[Cayman’s] Home Loan’s Goal: Own Low-Risk Assets, Pay Dividend
By Marie Beerens, For Investor’s Business Daily
One of the keys to business success is creating win-win situations. Such is the case for Home Loan Servicing Solutions, which was started by key executives of Ocwen Financial a little over a year ago, Ocwen itself and investors, all of whom benefit from the created structure.
Cayman Islands-based Home Loan (HLSS) buys mortgage servicing rights, or MSRs, as well as associated equity in servicing advances from Ocwen (OCN). It retains Ocwen as a subservicer to whom it pays part of the fees back. Meanwhile, it takes on the responsibility for financing servicing advances as well as assumes the risk of increased prepayments.
Mortgage servicing fees are usually paid to collect monthly mortgage payments, set-aside taxes and insurance premiums in escrow and forward interest and principal to the mortgage lender. MSRs are rights to those fees. Advances are paid in case of delinquencies where the contracted party will advance the unpaid principal and interest to the lender.
No Credit Risk
“Our mission is to own very high-quality assets that have no credit risk and very limited mark-to-market risk and to (put) these assets in a vehicle that pays an attractive dividend,” said John Van Vlack, Home Loan’s president. “So, we have some specific assets that we’re buying from Ocwen.”
Home Loan buys assets that relate to the nonagency servicing portfolio from Ocwen. This portfolio holds old subprime and Alt-A mortgages that were generated in the period 2000-2008, explains Van Vlack. “So we own servicing rights and we find these servicing rights and the associated advances to be a very attractive asset because there’s no correlation between interest rates and prepayments.”
The company services these loans because the prepayments are very steady. It earns 50 basis points, or 0.5%, in servicing fees. But since it retains Ocwen as a subservicer, which effectively services the loans, the fee is split approximately in half between the two. In this kind of structure, Home Loan is not exposed to any mortgage credit losses.
“They own an asset class in which they get the most senior cash flows off of the servicing and their primary risk factor is the trends in servicing advances, which is a relatively predictable, stable asset,” said Henry Coffey, analyst and Sterne, Agee & Leach. “And so from those very senior cash flows you’re getting a dividend of 7%.”
The company has been upping the dividend gradually and announced a 14-cents-a-share payout for the months of April, May and June. This is equivalent to a disbursement of more than 90% of its net earnings, something that can be compared to what REITs, or real estate investment trusts, pay.
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