Value-oriented hedge fund Kingstown Capital Management may have a problem after the firm rushed headlong into the shares of mortgage servicing giant Ocwen Financial amid the firm's regulatory troubles in 2014.
Ocwen's plunging shares accounted for 13.94% of Kingstown Capital's equity portfolio as of the third quarter, according to public filings compiled by FactSet, after the hedge fund tripled its stake in the William Erbey-founded mortgage servicer during the quarter. Were Kingstown to have held onto those Ocwen shares through the company's battles with New York Department of Financial Services superintendent Ben Lawsky this fall, the hedge fund may be bleeding red.
Kingstown didn't respond to multiple emails and voicemails seeking comment. When reached by telephone, Christof Pfeiffer, an equity analyst at Kingstown told Forbes he was "not authorized to talk to the press" before hanging up.
According to a Sept. 30 filing with the Securities and Exchange Commission, Ocwen was Kingstown's largest position after the fund bought three million shares through the course of the second quarter, tripling its position. The filing shows Kingstown to be one of Ocwen's ten largest shareholders, holding 3.58% of the firm's outstanding shares. After falling 27% on Monday, Ocwen has tumbled nearly 40% since the end of the third quarter and the stock is down over 70% year-to-date.
Kingstown doesn't appear to be alone in buying Ocwen ahead of its settlement with Lawsky. Seth Klarman-run Baupost Group bought over 7 million Ocwen shares in the third quarter, accumulating an over 5.55% stake, while Pennant Capital Management disclosed a 7.2% stake in Ocwen on Oct. 2. Other publicly traded Ocwen affiliates have also received the interest of value seeking hedge funds.
Luxor Capital disclosed on Nov. 11 it boosted its stake in Altisource Asset Management to 18.8% of the company's outstanding shares and in August the fund reported an about 11% stake in Altisource Portfolio Solutions. Both companies are related to Ocwen and they tumbled 23% and 33% respectively on Monday. SAB Capital Management, another mid-sized hedge fund, also is a large holder of Altisource Asset Management and Altisource Portfolio Solutions.
It appears recent hedge fund buyers of Ocwen and its related entities believed the company would be able weather its well-publicized regulatory woes over the past 12-months.
Last December, Ocwen agreed to a multi-billion dollar settlement with the Consumer Financial Protection Bureau and various State Attorneys General as part of a so-called national mortgage settlement that also involved large banks like
In October, Lawsky said Ocwen failed to live up to the terms of a consent order it agreed with the DFS in late 2012, and alleged that the company was backdating home modification and foreclosure documents. On Monday, Ocwen settled those allegations with Lawsky and the DFS, but the firm paid a heavy price, causing shares to tumble to new multi-year lows.
As part of its settlement, Ocwen agreed that founder and former billionaire William Erbey will step down as executive chairman of the company and its four publicly traded affiliates. Lawsky characterized the move as a way to address serious conflicts of interest the regulator found during a multi-year investigation of Ocwen.
For Erbey, known as a penny-pincher and a tireless worker, the pact is a dramatic reversal in fortune after he built a mortgage empire out of the aftermath of the housing bust. Erbey, according to Forbes's Real Time Wealth Rankings for billionaires, lost over $300 million on Monday causing his net worth to fall to around $800 million and knocking him out of the billionaire ranks. He was worth as much as $2.5 billion in March when we published our annual listing of the world’s wealthiest.
"The Department’s review of Ocwen’s mortgage servicing practices also uncovered a number of conflicts of interest between Ocwen and four other public companies (the aforementioned "related companies"), all of which are chaired by Mr. Erbey, who is also the largest individual shareholder of each and the Executive Chairman of Ocwen," Lawsky said on Monday.
As part of Monday's settlement, Ocwen will pay $150 million in hard dollar assistance to New York homeowners, $50 million in direct restitution and $100 million for housing, foreclosure relief and redevelopment programs.
The settlement also stipulates that the DFS-appointed monitor will approve the appointment of two independent directors to Ocwen's board and continue to watch over the company's operations. Over the next two years, the monitor will now have power to approve related party transactions between Ocwen and is affiliates, in addition to any additional mortgage servicing rights that the company will seek to acquire in the future.
"We are pleased to have reached a comprehensive settlement with the DFS and will act promptly to comply with the terms," Ocwen CEO Ronald Faris said on Monday. "We believe this agreement is in the best interests of our shareholders, employees, borrowers and mortgage investors," he added.
Ocwen reserved $100 million against its third quarter earnings in anticipation of a settlement and the company said it will record a $50 million fourth quarter charge to reflect the final settlement amount.
"I am grateful to the many associates who have worked alongside me and proud of what we have accomplished," Mr. Erbey said in a statement. "I am confident about Ocwen's future under the experienced leadership of the executive team. I have worked with Ron for more than 20 years, and he is uniquely qualified to lead Ocwen going forward," he added.
