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Buy Ocwen After Selloff: KBW

Tickers in this article: OCN

NEW YORK ( TheStreet) -- This time around, a regulatory order is good news.

KBW analyst Bose George on Thursday upgraded Ocwen Financial (OCN) to a "Buy" rating, with a $40 price target, after the shares declined 2.5% on Wednesday to close at $34.41.

Wednesday's decline followed a Wall Street Journal report saying that regulatory approval of Ocwen's pending acquisitions of mortgage servicer Homeward Residential Holdings and a majority stake in the mortgage servicing and origination assets of Residential Capital LLC -- held by Ally Financial -- could be delayed because New York superintendent of financial services Benjamin Lawsky was demanding that Ocwen appoint a monitor to oversee the company's mortgage servicing operations for two years.

Later on Wednesday, Ocwen's loan servicing unit did just that, entering into a consent order -- the euphemistic term for "cease and desist order" -- with the New York State Department of Financial Services, agreeing to appoint an independent monitor within 20 days "who will report directly to the Department to conduct a comprehensive review" of Ocwen's loan servicing operations in New York, representing about 40,000 loans, according to George.

As a specialist in servicing distressed and subprime residential mortgage service loans, Ocwen has been in the sweet spot in the aftermath of the real estate collapse in 2008. The company has greatly expanded its operations over the past two years, with its acquisitions of Litton Loan Servicing LP in September 2011, along with the acquisition of SCI Services and the purchase of mortgage servicing rights from JPMorgan Chase (JPM) this year.

The state regulators said in Wednesday's order that a June examination of Ocwen indicated "non-compliance by Ocwen" of a previous regulatory agreement, including the failure to send 90-day notices in "some instances" before commencing foreclosure actions, and commencing foreclosure actions without proper documentation, along with other violations.

The compliance monitor will serve for 24 months, to "identify needed corrective measures to address identified weaknesses and deficiencies in Ocwen's servicing practices, make recommendations to the Superintendent, and oversee their implementation as approved by the Superintendent."

George said "We do not expect the consent order to delay the closing of either acquisition," and that "while OCN is required to pay for costs associated with the monitor, we expect these costs to be moderate. Additionally, we do not expect this to prevent future mortgage servicing rights acquisitions."

While KBW didn't raise its earnings estimates or price target for the shares, George upgraded Ocwen because of "the upside to our $40 price target." The analyst estimates that Ocwen will earn $4.66 a share in 2013, with EPS increasing to $5.32 in 2014.

Ocwen's shares were up a whopping 138% year-to-date, through Wednesday's close, however, the shares were still trading for a relatively low 7.7 times the consensus 2013 EPS estimate of $4.46, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $5.02.