Ocwen Financial Corp. is ramping up a new profit-making venture that involves purchasing single-family loans out of old private-label residential mortgage-backed securities.
As private-label RMBS mature and the unpaid principal balance drops below 10%, it becomes uneconomical to service the remaining pool of loans. Under the servicing and pooling agreements, the owner of the "cleanup rights" can purchase the loans.
The Atlanta-based servicing company owns the cleanup call rights of "somewhere between $150 billion and $200 billion" RMBS, according to Ocwen chairman William Erbey.
"We will exercise our strong servicing capabilities by exercising cleanup call rights or investing in existing private-label [RMBS] tranches that we service," Erbey told investors and analysts.
"For competitive reasons," the chairman indicated that he didn't want to provide a lot of detail about the cleanup initiative. However, Owen expects to earn a 25% return on equity.
"The opportunity results from the arbitrage of the underlying loans and REO being worth more than the securities. In other words, the whole is worth less than the sum of the parts," Erbey said.
The Ocwen chairman noted there should be a steady stream of maturing PLS over the next several years. "We expect to be in the market purchasing securities in the next few months."