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Ocwen's deal for PHH comes with discount for assumed restructuring losses

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Ocwen's deal for PHH comes with discount for assumed restructuring losses

The restructuring plans for PHH Corp. have seen mixed results, and Ocwen Financial Corp.'s offer to purchase is at a 35% discount to GAAP book value as of Dec. 31, 2017, because the company assumes PHH will absorb losses as its restructuring continues.

The PHH restructuring is intended to focus the company's business around its core strengths of mortgage subservicing and portfolio retention, PHH President and CEO Robert Crowl said during a conference call. The company is ahead of schedule toward its goal of reducing its infrastructure costs. While the company has developed a robust pipeline of prospects for business development, it has not been able to win significant new business and has fallen behind its target for subservicing units, Crowl said.

Two of its existing clients informed the company that they will take some or all of their business off the PHH platform between the second quarter of 2018 to the first quarter of 2019, he said. Further pressure comes from federal tax reform putting a dent in PHH's deferred tax assets.

"We believe the proposed transaction represents an attractive opportunity to mitigate the risks and uncertainties associated with the business transformation efforts," Crowl said.

Both companies have been operating with the threat of regulatory overhang stemming from the way they serviced home loans following the financial crisis. PHH and a subsidiary agreed to pay $45 million to settle misconduct claims in a number of states and the District of Columbia related to activities from 2009 and 2012. The company successfully challenged a fine levied against it following a Consumer Financial Protection Bureau's investigation into alleged misconduct. The company may still yet appeal a decision on PHH's challenge to the CFPB's structure.

Ocwen continues to settle with states who accused the company of failing to comply with loan servicing regulations, and has reached agreements with 28 states and the District of Columbia on similar terms, President and CEO Ronald Faris said. Settlements with two remaining states might not be worked out on the same terms, he cautioned.

The PHH deal offers Ocwen the chance to scale up its operations, which has become increasingly necessary to service various types of loans and to absorb spikes in delinquencies, he said.

"Consolidation under these circumstances is not only inevitable, it is necessary in my opinion in order to restore much needed economies of scale, capacity and higher-touch servicing capabilities," Faris said during a separate conference call.

During the fourth quarter of 2017, the company made a strategic shift back toward its core businesses of serving and subservicing, portfolio recapture and its reverse mortgage lending, Faris said.