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Everyone knows the current environment has been hard on financials, especially those that have any involvement in residential mortgages.

There are a few firms that are managing to use certain company-specific advantages to hold their own and even prosper. Ocwen Financial (NYSE:OCN) may be one of these.

Background

Ocwen Financial Corporation is a business process outsourcing provider to the financial services industry, specializing in loan servicing, mortgage fulfillment and receivables management services.

The company currently operates within two lines of business:

Ocwen Asset Management - comprised of the Servicing, Loans and Residuals and Asset Management Vehicles segments

The Servicing segment provides outsourced loan servicing for subprime loans but does not own the loans. Many of the loans are actually securitized and owned by trusts. The Loans and Residuals segment does hold loans for resale. Asset Management Vehicles holds loans as investments and does securitizations.

Ocwen Solutions - comprised of the Technology Products, Mortgage Services and Financial Services segments.

Technology Products comprises a set of systems that provide support for life of loan activities from origination to servicing to collections. Mortgage Services facilitates loan origination as an outsourcing provider. Financial Services provides debt collection and receivables management.

Risks

Delinquencies are up industry-wide. Delinquencies and foreclosures result in "advances" and other costs to the company.

During any period in which the borrower is not making payments, the company is required under most servicing agreements to advance funds to the investment trust to meet contractual principal and interest remittance requirements for investors. Luckily, as the servicer, Ocwen is obligated to advance funds only to the extent that they believe the advances are recoverable. In addition, for any advances that are not covered by loan proceeds, most of the pooling and servicing agreements provide for reimbursement at the loan pool level, either by using collections on other loans or by requesting reimbursement from the securitization trust. This at least limits Ocwen's exposure.

Ocwen is also required to pay property taxes and insurance premiums, to process foreclosures and to advance funds to maintain, repair and market real estate properties on behalf of investors.

The bottom line is that it costs the company money to finance these advances and there is a potential that some of the funds will not be recovered.

The company also has a host of derivatives, auction rate securities and various other financial vehicles that have seen some stress in the current environment.

Prepayments are another risk as they tend to reduce the amount of profit derived from the loans.

Ocwen's Advantages

The company has developed a set of proprietary software tailored to its business. This expertise in software helps make the company a low-cost competitor.

The company has long had a business segment focused on debt recovery. Ocwen last June acquired NCI, one of the largest collections companies in the U.S. With the difficulties in the mortgage market currently, there is no lack of business in this segment. Though recoveries may not be as large as in normal times, the increase in volume more than makes up for it.

Ocwen has used their systems and process expertise to ramp up collections operations offshore. This is further reducing costs for the company even as more collections agents are brought online.

Ocwen has focused on creating repeatable processes and models that can be taught to collections agents and has created flexible systems with scripting engines to ensure that collections processes are consistent.

As NCI is further integrated into Ocwen, NCI will be moved over to the Ocwen systems and the benefits of Ocwen's scripted approach will be used to reduce variability of collectors' performance, enhancing recovery.

Conclusion

Ocwen is a small cap company that is surviving the mortgage meltdown. Since they do originations, servicing and collections for other financial companies, they have been less hurt by the current environment. They expect to be able to pick up market share as other similar companies withdraw from the industry.

The strong technology segment and offshoring initiatives allow Ocwen to operate as a low-cost provider of business processes.

The company's strength in collections positions it well to benefit from the tough times and the struggles of lenders and borrowers alike.

The company is profitable and reasonably well financed for its size. It suffers by association with the financial sector in general. Given how out of favor financials are now, the stock can be acquired at a reasonable price even as Ocwen is positioning itself to come through the current troublesome environment as a stronger, more efficient company.

Disclosure: Author is long OCN at time of writing

Source: Ocwen Financial: Making the Best of Hard Times