Business Context and Reporting Period
The filing is a Form 10-Q for Ocwen Financial Corporation, not Onity Group Inc., covering the three and six months ended June 30, 2015. Ocwen provides residential mortgage servicing, subservicing, forward mortgage lending and reverse mortgage lending through operations in the United States, India and the Philippines.
The unaudited results should be read with the 2014 Form 10-K. Management states that interim results are not necessarily indicative of full-year results.
Key Financial Metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Total revenue | $463.3 million | $553.1 million | $973.7 million | $1.104 billion |
| Net income | $9.9 million | $67.0 million | $44.3 million | $127.5 million |
| Net income attributable to common stockholders | $9.7 million | $66.0 million | $44.1 million | $125.5 million |
| Diluted EPS | $0.08 | $0.48 | $0.35 | $0.91 |
| Operating cash flow | Not separately provided | Not separately provided | $535.0 million | $210.0 million |
- Servicing and subservicing fees declined 19% in the quarter and 14% year to date, primarily from MSR sales, portfolio runoff and transfers.
- Gain on loans held for sale increased 16% in the quarter to $45.1 million and 8% year to date to $89.6 million.
- Total expenses increased 2% in the quarter to $352.3 million and 5% year to date to $730.6 million. Professional services costs rose materially because of litigation, regulatory monitoring, compliance and strategic advisory work.
- Interest expense declined 8% in the quarter and 12% year to date, primarily because of lower NRZ-related financing liability balances and debt reductions.
- Net gains on mortgage servicing rights sales were $30.3 million in the quarter and $56.7 million year to date.
- At June 30, 2015, cash was $320.1 million, compared with $129.5 million at December 31, 2014. Total assets were $8.005 billion and total liabilities were $6.860 billion.
- Total equity was $1.145 billion, including $1.142 billion attributable to Ocwen stockholders.
- Debt included $1.741 billion of match funded liabilities, $2.744 billion of financing liabilities, $1.290 billion of other secured borrowings and $350.0 million of senior unsecured notes.
Material Changes Versus Prior Comparable Period
- Residential assets serviced decreased to $321.7 billion at June 30, 2015 from $435.1 billion a year earlier, a 26% decline. The servicing portfolio reduction drove lower recurring fee revenue.
- Quarterly income before taxes fell 84% to $12.5 million; six-month income before taxes fell 63% to $55.3 million.
- Quarterly net income attributable to common stockholders fell 85%; six-month net income fell 65%.
- The Servicing segment’s pretax income declined 51% in the quarter and 46% year to date. Lending segment pretax income increased 105% in the quarter and 299% year to date, helped by improved forward-lending margins and higher reverse-mortgage volume.
- Reverse mortgage loans held for investment increased 35% from year-end to $2.097 billion, while MSRs declined 30% to $1.341 billion.
- Advances and match funded advances declined 17% from year-end to $2.754 billion, reflecting collections and asset sales.
- Operating cash flow increased substantially year over year, while investing activities provided $43.9 million versus $542.2 million used in the prior-year period. Financing activities used $388.3 million versus $413.1 million provided in the prior-year period.
- Effective January 1, 2015, Ocwen elected fair-value accounting for a newly created class of non-Agency MSRs and recorded a $52.0 million pretax cumulative-effect increase to retained earnings, before deferred taxes of $9.2 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects servicing revenue to continue declining in the near term as additional Agency MSR sales, portfolio runoff and regulatory growth restrictions reduce the servicing portfolio.
- Ocwen announced a cost-improvement initiative targeting at least $150 million of annual cost reductions over the following year, while continuing to invest in compliance and borrower-service infrastructure.
- Ocwen completed or announced Agency MSR sales totaling $65.6 billion and $25.0 billion of UPB, respectively, as of June 30, 2015. Management expected approximately $950 million of proceeds from planned transactions, subject to approvals and closing conditions, with most proceeds intended for SSTL prepayments.
- The SSTL balance declined from approximately $1.3 billion to $936.1 million during the first half of 2015. Ocwen prepaid $334.6 million using MSR-sale proceeds.
- Management stated that it believed liquidity was adequate to meet obligations through 2015, but this depends heavily on renewing, replacing or extending financing facilities. Approximately $2.1 billion of advance-funding capacity had revolving periods ending in 2015, and $397.5 million of warehouse and participation facilities matured in 2015.
- Only $169.6 million of reported unused advance-funding capacity was immediately usable based on pledged eligible collateral.
- Ocwen refinanced and increased a servicing advance facility from $400 million to $450 million in June 2015 and was pursuing refinancing of an existing $1.8 billion servicing advance facility.
- Servicer-rating downgrades triggered termination rights in 644 of 726 non-Agency agreements with minimum rating criteria, representing approximately $36.9 billion of UPB, or about 18% of the non-Agency servicing portfolio. Four servicing agreements had received termination notices.
- Regulatory settlements restrict future MSR acquisitions, require ongoing monitoring and remediation, and expose Ocwen to possible penalties, license actions and additional compliance costs. The NY DFS settlement included a $100 million civil penalty and $50 million of borrower restitution.
- Ocwen accrued $16.7 million for probable and estimable mortgage-servicing litigation losses but could not estimate reasonably possible losses above recorded amounts. Outstanding representation and warranty repurchase demands totaled $120.3 million of UPB covering 607 loans.
- On July 14, 2015, the IRS proposed additional taxes and penalties of $37.0 million related to the 2009 taxable spin-off of Altisource. Ocwen estimated the possible loss range at zero to $37.0 million and intended to evaluate and potentially contest the adjustment.
- Forward-looking results remain exposed to MSR valuation assumptions, interest rates, prepayment speeds, delinquencies, advance funding, regulatory actions, litigation, rating downgrades and Ocwen’s relationship with New Residential Investment Corp. (NRZ).
Most Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Ocwen Financial Corporation, while the request metadata identifies Onity Group Inc.
- Verify the timing and completion of announced MSR sales, related cash proceeds, servicing transfers and the effect on future revenue.
- Monitor renewal or refinancing of advance-funding and warehouse facilities, available collateral and compliance with debt covenants.
- Assess the impact of servicer-rating downgrades and potential servicing terminations, including the dependence on NRZ for advance funding.
- Track regulatory examinations, consent-order compliance, litigation, repurchase claims and the IRS proposed adjustment.
- Evaluate whether the $150 million cost-reduction initiative can offset the expected decline in servicing revenue without impairing compliance or operating capability.
- Review the fair-value assumptions supporting MSRs and reverse mortgages, particularly prepayment speeds, discount rates, delinquencies and advance-financing costs.