Fitch Downgrades Ocwen Financial (OCN) to 'B-'; Outlook Negative

Fitch Ratings has downgraded the ratings of Ocwen Financial Corporation (OCN) and its wholly-owned primary operating subsidiary, Ocwen Loan Servicing, LLC (OLS) to 'B-' from 'B'. The downgrade follows yesterday's announcement of the company's settlement with the New York Department of Financial Services (NY DFS) and the accompanying departure of its Executive Chairman. The ratings have also been removed from Rating Watch Negative and assigned a Negative Rating Outlook. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS - ISSUER DEFAULT RATINGS, SECURED AND UNSECURED DEBT

The downgrade of the long-term Issuer Default Ratings (IDRs) reflects increased strategic uncertainty following the announced departure of the firm's Executive Chairman, combined with an expectation of increased earnings pressure as a result of heightened compliance standards.

The removal of the Rating Watch Negative reflects the decrease of near-term risks associated with potential outsized fines and/or loss of servicing contracts. In place of these near-term concerns, however, are longer-term challenges in terms of strategic direction, leadership and financial performance under a heightened operational and governance framework, which together support the assignment of a Negative Rating Outlook.

The terms of yesterday's settlement include both monetary and non-monetary provisions. The $150 million settlement, including a civil penalty of $100 million and restitution of $50 million will be largely covered by accruals made by the company for legal and regulatory matters during the third- and fourth-quarters of 2014, along with cash on-hand as of Sept. 30, 2014. Fitch calculates that leverage, as measured by total debt to tangible equity, was 3.69x on a stand-alone basis and 5.28x on a consolidated-affiliate basis, as of Sept. 30, 2014, which Fitch views to be consistent with the current rating category.

Beyond the immediate financial impact, however, Fitch expects that the costs to meet the heightened compliance and governance standards will create a drag on operating margins. In addition, without the ability to continue to utilize affiliate companies for certain activities, additional operating costs may fall to OCN to support.

Fitch views William Erbey's announced resignation from OCN and its related entities as a key driver for the downgrade and Negative Outlook, as his departure introduces strategic uncertainty with respect to OCN and its affiliates. Erbey will step down as an officer and director of OCN, as well as from the boards of OCN's related companies as of Jan. 16, 2015.

From a non-monetary perspective, OCN is expected to seek to strengthen its corporate governance and will agree to not share any common officers or employees with any related parties and will not share risk, internal audit or vendor oversight functions with any related party. Any OCN employee, officer, or director owning more than $200,000 equity in any related party must be recused from negotiating or voting to approve a transaction with the related party, if the transaction size exceeds $120,000 in revenue or expense.

Fitch believes that the appointment of an independent operations monitor for a minimum of two years to recommend and oversee the implementation of a more robust operational and corporate governance framework could stabilize OCN's governance profile. The monitor is expected to add two independent directors to OCN's board and consult with them to identify operational issues and to ensure that they are addressed. OCN may acquire mortgage servicing rights upon meeting certain benchmarks specified by the monitor related to its onboarding, including developing sufficient risk controls and a written plan to address potential risks and deficiencies in the onboarding process.

The downgrade of OLS' senior secured term loan to 'B-/RR4' from 'B/RR4' maintains the equalization of the senior secured term loan rating with the IDRs assigned to OCN and OLS and continues to reflect average recovery prospects in a stressed scenario based upon collateral coverage for the term loan. The term loan is secured by a first priority interest in all unencumbered assets of the company and a pledge of the capital stock of all subsidiaries.

The downgrade of OCN's senior unsecured notes to 'CC/RR6' from 'CCC/RR6' maintains the two notch differential between the senior unsecured notes and the IDR assigned to OCN and reflects the company's predominately secured funding profile and the modest level of unencumbered balance sheet assets available to support the unsecured noteholders in a stressed scenario.

RATING SENSITIVITIES - OCN IDR AND UNSECURED DEBT

The ratings could be further downgraded as a result of sustained strategic and management uncertainty or a materially modified strategic direction for the firm, if it proves to be adverse to creditors. Additional material fines and penalties, further restrictions on business activities, or termination of servicing duties could result in negative rating action, as could a material deterioration in financial performance resulting from a reduction in operating cash flow generation and/or available liquidity, a sustained increase in balance sheet leverage on a standalone or consolidated-affiliate basis, and/or aggressive capital management.

Fitch does not envision positive rating momentum for OCN at this time. The Rating Outlook could be revised to Stable if OCN can successfully comply with the independent monitor and the consent order, address current strategic and leadership uncertainty and strengthen its overall operational and corporate governance framework and/or its financial position.

Revision of the Rating Outlook is dependent on greater clarity with respect to OCN's organization structure, strategic direction and leadership, following the announced departure of its Executive Chairman. In addition, OCN's ability to navigate continued regulatory scrutiny and address and meet the requirements under the consent order will also influence the resolution of the Outlook.

The ratings of the unsecured notes will be sensitive to any changes in OCN's long-term IDR as well as to changes in OCN's funding profile, the mix of secured versus unsecured funding, and unencumbered asset coverage. A material increase in unsecured funding combined with a material improvement in unencumbered asset coverage could reduce the notching between the IDR and the unsecured notes and/or improve the RR.

RATING SENSITIVITIES - OLS IDR AND SECURED DEBT

OLS is a primary operating company, and wholly-owned subsidiary of OCN. The ratings of OLS are aligned with those of OCN because of the unconditional guaranty provided by OCN and its guarantor subsidiaries. Therefore, the ratings for OLS are sensitive to the same factors that might drive a change in OCN's IDR.

The ratings of the senior secured term loan are sensitive to changes OCN and OLS's IDRs as well as changes in collateral values and advances rates under the secured borrowing facilities, which ultimately impact the level of available asset coverage.

Fitch originally placed the ratings of OCN and OLS on Rating Watch Negative on Oct. 24, 2014, following material issues raised by the NY DFS regarding OCN's servicing practices. More recently, the Office of Mortgage Settlement Oversight (OMSO) also identified two issues in a report on the servicer's compliance with the National Mortgage Settlement (NMS) related to processes in OCN's internal review group and the letter dating issue raised by the NY DFS in October.

Fitch has removed from Rating Watch Negative and downgraded the following ratings:

Ocwen Financial Corporation
--Long-term IDR to 'B-' from 'B';
--Senior unsecured notes to 'CC/RR6' from 'CCC/RR6'.

Ocwen Loan Servicing, LLC
--Long-term IDR to 'B-' from 'B';
--Senior secured term loan to 'B-/RR4' from 'B/RR4'.

Fitch has removed from Rating Watch Negative and affirmed the following rating:

Ocwen Financial Corporation
--Short-term IDR at 'B'.

The Rating Outlook is Negative.

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