Ocwen Financial has found a new way to fund its rapid expansion in mortgage servicing: issuing notes tied to the fees that it earns from managing government-backed loans.
The $123.5 million of notes do not amortize, making only interest payments for 14 years. Monthly payments will be calculated as 0.21% of the principal balance of a pool of mortgages, according to a person familiar with the transaction. The initial balance of this pool is approximately $11.8 billion. So if some of the mortgages are paid off because they mature or because the home is sold or refinanced, reducing the servicing fees Ocwen earns, investors will receive a commensurately smaller amount of interest.
Based upon expected prepayments the cash flows from interest payments would produce a 10% yield, according to the person familiar with the transaction.
Upon maturity in February 2028, Ocwen will return investors’ principal, but the amount will be reduced commensurate with any reduction in the principal balance of the mortgage pool at that time.
Barclays and Morgan Stanley are joint lead managers on the deal.