A Contrarian Call: Compass Point Upgrades Banking Regulator Magnet Ocwen Financial

Fred Small of Compass Point Research believes Ocwen Financial Corp (NYSE: OCN)'s 54-percent plunge on Thursday created a buying opportunity. The analyst upgraded shares of Ocwen from Neutral to Buy but with a price target lowered from $5 to $3.50 for three main reasons.

1. 'Mispriced' Regulatory Risk

According to Small, the regulatory risk is "mispriced" following the "blizzard" of lawsuits and cease-and-desist orders from more than 20 states. As such, the probability of Thursday's "drama" creating ongoing concerns for Ocwen is low. In addition, the $1.5 billion estimate of Ocwen's escrow reconciliation and restitution isn't a real contingent liability.

2. New Residential Investment

Second, the analyst believes New Residential Investment Corp (NYSE: NRZ) is unlikely to transfer the majority of Ocwen's sub-servicing to another servicer because there are several risks involved in doing so.

3. Good Riddance To MSRs

Finally, Small suggested there is now a "complete deflation of recent optimism" surrounding Ocwen's ability to begin acquiring MSRs (mortgage servicing rights) in the near term. To this, the analyst simply states, "good riddance" as optimism about any future MSR purchases is no longer priced in to the stock and regulatory risk is also "over-baked."

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