An investment firm, BlueMountain Capital Management, LLC, delivered a strongly worded demand letter to Ocwen Loan Servicing, LLC, Deutsche Bank National Trust Company and other entities involved in the administration of certain securities backed by residential mortgage notes. BlueMountain has alleged that, by virtue of Ocwen's servicing practices and the administration of the collateralized notes, an event of default has occurred and the security must increase the interest rate on the subject securities by 3.0%. Below is a summary of BlueMountain's allegations:
The facts establishing these Events of Default are irrefutable. For example, Ocwen recently "stipulate[d]" and "agree[d]" in a consent order with the New York Department of Financial Services to violations of law and to engaging in imprudent servicing practices. In addition, the California Department of Business Oversight has commenced proceedings to suspend Ocwen's servicer license inCalifornia, a significant source of loans in the RMBS trusts that generate the advances that collateralize the payments to Noteholders. These (and other) agencies' findings and enforcement actions demonstrate Ocwen's systemic, long-standing and continuing servicing failures and disregard of applicable and analogous laws. Evidencing the significance of these affirmations of Ocwen's servicing misconduct, the rating agencies expressly referenced the state regulatory authorities' actions as a basis for their decisions to downgrade Ocwen's servicer rating and the corporate ratings of related entities, Ocwen Financial Corporation and Home Loan Servicing Solutions, Ltd. Likewise, the share price of the two related companies fell precipitously following the announcement of the California suspension proceeding, i.e., by approximately 36% and 20%, respectively.
The recent disclosures thus demonstrate Ocwen's material breaches of its covenants and warranties not to engage in such illicit and imprudent practices; and those breaches in turn materially increase the risk of loss on the Notes that are collateralized by receivables affected by Ocwen's standing as a servicer. Indeed, the offering memorandum governing the issuance of the Notes explicitly recited the very servicing misconduct that Ocwen engaged in as a factor that would increase the risk of loss on the Notes. That material increase in the risk of loss gives rise to the specified Events of Default, and a corresponding right to an increased return for the Noteholders.
A link to the BlueMountain press release and letter to Ocwen, Deutsche Bank, et al. can be found here.