Ocwen Financial Corp. (OCN) won a $3 billion auction for Residential Capital LLC’s loan-servicing unit, beating Nationstar Mortgage Holdings Inc. (NSM), to become at least the fifth-largest U.S. mortgage servicer.
Ocwen will become the biggest non-bank in the mortgage- servicing industry, a business that becomes more profitable with greater scale, according to Wilbur Ross, who sold his Homeward Residential Holdings Inc. to Ocwen this month. He paid $750 million in cash and convertible preferred stock and has a continuing stake in the firm. Ocwen teamed up for the ResCap bid with Walter Investment Management Corp. (WAC)
“The ResCap Board of Directors has given its preliminarily approval of the bid by the team of Ocwen and Walter Investment for $3 billion as the highest and best bid,” said Susan Fitzpatrick, ResCap’s communications director, in a statement.
Ocwen rose as much as 7.5 percent to $38.91 on news of the bid and fell 35 cents to $35.85 as of 1:10 p.m. in New York Stock Exchange trading. Nationstar fell as much as 15 percent and was down $5.44 to $29.42 at 1:10.
The bidders were betting they can profit as banks retreat from the $9.6 trillion mortgage servicing industry, a business that used to generate monthly revenue of 0.25 percent to 0.4 percent of loan balances. Federal and state probes of foreclosure practices led to new regulations that are driving up costs, and a pending change in bank capital requirements also made the business less desirable.
Nationstar’s head of investor relations Marshall Murphy didn’t return a call for comment. Katarina Wenk-Bodenmiller, an outside spokeswoman for Ocwen at Sommerfield Communications Inc., didn’t immediately have a statement from the company.
Ally Financial Inc. (ALLY), a Detroit-based auto lender majority owned by U.S. taxpayers, allowed ResCap to file for bankruptcy in May to distance itself from the mortgage lenders’ losses and help repay its 2008 bailout following the U.S. housing crash and subsequent credit crisis. Ally was previously owned by General Motors Corp.
ResCap, coupled with Ally’s much smaller business, was the fifth-largest mortgage servicer in the U.S. in the second quarter, handling the billing and collections on about $329 billion of mortgages, according to Inside Mortgage Finance, a trade journal. ResCap, once among the largest originators, reduced its assets to $15.7 billion in the first quarter from more than $130 billion in 2006.
Mortgage liabilities at ResCap from faulty home loans made before the housing bubble burst helped derail Ally’s initial public offering. A successful sale of the unit would allow Ally Chief Executive Officer Michael Carpenter to separate the auto lender from its money-losing unit.
Ocwen has also bolstered its business, including the purchase of WL Ross & Co.’s Homeward, which services about 422,000 mortgages with an unpaid principal balance exceeding $77 billion, according to a statement from Ocwen.
Its shares had gained 25 percent since the announcement of the Homeward acquisition through yesterday.
Ocwen is currently the largest independent servicer with $5.4 billion in assets. Nationstar, based in Lewisville, Texas, has $4.9 billion. Revenue at Ocwen rose to $211 million in the second quarter, about double the year earlier, as it bought servicing rights from JPMorgan Chase & Co. and sub-contracted with other institutions to handle their most troubled loans.
Before completing the purchase, the winning bidder must overcome objections from ResCap customers, including its two biggest, Fannie Mae and Freddie Mac. The government-controlled companies have demanded in court filings that the winner take on the legal liability that ResCap currently faces for loans it originated.
ResCap’s $2.1 billion of 9.625 percent, third-lien securities, which represent almost two-thirds of its outstanding bonds and fell to as low as 57 cents on the dollar last year, have traded above face value for a month. They rose 1.25 cents to 104 cents today, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Nationstar’s $2.3 billion stalking horse bid for the right to service mortgages owned by Fannie Mae, Freddie Mac and others, was based on not accepting any potential legal liabilities for the loans, according to court documents.
Once the auction is over, New York-based ResCap and the winner will have until Nov. 19 to resolve the dispute with the mortgage owners, which are demanding at least $394 million in payments in addition to the liability guarantees. Should they fail, the fight would be decided by U.S. Bankruptcy Judge Martin Glenn in Manhattan, who is overseeing ResCap’s case.
Berkshire Hathaway is the stalking horse bidder for a separate auction of ResCap’s mortgage portfolio, which will follow the servicing auction.
The case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).