As Rates Rise, Ocwen Will Thrive Again
By Gene G. Marcial
Ocwen Financial (OCN) is an odd duck: Unlike other financial stocks, it rises when interest rates go up and falls when rates decline. Ocwen is in the business of servicing subprime mortgage loans for real estate companies and mortgage providers for a fee based on a percentage of the loan value.
So its operating performance is inversely correlated to the refinancing index. In a period of stable or rising interest, Ocwen's margins are strong, as the incentive to refinance diminishes. But when interest rates fall--as they have in the past two years--Ocwen's income suffers as homeowners refinance in droves. Ocwen pays mortgage originators for loan-servicing rights. Most analysts are negative on Ocwen stock. But Vince Carino of Brookhaven Capital Management, who has accumulated a sizable stake, notes that interest rates are ready to rise with the economic recovery.
"As the yield curve flattens, Ocwen's business will pick up again--and so will its stock," he says. Carino projects earnings of 25 cents to 30 cents a share in 2003 and 80 cents in 2004--after a loss in 2002. He expects the stock, now at 2.71, to hit its old high of 11 in a year.
Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.