Ocwen Financial Corp., one of the biggest U.S. mortgage servicers, rejected as "groundless" accusations by an investor group that the company’s practices created defaults on home-loan bonds backed by debt it oversees.

"Ocwen denies that there is any basis for a default under the trust agreements, and it will respond, at the appropriate time," according to a letter sent by Richard A. Jacobsen on behalf of Ocwen to Kathy Patrick of Gibbs & Bruns LLP, which represents the bondholders, and distributed by Globe Newswire.

Investors owning at least 25% of voting rights for 119 mortgage-backed securities deals with $82 billion of original balances sent a so-called notice of nonperformance to trustees for the bonds, saying that the company has failed to meet its requirements as a loan servicer while shifting the costs of regulatory-probe settlements to them, according to a statement released by Patrick on Jan. 23.

The move against Ocwen, which could lead to a lawsuit or loss of contracts managing the underlying loans, adds to the woes of a company that’s been under scrutiny by U.S. and state regulators for practices including mishandling foreclosures. The investors include Pacific Investment Management Co., BlackRock Inc. and MetLife Inc., according to a person with knowledge of the matter who asked not to be identified because the group hasn't been made public.

"While the future of this bondholder challenge is far from certain at this point, the roster is more than enough to warrant concern for Ocwen," Compass Point Research & Trading LLC analysts including Kevin Barker and Isaac Boltansky wrote today in a report.

Hedge-fund firm BlueMountain Capital Management said on Jan. 23 that "misconduct" by the servicer created a default on other securities used by an Ocwen affiliate for financing, and California reached a settlement with the company. The company said in a statement today that it "intends to vigorously defend itself against the allegations in the letter."

The "biggest threat to Ocwen operating as the company stands today" is the investor allegations, which could cause holders of its term loans to require immediate repayment of $1.3 billion of debt, according to the Compass Point analysts, who maintained their "neutral" rating on its shares and reduced their price target to $7.50 from $14.

Ocwen shares soared in pre-market trading after the company avoided a California suspension last week in a $2.5 million settlement of a dispute with the state. The stock traded at $8.19 as of 8:53 a.m. in New York, up from $6.35 on Jan. 23.

"It is important to realize that" the types of separate notices issued by BlueMountain and other bondholders "are not black and white events, not all parties are going to agree, and resolution could take months if not years," Henry Coffey Jr., an analyst with Sterne Agee & Leach Inc., wrote yesterday in a report.

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