Ocwen Steps To The Plate

The US real estate market is gaining some much needed momentum, and that’s great news for homeowners, real estate agents, and yes, stock market investors.

According to the National Association of Realtors, existing home sales were 10.7 percent higher in September than a year earlier. In addition, the average US home value was up 10 percent on a year-to-year basis, the 10th consecutive month of double-digit home price increases, the NAR reports.

“Affordability has fallen to a five-year low as home price increases easily outpaced income growth,” says Lawrence Yun, chief economist at the NAR. “Expected rising mortgage interest rates will further lower affordability in upcoming months.”

Investors are pouring into the real estate market, too.

According to RealtyTrac.com, investor-only property purchases have totaled 950,000 since the end of 2011, with a value of over $1 trillion.

More than 78 percent of those purchases were “clean-up buys” of either underwater homes or foreclosed homes that help the housing market to recover. With fewer distressed properties on the market, the mortgage market is dealing with fewer troubled homeowners, and as a result is seeing the greatest activity since 2008, the launching point of the Great Recession.

For stock investors, a healthier mortgage market means more robust profits for select companies ideally positioned in the real estate sector.

Here’s one vote for Ocwen (NYSE: OCN), an Atlanta-based mortgage loan servicer.

Ocwen is trading at $53 and offers all the signs of a show horse ready to jump out of the gate and add another 20 percent to 25 percent of stock appreciation in the next six months.

Some of those reasons are already listed above, as a healthier mortgage market should boost Ocwen, which saw revenues double in the third quarter of 2013, to $531 million, from $232 million ! one year earlier.

Ocwen did see some financial headwinds in the last quarter, but they should be temporary. Most of the trouble centered around the company’s $2.5 billion purchase of servicing rights (totaling $78 billion) from OneWest Bank, and its recent purchase of the assets of Homeward Residential and Residential Capital, which weighed against the bottom line.

Ocwen chief executive officer Bill Erbey, speaking at an October 31 earnings call to analysts and reporters, said third quarter results were negatively impacted by the purchases, but said the firm would rebound going forward, primarily due to the stable transition on the OneWest and ResCap purchases, and to a burgeoning mortgage market.

“Revenue was suppressed due to delays, that have now been resolved, in boarding the OneWest transaction,” he said. “[Q3 profit margins were] below historical levels due to the timing involved in transitioning ResCap and OneWest. We feel very comfortable that once we have completed the ResCap transition to the Ocwen technology platform, we will return to our historical margins.”

Recently, those margins had been off the charts. Ocwen has doubled its revenue inflows thanks to a mortgage market once again flexing its muscles, and also due to deals that add $200 billion in mortgage servicing rights to Ocwen’s portfolio.

Analysts point to increased servicing and sub-servicing fees, in addition to revenues on loans held for sale and other income, all positive factors that should remain stable over the next few quarters. Another “under the radar” profit center is loan modifications, where Ocwen wrote-up 32,051 loan modifications, up 14 percent on a year-to-year basis.

All in all, it’s an attractive package that’s raising some well-financed eyebrows. John Armitage, chief at London-based Egerton Capital, a London-based hedge fund with $11 billion in assets, chose Ocwen as one of his “highlight” stocks over t! he past m! onth.

Armitage says that Ocwen is ideally positioned in a stronger mortgage market, and is picking up contract after contract to service mortgage loans. All that contract activity should grow more abundant as the market continues to pick up momentum.

Then there’s Oppenheimer equity analyst Ben Chittenden, who agrees with company management that the less-than-stellar Q3 earnings were merely “timing related”.

“Although the results were somewhat disappointing from a quarterly perspective, we don’t think that it changes (Ocwen’s) long-term story and is more of a timing issue,” he says. Chittenden advises investors to use any share pricing softness as a sign to snap up shares of Ocwen.

Overall, the Ocwen story seems like a short-term slowdown against the backdrop of a long-term growth story, largely tied to a once-again vibrant mortgage market.

Historically, that’s a buying opportunity for opportunity-minded investors. With banks and lenders increasing their mortgage activity, Ocwen looks like a nice addition to your holiday stocking this year.

Brian O’Connell is an investment analyst at Investing Daily. He has appeared as an expert financial commentator on CNN, NPR, Fox News, Bloomberg, CNBC, C-Span, CBS Radio, and many other media broadcast outlets.