Business Context and Reporting Period
The filing is Ocwen Financial Corporation’s unaudited Form 10-Q for the three months ended March 31, 2016. The request metadata identifies “ONITY GROUP INC.,” but the filing identifies the registrant as Ocwen Financial Corporation (NYSE: OCN). Ocwen originates and services forward and reverse residential mortgage loans through its Servicing and Lending segments, with operations in the United States, India, the Philippines and the U.S. Virgin Islands.
The servicing portfolio declined substantially because of Agency mortgage servicing rights sales and portfolio runoff. Management stated that recent regulatory settlements and compliance investments have changed the economics of the servicing business and that meaningful near-term servicing profitability is unlikely without structural changes.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 / Prior Period | Change |
|---|---|---|---|
| Total revenue | $330.8 million | $510.4 million | Down 35% |
| Operating expenses | $328.7 million | $378.4 million | Down 13% |
| Loss before income taxes | $102.1 million | Income of $42.8 million | Material deterioration |
| Net loss attributable to Ocwen | $111.3 million | Net income of $34.4 million | EPS changed to $(0.90) from $0.27 |
| Operating cash flow | $140.9 million | $325.0 million | Down 57% |
| Cash at period end | $280.5 million | $257.3 million at Dec. 31, 2015 | Up 9% |
| Total assets | $7.4 billion | $7.4 billion at Dec. 31, 2015 | Broadly unchanged |
| Total liabilities | $6.7 billion | $6.5 billion at Dec. 31, 2015 | Up 2% |
| Total equity | $738.5 million | $854.6 million at Dec. 31, 2015 | Down 14% |
- Servicing and subservicing fees were $297.5 million, down 33%, primarily from the reduced servicing portfolio and lower modification activity.
- Gain on loans held for sale was $15.6 million, down 65%. The prior-year period included a $12.9 million gain on sales of repurchased loans and materially higher lending gains.
- Interest expense was $106.1 million, down 11%, partly due to lower senior secured term-loan borrowings and changes in the NRZ financing liability. The company incurred $6.2 million of additional payments related to its downgraded S&P servicer rating.
- MSRs totaled $1.08 billion at March 31, 2016, including $732.2 million carried at fair value. The company recorded a $30.0 million impairment charge on government-insured MSRs.
- Reverse mortgage loans held for investment increased to $2.77 billion from $2.49 billion at December 31, 2015, with related HMBS borrowings increasing to $2.65 billion from $2.39 billion.
- Cash flow from investing activities was negative $183.0 million, largely reflecting $304.1 million of reverse mortgage originations and $19.8 million of capital expenditures.
- Financing activities provided $65.3 million, including $233.2 million from reverse mortgage securitizations accounted for as secured financings.
Material Changes Versus the Prior Comparable Period
- The residential servicing portfolio fell 38% to $237.1 billion from $382.2 billion at March 31, 2015. Average serviced UPB also declined 38%.
- Servicing segment pre-tax results shifted to a $68.3 million loss from $46.7 million of income. Revenue declined faster than expenses despite cost reductions.
- Lending segment pre-tax income declined 87% to $2.0 million. Forward loan production fell 14% to $788.1 million, while reverse mortgage production was broadly stable at $191.2 million.
- Completed loan modifications declined 34% to 16,604. HAMP modifications declined 36% to 7,699.
- Average employment declined 16% to 7,707, including a 29% reduction in U.S.-based headcount, as part of the cost improvement initiative.
- Professional services expense increased, primarily because regulatory monitoring costs rose to approximately $30.0 million from $9.0 million.
- Stockholders’ equity declined by $115.2 million during the quarter, primarily because of the net loss. The company repurchased 991,985 shares for $5.9 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects servicing cost reductions to lag the decline in the servicing portfolio. It is pursuing headcount reductions, offshore migration, process improvements and lower third-party technology and facilities costs.
- Management intends to grow forward and reverse lending and evaluate adjacent businesses, including automotive floor-plan lending and rental-property finance, but acknowledged execution, integration and return risks.
- Management stated that it believes liquidity is adequate for the next twelve months. However, significant 2016 refinancing and renewal requirements exist, including advance-funding facilities and warehouse arrangements.
- The March 2016 amendment to the Senior Secured Term Loan removed several financial covenants but requires $6.3 million prepayments on May 31, July 29 and September 30, 2016, and maintains a 40% loan-to-value covenant.
- At March 31, 2016, the company reported $212.9 million of unused advance-funding capacity, but stated that none of that capacity could be used based on available eligible collateral.
- NRZ funded advances associated with approximately $132.7 billion of Rights to MSRs, with approximately $4.9 billion of related outstanding advances. Because Ocwen’s S&P servicer rating was below “Average,” a termination event existed; beginning April 7, 2017, NRZ could direct transfers of affected servicing agreements if the rating was not improved.
- Regulatory, litigation and compliance exposures remain substantial. The company had accrued $39.5 million for probable and estimable mortgage-servicing litigation losses but could not estimate reasonably possible losses above accrued amounts.
- Outstanding representation and warranty repurchase demands totaled $81.9 million of UPB covering 408 loans. The related liability was $32.3 million.
- CFP and other investigations, False Claims Act litigation, securities litigation, RMBS servicing disputes and potential servicing terminations could materially affect liquidity, revenue and capital.
- The company’s credit ratings were below investment grade: Moody’s B2 under review, S&P B stable, Fitch B- stable and Kroll B+ stable.
Investor Verification Priorities
- Verify the registrant identity, because the supplied metadata names Onity Group Inc. while the filing is for Ocwen Financial Corporation.
- Reconcile the sustainability of liquidity with the company’s losses, debt maturities, covenant requirements, collateral availability and 2016 refinancing needs.
- Assess whether servicing cost reductions can offset continued portfolio runoff and the 38% year-over-year decline in serviced UPB.
- Monitor NRZ’s advance-funding obligations, Ocwen’s servicer rating and the potential loss of servicing revenue after April 7, 2017.
- Review the valuation sensitivity of Level 3 MSRs and reverse mortgage assets, including prepayment, delinquency, discount-rate and interest-rate assumptions.
- Track regulatory monitorships, CFPB investigations, False Claims Act actions, RMBS servicing disputes and potential incremental litigation losses.
- Confirm the renewal or replacement of advance-funding and warehouse facilities that mature or enter amortization during 2016.