Compass Point Downgrades Home Loan Servicing (HLSS) to Neutral

Compass Point downgraded Home Loan Servicing (NASDAQ: HLSS) from Buy to Neutral with a price target of $18.00.

Analyst Jason Stewart comments, "We lower our rating on HLSS to Neutral from Buy and reduce our price target to $18. Our revised view is based on the increased risk to HLSS's revenue and assets tied to the Ocwen (OCN - N, $29 PT, Barker) servicing relationship. Yesterday afternoon, Moody's downgraded OCN's primary servicer quality (SQ) assessment to SQ3 from SQ3+. This downgrade follows an August 28, 2014 downgrade from SQ2-. While this last downgrade does not yet trigger the need for immediate action on the part of HLSS, the quick successive downgrades by Moody's suggest there may be more downside to OCN's primary servicer ratings. A downgrade from Moody's below SQ3 would trigger a termination event between OCN and HLSS. In such a scenario, the contract would likely be re-negotiated without a substantive negative impact to HLSS; however, the additional risk and uncertainty have caused us to re-evaluate our valuation methodology for HLSS. Real asset risk for HLSS should arise only if OCN is terminated as a primary servicer, which remains unlikely but is increasing in odds as the regulatory risk and ratings downgrades intensify. Historically, HLSS has been relatively immune from OCN's regulatory risk and for good reason. HLSS does not touch the consumer as it is simply a capital markets vehicle. The last five "Lawsky events" have produced a cumulative one day loss of -1.7%. This time, however, we see the increased uncertainty persisting. Longer term, we remain constructive on the HLSS story as the balance sheet is diversifying and cash flow profile remains stable in a variety of rate environments. Given the risk regulatory scrutiny at OCN is having on HLSS, we are moving to the sidelines and expect long term buyers will see a lower entry point for the stock."

For an analyst ratings summary and ratings history on Home Loan Servicing click here. For more ratings news on Home Loan Servicing click here.

Shares of Home Loan Servicing closed at $18.90 yesterday.

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