By Sharanya Hrishikesh
Feb 29 (Reuters) - Shares of Home Loan Servicing Solutions fell as much as 9 percent below their offering price on Wednesday, as the company failed to draw investor interest in its "untested" business model.
The company, founded by Ocwen Financial Corp's chairman in 2010, will use the proceeds to buy the right to receive servicing fees and other related assets from Ocwen Loan Servicing LLC.
The Cayman Islands-based company also said it will use third-party residential mortgage loan servicers to collect payments and handle foreclosures instead of developing its own mortgage servicing platform.
Ocwen, which services residential and commercial mortgage loans, had been in the news for buying the mortgage servicing arms of banking giants Goldman Sachs Inc, Morgan Stanley Inc and Barclays Bank Plc over the last two years.
The newly incorporated mortgage servicer will buy a portion of the assets that Ocwen Loan Servicing took over when it acquired HomEq Servicing, the U.S. subprime mortgage servicing business of Barclays.
Sterne, Agee & Leach analyst Henry Coffey said Home Loan Servicing's partnership with Ocwen made it almost a passive investor, with a stake in Ocwen's activities, and its business model was convincing.
In January, Home Loan Servicing's board declared a contingent interim dividend of 10 cents a share per month for three months following the IPO. It also said in its regulatory filing it expects to distribute at least 90 percent of its net income to shareholders in the form of a monthly dividend.
"It is structured like a REIT but is not one. It has a much more capital efficient structure because it does not pay taxes on distributable earnings, and therefore, is a very efficient way to fund assets," Sterne, Agee & Leach analyst Henry Coffey said.
Home Loan Servicing said in its filing it expects to be treated as a passive foreign investment company (PFIC) under U.S. federal income tax laws.
Jay Ritter, professor of finance at the University of Florida said the company is likely to do well in the future.
"There is room for a middle-man in the market, and Home Loan Servicing has the potential to be that," Ritter said. "But they are operating in a market that has no barriers to entry... Obviously the underwriters to the offering were confident enough of the business model. This is not a fly-by-night operator,"
However, IPO desktop analyst Francis Gaskins said the company's business model did not inspire much confidence as the whole U.S. mortgage servicing market is currently under regulatory scrutiny.
"It is a spin-off from the parent, and currently they don't really have operations," Gaskins said. "The mortgage servicing market is dominated by the big banks, which have lower cost structures, and they are not regulated as much on a state and federal basis as a straight mortgage servicing company."
The company sold 13.3 million shares at $14, the lower end of its expected price range.
Wells Fargo, Barclays, Citigroup, Deutsche Bank, RBC, KKR and Piper Jaffray ran the books for the offering.
Concurrent to the offering, William Erbey, Home Loan Servicing's founder, chairman and principal shareholder, will buy $10 million of ordinary shares at the offering price in a private placement, according to a regulatory filing.
Shares of the company closed at $13.56, 3 percent below the IPO price on the Nasdaq. More than 5 million shares changed hands during the day.
At its closing price, the company is valued at around $190 million.