participate in the process. We think there's plenty of room to participate in that process and we anticipate spending time on that. I think there's also a possibility, albeit just my own opinion--speculative--that somehow some way the portfolio gets broken up into pieces because it's such a large portfolio." Faris added he believes owners of the loans, including U.S. government agencies Fannie Mae ( FNMA.ON), Freddie Mac ( FMCC.OB), Ginnie Mae as well as other holders of residential mortgage backed securities containing loans serviced by ResCap "may feel more comfortable if the portfolio gets split up amongst a few different parties." A competing bid from Ocwen, which became the nation's largest subprime mortgage servicer after acquiring Litton Loan Servicing from Goldman Sachs ( GS) last year, should hardly come as a surprise. Ocwen has repeatedly been flagged as a potential bidder for ResCap's mortgage servicing portfolio, and Ocwen CFO John Britti said on the company's May 3 earnings call ResCap was "certainly that's something that's in our sights."
Still, news of a bid by Ocwen may not be entirely priced into shares of publicly-traded mortgage servicers. On Wednesday, Citigroup analysts downgraded Nationstar to "neutral" from "buy," arguing "the stock could be vulnerable to a pull back on any negative headlines around the ResCap deal such as a competing bid or delays." On the subject of potential bidders, Citigroup's analysts wrote "we have not heard of any yet." Shares of Nationstar, majority owned by Fortress Investment Group ( FIG), fell by some 5% to a low of $18.80 in midday trading Wednesday and closed lower by 3.03% at $19.20 despite a broad market rally. In addition to Nationstar and Ocwen include Walter Investment Management ( WAC). Smaller dedicated players such as these are rapidly gaining market share as Bank of America, JPMorgan and Citigroup back out of the servicing business, according to data from trade publication Inside Mortgage Finance. Wells Fargo, on the other hand, continues to grow its mortgage servicing portfolio. Citigroup analysts estimate more than $4 trillion worth of credit challenged mortgages sitting on bank balance sheets that could be potentially be transferred to non-bank mortgage servicers as banks sell off troubled assets to address new capital rules aimed at strengthening their balance sheets. In a relatively small deal announced on Tuesday, Nationstar and Newcastle Investment Corp. acquired servicing rights on $10.4 billion worth of mortgages from Bank of America. "Some stronger banks may not sell any, while others will sell large amounts," Citigroup stated in an April 23 report on Nationstar. Notwithstanding the downgrade and the threat of competing bids, Citigroup analysts "put the odds of
Nationstar winning ResCap at 75% and would use any material downside as a buying opportunity," according to Wednesday's note. Unmentioned by Citigroup's report, however, and also not addressed by Ocwen Management on Tuesday, were requests by ResCap creditors, including Berkshire Hathaway, for an investigation into "dozens of transactions with Ally and its affiliates involving billions of dollars of asset transfers and intercompany financing," according to a court document filed by Berkshire's attorneys. Berkshire wants an independent examiner to look at the deals, which "may give rise to various potential claims that Ally and affiliates have harvested assets from ResCap and seek a quick and easy divorce through bankruptcy," according to a court filing by Berkshire attorneys. An official committee of unsecured creditors, meanwhile, wants subpoena power to conduct its own investigation. "Among the most significant" of the deals Berkshire wants investigated was Ally's January 2009 acquisition of ResCap's ownership stake in IB Finance Holding Company LLC, the direct holding company of Ally Bank (formerly known as GMAC Bank).
ResCap still faces billions in potential mortgage-related liabilities from the housing crisis, and Ally appears to hope putting the unit in bankruptcy will seal off the rest of the bank from those issues, according to a court filing by Berkshire's attorneys. The plan, according to the filing by Berkshire's counsel, "fits neatly into Ally's publicly-stated goal of separating itself, once and for all, from ResCap. Whether Ally's agenda also happens to be in the best interest of ResCap and its creditors is another question, one that should be a focus of a searching inquiry." Ally spokeswoman Gina Proia declined to comment on Berkshire's filing, but stated that "the request by ResCap's official unsecured creditors committee, as a general matter, is expected. Ally will, of course, cooperate with all reasonable information requests from the committee to expedite completion of their inquiry and confirmation of ResCap's plan of reorganization." For its part, ResCap hopes the U.S. government will throw its weight behind its proposed sale to Nationstar and Ally. "In structuring the sales, the debtors worked with a wide range of governmental constituencies, including (i) Fannie Mae, Freddie Mac, and Ginnie Mae; and (ii) the U.S. Treasury," ResCap states in a filing asking the court to approve the sale. "By any measure, the regulatory complexity, size, and nature of the sales are almost unprecedented, and the debtors are hopeful that they will continue to have the support of these governmental constituencies." Calls and email messages to representatives for Berkshire Hathaway, Ocwen, ResCap, and the unsecured creditors committee were not returned. A Nationstar spokesman declined to comment. -- Written by Dan Freed in New York. Follow this writer on Twitter.