Business Context and Reporting Period
The submitted filing is a Form 10-Q for the quarter and six months ended June 30, 2021. The filing identifies the registrant as Ocwen Financial Corporation (NYSE: OCN), not ONITY GROUP INC.; this issuer discrepancy should be verified. Ocwen is a non-bank mortgage servicer and originator operating primarily through PHH Mortgage Corporation, with servicing, originations and corporate activities across the United States, India, the Philippines and the U.S. Virgin Islands.
At June 30, 2021, Ocwen serviced approximately 1.3 million loans with aggregate unpaid principal balance of $237.3 billion and had approximately 5,200 employees.
Financial Metrics
| Metric | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | Comparable Period |
|---|---|---|---|
| Total revenue | $265.4 million | $473.0 million | $227.0 million / $480.9 million |
| Net income (loss) | $(10.3) million | $(1.8) million | $2.0 million / $(23.5) million |
| Loss per share, diluted | $(1.15) | $(0.20) | $0.23 / $(2.67) |
| Operating expenses | $149.8 million | $289.4 million | $144.8 million / $282.0 million |
| MSR valuation adjustments, net | $(72.5) million | $(51.2) million | $(23.4) million / $(197.6) million |
| Net cash from operating activities | Not separately presented | $(216.2) million | $224.8 million |
Second-quarter revenue increased 28% from the first quarter, primarily reflecting higher servicing revenue, reverse mortgage revenue and gain on loans held for sale. However, the company reported a pretax loss of $22.2 million and a net loss of $10.3 million. The six-month effective tax rate was unusually high at 83.2%, largely because the prior-year period benefited from approximately $65.0 million of CARES Act-related tax benefits.
- Servicing and subservicing fees: $184.4 million in the quarter and $356.2 million year to date.
- Reverse mortgage revenue: $29.3 million in the quarter and $51.1 million year to date.
- Gain on loans held for sale: $42.7 million in the quarter and $48.4 million year to date.
- Interest expense: $33.5 million in the quarter and $62.0 million year to date.
- Equity: $447.1 million at June 30, 2021, compared with $415.4 million at December 31, 2020; reported book value was $48.66 per share.
- Cash and cash equivalents: $243.6 million, plus $67.9 million of restricted cash.
- Total assets: $11.8 billion; total liabilities: $11.3 billion.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue rose from $227.0 million to $265.4 million, but results shifted from net income of $2.0 million to a net loss of $10.3 million.
- Year-to-date revenue declined 2% from $480.9 million to $473.0 million, while the net loss improved from $23.5 million to $1.8 million.
- MSRs increased 60% from $1.29 billion at December 31, 2020 to $2.07 billion, primarily due to bulk acquisitions and newly capitalized MSRs. Two June bulk acquisitions added approximately $55.1 billion of servicing UPB.
- The owned MSR portfolio expanded substantially, while the NRZ servicing portfolio continued to decline. NRZ represented approximately 26% of servicing UPB and 36% of loan count at June 30, 2021; current agreements generally extend through July 2022.
- Loans held for sale increased 79% to $696.0 million, and mortgage loan warehouse facilities increased 71% to $773.4 million, reflecting higher origination activity.
- MSR financing facilities increased 131% to $1.01 billion. Senior secured term loan borrowings were fully repaid, while senior notes increased to $610.6 million.
- Operating cash flow changed from $224.8 million provided in the first six months of 2020 to $216.2 million used in the first six months of 2021, primarily because of higher loan production and MSR purchases.
Guidance, Outlook, Risks and Unusual Items
Management expects servicing volume to continue growing through multiple origination and MSR acquisition channels, with growth intended to offset potential attrition from the NRZ relationship after July 2022. Management also expects continued expansion of recapture and reverse mortgage activities, including growth from the planned RMS acquisition, and expects net income and equity to improve during the remainder of 2021 absent a significant change in interest rates.
- Ocwen and Oaktree launched MAV Canopy, a joint venture intended to invest up to $250 million in GSE MSRs. Ocwen owns 15% and Oaktree owns 85%. Ocwen contributed $11.5 million through June 30, 2021 and recorded $0.4 million of earnings.
- PMC agreed to acquire certain Reverse Mortgage Solutions assets for an estimated $12.4 million. Closing was expected in the second half of 2021, subject to regulatory approvals and other conditions.
- COVID-19 continued to delay servicing fees and ancillary income through forbearance plans and foreclosure restrictions. Approximately 67,300 loans were under forbearance at June 30, 2021.
- MSR fair value remains highly sensitive to interest rates and prepayments. A hypothetical 25-basis-point rate decrease was estimated to reduce total net fair value by approximately $38.2 million; a 25-basis-point increase was estimated to increase it by approximately $36.9 million.
- The company refinanced debt in March 2021, issuing $400.0 million of PMC senior secured notes and $199.5 million of Ocwen senior secured notes, repaying older notes and the senior secured term loan. A further $85.5 million of Ocwen senior secured notes was issued in May 2021. The Ocwen notes bear 12% cash interest or 13.25% paid-in-kind interest and mature in 2027.
- Approximately $1.37 billion of debt outstanding was scheduled to mature, begin amortizing or require partial repayment within the following 12 months.
- The company reported compliance with debt covenants. The most restrictive disclosed requirements included $275.0 million of tangible net worth and $125.0 million of consolidated liquidity.
- Legal and regulatory matters remain material. Accrued probable and estimable legal and regulatory matters, including legal fees, totaled $46.9 million. Management stated that reasonably possible losses above accrued amounts could not currently be estimated.
- Significant contingencies include CFPB appellate proceedings, class actions, servicing and foreclosure claims, indemnification claims, loan repurchase demands and regulatory examinations.
Most Important Facts for Investors to Verify
- Confirm the filing issuer: the request names ONITY GROUP INC., while the filing is for Ocwen Financial Corporation, CIK and ticker information not provided in the request.
- Assess whether the large MSR acquisitions can generate sufficient servicing revenue and cash returns to offset valuation volatility, funding costs and portfolio runoff.
- Review liquidity against approximately $1.37 billion of near-term debt maturities or amortization requirements and the limited collateral-based availability of certain facilities.
- Monitor the NRZ relationship, including renewal or termination risk around July 2022 and its concentration in delinquent servicing volume.
- Evaluate the effects of interest rates, prepayments, forbearance exits and foreclosure policy changes on MSR fair values, servicing revenue and margin requirements.
- Review the sustainability of profitability because the quarter remained loss-making despite higher revenue and because prior-year comparisons benefited from unusual CARES Act tax benefits.
- Review legal, regulatory, representation and warranty exposures, including the $46.9 million legal and regulatory accrual and $41.6 million indemnification liability.