In response to accusations from institutional investors against Ocwen Financial  of "failure to perform," investment advisor LL Funds has come to the defense of the embattled mortgage servicer in the form of an independent 26-page white paper titled "In Defense of Ocwen Servicing " released Friday.
Atlanta-based Ocwen, one of the largest non-bank mortgage servicers in the country, has had a tumultuous year in 2014  that capped with a loss of more than half a billion dollars for Q4. Then in January, a group of institutional investors that included Black Rock, MetLife, and Pimco, sent a "failure to perform" notice to trustees of Ocwen-serviced deals accusing Ocwen of failing to collect on $82 billion worth of home loans.
Philadelphia-based LL Funds, which manages more than $1.5 billion market value non-Agency residential mortgage-backed securities, said in the white paper released Friday that the institutional investors' claims of non-performance on the part of Ocwen, made through law firm Gibbs and Bruns, are flawed. LL Funds wrote that when certain factors, namely the fact that Ocwen services a much larger portion of subprime borrowers than other servicers and Ocwen has given marginal borrowers a second and third chance, that "Ocwen's performance is better than other servicers."
On Gibbs and Bruns' claim that "Ocwen's imprudent modification practices result in material higher re-default and re-modification rates when fairly compared to modifications performed by other servicers," LL Funds says this comparison is "anything but 'fair.'" The fact that Ocwen services a larger number of subprime borrowers, who represent the weakest tier of borrowers in the credit spectrum, are expected to have higher default rates by virtue of their weak credit, which has the potential to skew Ocwen's numbers.
In the paper, LL Funds estimates that the loss, past and future, associated with actual loan modifcations undertaken by Ocwen to be between 42 and 53 percent, a "robust" result, meaning "there is no reasonable estimate of modification losses that comes close to the estimated losses that would have been realized had Ocwen pursued liquidation rather than modification." LL Funds went on to say they believe Ocwen deserves credit for its aggressive modification practices and the bondholders are better off as a result.
"Such legal action (the "failure to perform" notice sent to Ocwen trustees) can harm Ocwen significantly, and perhaps even lead to changes in who ultimately services these RMBS deals," LL Funds wrote. "We believe a servicing transfer away from Ocwen, in the unlikely event that it were to occur, would harm both bondholders and homeowners."