Ocwen shares fall on Wells Fargo deal reversal

Ocwen Financial (OCN) shares plunged Friday following formal cancellation of the mortgage-servicing giant's stalled deal to buy the servicing rights to a $39 billion Wells Fargo (WFC) portfolio of home loans.

The transaction, on hold since February following concerns raised by a New York regulator, was terminated by mutual agreement of both firms, Ocwen said in a Thursday night financial filing.

Ocwen said it would recover its $25 million deal deposit from Wells Fargo.

Shares of Atlanta-based Ocwen closed down more than 8.9% at $20.60 in Friday trading. Wells Fargo shares closed down fractionally at $53.35.

Mortgage servicers handle the day-to-day payment processing and paperwork involved with home loans. Ocwen would have gained the right to service approximately 184,000 mortgages under the deal, expanding the firm amid a major industry shift in which large banks have sold billions of dollars in mortgage-servicing rights to non-bank companies.

But the deal, announced in January, was put on hold less than a month later in response to questions raised by Benjamin Lawsky, superintendent of the New York State Department of Financial Services. In public comments this year, Lawsky has questioned whether non-bank mortgage servicers are cutting their servicing costs so low that consumers face potential harm.

"One of the things we're concerned about as a regulator is whether these (mortgage-servicing rights) sales trigger a race to the bottom that puts homeowners at risk," Lawsky said in a speech at a Mortgage Bankers Association conference in May. "The cheaper a servicer can service those mortgages, the more profit it expects to earn from the fixed servicing fees, and the more it can offer the banks to buy these MSRs."

"The result is high prices paid for MSRs, together with incentives for cut-rate servicing by non-banks," added Lawsky.

The New York regulator declined to comment Friday on cancellation of the Ocwen-Wells Fargo deal. However, Lawsky has publicly raised other questions about Ocwen's business operations.

In October, the Department of Financial Services said a review found that Ocwen letters denying homeowners' requests for modifications of their mortgages had been backdated.

As a result, the 30-day period in which the borrowers could challenge the denials "had already elapsed by the time they received the backdated letter," Lawsky wrote in a notification to the firm.

Ocwen CEO Ronald Faris subsequently said the company would hire an independent firm to help investigate the problem and consult with the firm's community advisory council "on how we can best make things right."