Nearly four years after turning in its thrift charter, Ocwen Financial Corp. has reconsidered the merits of federal regulation and has applied to convert to a bank holding company and buy a tiny Texas bank.

With little fanfare, the $2.3 billion-asset Ocwen submitted the application in mid-November to the Federal Reserve Board.

Along with bank holding company status, it seeks to buy the $15.1 million-asset Kent County State Bank in Jayton, Tex.

Approval for either request could give Ocwen, of West Palm Beach, Fla., access to funds being made available by the Treasury Department. A variety of companies including GMAC and Protective Life Corp. applied to become bank holding companies last month. Goldman Sachs Group, Morgan Stanley, and American Express Co. all won speedy approval of their applications for such conversions in the past two months.

Liquidity is certainly an issue for Ocwen, whose main business is servicing subprime mortgages. Like other big servicers, it has had to advance hundreds of millions of dollars to investors to cover payments missed by borrowers.

Paul Koches, Ocwen's general counsel, would not say Tuesday whether it has applied, or intends to apply, for a federal equity infusion. He would say only that the company wants "to diversify sources of financing of our business and to make our overall financing more cost-effective."

Joseph Lynyak, a partner at Venable, who negotiated a supervisory agreement between Ocwen and the Office of Thrift Supervision in 2004, identified another motivation for the servicer to return to the federal fold.

Ocwen "in hindsight may be recognizing the value of a national regulator" rather than multiple state regulators, he said.

The company could achieve "economies of scale" and cut several million in compliance costs a year with a federal charter, Lynyak said.

Peter Wallison, a fellow at the American Enterprise Institute, said the underlying reason for Ocwen - not to mention numerous investment banks and insurance companies - to seek bank holding company status is that they believe federal regulation makes them more stable in investors' eyes.

"Companies believe Fed regulation and access to the discount window might make them safer and sounder," said Wallison, who was the general counsel of the Treasury Department during the Reagan administration.

William Erbey, Ocwen's chairman and chief executive, said on a conference call last month that it is "working hard on several different structures and sources of financing." In the meantime, Erbey said, he is running the business "assuming that we will receive no new financing and that no existing financing lines will be renewed." The company has "sufficient liquidity" to sustain its current business, he said. As of Sept. 30, Ocwen had $162.3 million in cash.

Like the thrift in Fort Lee, N.J., that Ocwen owned from 1988 to 2005, Kent County State Bank has just one branch. By the time Ocwen decided to sell off the thrift's deposits, the company's relationship with the OTS looked rocky. For example, the regulator took issue with Ocwen's characterization of the 2004 supervisory agreement, which governed its subprime servicing business, as mostly a formalization of existing practices. At the time, Ocwen had been fighting several borrower lawsuits that had accused the company of unfair servicing practices.

But recently, Ocwen has been one of the few mortgage servicers to aggressively pursue loan modifications, particularly those reducing principal, which may be helpful with its pending bank application. (The comment period for the application ends on Dec. 18.)

Some analysts have said Ocwen has ulterior motives for those borrower-friendly moves.

Rod Dubitsky, the head of Credit Suisse's ABS research division, wrote in an October report that Ocwen was responsible for 70% of the industry's loan modifications that reduced principal. He attributed the company's modification efforts to its need "to alleviate servicing advance expenses."

John Grist, the president of Commercial State Bank in Andrews, Tex., which owns Kent County State Bank, said the Dallas private-equity firm Lone Star Funds had applied to buy the bank but that the Texas Department of Banking and Federal Deposit Insurance Corp. "had some apparent concerns about the management they proposed," so Lone Star was unable to secure regulatory approval. Grist declined to state the bank's purchase price.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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