BlueMountain Says Ocwen Affiliate HLSS Defaulted on Debt

BlueMountain Capital Management, the $20 billion investment firm, said “misconduct” by Ocwen Financial Corp. triggered a default in securities issued by an affiliate of the mortgage servicer.

The types of bonds that BlueMountain said it owned, backed by payments related to delinquent home loans, totaled about $1.2 billion when they were sold in 2012 and 2013 by Home Loan Servicing Solutions LLC, according to data compiled by Bloomberg. The notes and similar securities were issued by a trust that last year held $5.3 billion of the receivables, according to a presentation in September by the Home Loan Servicing, which buys servicing rights from Ocwen and hires it to oversee the loans.

BlueMountain also “has directed the trustees of certain” mortgage bonds to “investigate and/or take action with respect to Ocwen,” according to its statement Friday.

Shares of Ocwen slid 17 percent to $6.35, bringing their loss for the past 12 months to 87 percent. Home Loan Servicing fell 10 percent to $13.76, down 37 percent over the past year. The stocks have plunged amid investigations into Ocwen and related companies by states including New York and California and federal regulators. BlueMountain said in the statement that it also owns the mortgage-backed securities and is betting against the shares of the two companies, along with holding the Home Loan Servicing debt, known as servicing advance bonds.

‘Servicing Failures’

Ocwen settled with New York last month after the state criticized it for funneling foreclosure-related business to affiliated entities and citing examples where the company backdated letters to borrowers that made it more difficult for the homeowners to modify their mortgages. California has said it’s seeking to suspend Ocwen after the company failed to provide information needed to assess its compliance with a state law.

“These (and other) agencies’ findings and enforcement actions demonstrate Ocwen’s systemic, long-standing and continuing servicing failures and disregard of applicable and analogous laws,” Erik Haas, a lawyer for BlueMountain at Patterson Belknap Webb & Tyler LLP, said in a letter to the trustee attached to the statement.

The deals’ terms require Ocwen to comply with applicable laws and operate in line with standards being used by “prudent” servicers, he said.

Payment Trigger

BlueMountain said that the default triggers a need for the debt to be paid down more quickly and for its interest rate to be increased by 3 percentage points. The debt is backed by money owed to Home Loan Servicing for advances made in connection to delinquent loans, such as cash sent to bondholders to cover borrowers’ missed payments or used to pay property taxes. The funds get recouped from proceeds of foreclosures or when homeowners catch up.

James Lauter, Home Loan Servicing’s chief financial officer, didn’t return telephone messages seeking comment. David Millar, a spokesman for Ocwen at Sard Verbinnen & Co., declined to comment.

Home Loan Servicing paid off $600 million of securities tied to the advance trust this month after expanding a credit line with banks, according to a Jan. 16 report by Barclays Plc analyst Dennis Lee. It has $375 million of asset-backed securities issued by the trust due in May and an additional $450 million with an expected maturity date in October, he said.

‘Liquidity Pressures’

“The company may still face liquidity pressures later this year, if it is unable to raise additional funding through the ABS market or other financing channels over the next several months,” Lee wrote.

Keefe Bruyette & Woods Inc. analysts led by Bose George wrote in a report Friday that “there are likely to be strong legal defenses to the argument being put forward by BlueMountain.”

Trustees for numerous mortgage bonds with loans overseen by Ocwen told investors from October through December that default events had occurred as a result of downgrades to its servicer ratings, and in some cases asked holders of the debt whether to fire the company, according to Nomura Holdings Plc analysts.

“In the current environment, we do not expect that bondholders have a strong incentive to transfer servicing based on” the notices, “as it is not obvious that a group of investors can agree that there is a better servicing alternative,” Nomura analysts including Paul Nikodem wrote in a Jan. 9 report. “This calculation could change if Ocwen’s financial situation worsens meaningfully.”

William Erbey, who founded Ocwen and Home Loan Servicing, agreed to step down from his positions at Ocwen and related companies in its settlement with New York regulators. Ocwen recently turned over the information requested by California and expects that its “ongoing cooperation will result in a satisfactory outcome for all parties,” the Atlanta-based firm said in a Jan. 13 statement.