Remember the new in Ocwen Financial Corporation (NYSE: OCN) a few weeks back? Well, the U.S. CFPB sued Ocwen Financial over errors in mortgage servicing under two weeks ago, causing the stock to lose over 50% of its value. However, the stock rebounded after it announced its filing of two related motions that sought an early court ruling that the Consumer Financial Protection Bureau (CFPB) was unconstitutional. Therefore, that enforcement action against Ocwen should be thrown out.
Today, OCN and New Residential Investment Corporation (NYSE: NRZ) announced that they were currently working towards an agreement that could solidify, as well as enhance their business relationship. This prompted OCN to soar over 35%, and the stock was up over 6% during the after hours, at one point. Take a look at OCN on the hourly chart:
Let’s take a look at the catalyst.
OCN and NRZ Definitive Agreement
Ocwen Financial stated that it would sell $425M of assets in order to help buoy its finances. Now, New Residential Corporation would purchase mortgage servicing rights from OCN. The proposed definitive agreement relates to around $117B in mortgage servicing rights, and those would convert NRZ’s existing rights to the mortgage service rights to full-owner mortgage servicing rights. This conversion would be completed once the the companies sign the the definitive agreement.
More specifically, the mortgage servicing rights would move to a new subservicing agreement, which would have a life of five years. Again, this new agreement would convert the previous arrangement into a more traditional subservicing arrangement, involving upfront payments of $425M as mortgage servicing rights. Not only that, but New Residential Investment Corporation would make an equity investment in OCN, and become a 4.9% owner.
According to Ocwen Financial President and Chief Executive Officer Ron Faris, “We are excited about the prospect of this new arrangement and expect that this agreement will further strengthen what I view as an already strong partnership by eliminating some of the uncertainties inherent in the existing arrangement, which will be good for shareholders of both companies.”
With this new equity investment and purchase of a piece of its mortgage servicing rights, OCN could strengthen its financial position, prompting shares to pop. Now, if traders got into this a few weeks back for a mean reversion trade, it would’ve paid off quite well.
The news regarding OCN’s and NZR’s definitive agreement sent shares soaring today. This would help to strengthen the business relationship between the two companies, as well as the finances of OCN. Consequently, OCN was up significantly on the day, as the outlook on the company is less bleak.