Home Loan Servicing Opens Down 5% Post-IPO

Home Loan Servicing Solutions Ltd. (HLSS) declined on Wednesday, its first day as a public company, even as broader markets continued to push higher.

The company's stock opened at $13.25 a share on the Nasdaq, down 5% from its initial public offering price of $14; it was changing hands recently at $13.56, down 3.1%. It sold 13.3 million shares at the low end of its $14-to-$16 price range.

Headquartered in the Cayman Islands, Home Loan Servicing was created to acquire mortgage-servicing rights and other income from servicing mortgage loans. By just acquiring the rights, the company will not originate or purchase mortgage loans; in fact, it won't even actually service the loans. It plans to hire another firm to do that.

Home Loan Servicing has multiple ties to Ocwen Financial Corp. (OCN). It is using its IPO proceeds to purchase the right to receive servicing and other fees from Ocwen Loan Servicing LLC, a subsidiary of Ocwen, on a portion of its pooling and servicing agreements. Its executives were in senior management roles at Ocwen Financial up until the IPO, when they resigned from Ocwen to join Home Loan Servicing. The company plans to eventually purchase "substantially all" the remaining mortgage-servicing rights currently owned by Ocwen Loan Servicing.

Ocwen Financial's stock was trading recently at $16.15, essentially flat.

Home Loan says its business plan will result in predictable revenue and expenses, generating a stable income stream. It plans to distribute at least 90% of its net income to its shareholders via dividends. On Jan. 30, Home Loan's board declared a contingent interim dividend of 10 cents a share per month for each of the three full months following the IPO; on an annualized basis of $1.20, that results in a yield of 8.6% at the IPO price.

The company's strategy is complicated by the transfer of legal ownership of mortgage-servicing rights from the seller, which requires the prior approval or consent of various third parties, including rating agencies. That's the case with its initial deal with Ocwen Loan Servicing, which doesn't have the necessary approvals and consents as of the IPO closing. Home Loan Servicing says that shouldn't affect its business strategy or performance; if a seller hasn't obtained the necessary approvals and consents, the company instead plans to acquire the rights to receive the servicing fees that the current servicer receives, as it has done with Ocwen's first batch.

As compensation for its servicing work after Home Loan buys the rights, Ocwen Loan Servicing will receive a monthly base fee initially equal to 12% of servicing fees collected each month, with the opportunity to earn a monthly performance-based incentive fee.

The mortgage-servicing assets that the new company will purchase are a portion of the assets acquired by Ocwen Loan Servicing when it purchased the U.S. subprime mortgage-servicing business of HomEq Servicing in Sept. 2010. The estimated price for the initial purchase is $181 million. The company says it obtained an opinion from the Mortgage Industry Advisory Corporation, an independent valuation firm, of the fairness of the purchase price.

One of the risks Home Loan cites in its prospectus is its status as a new company; it has no track record of performance to show investors. It warns that its business model is untested and its operations don't begin until after the IPO and the initial acquisition from Ocwen.

William C. Erbey, the chairman and founder of Home Loan Servicing, has agreed to purchase $10 million worth of the new company's shares at the IPO price in a concurrent private placement; he will also continue to serve as chairman at Ocwen.

Wells Fargo & Co. (WFC), Barclays PLC's (BCS) Barclays Capital, Citigroup Inc. (C) and Deutsche Bank AG (DB) managed Home Loan Servicing's offering.

-By Lynn Cowan; 301-270-0323; lynn.cowan@dowjones.com

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