Business Context and Reporting Period
This Form 10-Q is for Ocwen Financial Corporation, despite the request metadata identifying Onity Group Inc. It covers the three months ended March 31, 2020, and was filed May 8, 2020. Ocwen is a non-bank mortgage servicer and originator operating primarily through PHH Mortgage Corporation and Liberty Home Equity Solutions. Its servicing portfolio totaled approximately $208.8 billion of unpaid principal balance across 1.4 million loans at quarter-end, including significant exposure to New Residential Investment Corp. (NRZ).
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 / Year-end 2019 |
|---|---|---|
| Total revenue | $253.8 million | $303.9 million |
| Net loss | $25.5 million | $44.5 million loss |
| Loss per diluted share | $0.19 | $0.33 |
| Loss before income taxes | $87.3 million | $41.1 million loss |
| Operating cash flow | $171.0 million | $100.7 million |
| Cash and cash equivalents | $263.6 million | $428.3 million at Dec. 31, 2019 |
| Total assets | $10.0 billion | $10.4 billion at Dec. 31, 2019 |
| Stockholders’ equity | $429.9 million | $412.0 million at Dec. 31, 2019 |
- Servicing and subservicing fees declined 18% to $211.5 million, primarily reflecting a smaller servicing portfolio and the NRZ PMC termination.
- Reverse mortgage revenue declined 29% to $22.8 million, while gain on loans held for sale increased 48% to $13.3 million.
- MSR valuation adjustments were a $174.1 million loss, compared with a $109.0 million loss in the prior-year quarter. The loss primarily reflected lower interest rates and portfolio runoff, partly offset by $35.3 million of hedging gains.
- Operating expenses decreased 20% to $137.2 million. Compensation and benefits declined 36%, but professional services expense increased substantially because Q1 2019 included a $30.7 million service-provider recovery.
- Interest expense increased 13% to $30.0 million. Total liabilities were $9.6 billion, including $6.3 billion of HMBS-related borrowings, $626.0 million of advance match-funded liabilities, $797.6 million of other secured borrowings and $311.3 million of senior notes.
- The $61.9 million income tax benefit, principally related to the CARES Act, reduced the reported net loss. The estimated CARES Act benefit was preliminary and subject to further analysis.
- Cash used in investing activities was $147.3 million and cash used in financing activities was $199.3 million, resulting in a $175.6 million decrease in cash, cash equivalents and restricted cash.
Material Changes Versus the Prior Comparable Period
- Total revenue decreased $50.0 million, or 16%, year over year.
- The servicing portfolio declined from approximately $251.1 billion at March 31, 2019 to $208.8 billion at March 31, 2020. Average serviced UPB decreased 18%.
- Average employee headcount declined 27%, supporting lower compensation and servicing costs.
- Forward loan production increased substantially following the re-entry into correspondent lending; forward production was $710.2 million versus $211.2 million in Q1 2019. Reverse mortgage production increased 60% to $226.0 million.
- On January 27, 2020, Ocwen prepaid $126.1 million of its senior secured term loan, reduced the maximum balance to $200.0 million and extended maturity to May 2022.
- Ocwen repurchased 5.7 million common shares for $4.6 million, reducing shares outstanding to approximately 129.6 million at March 31, 2020.
- Adoption of the current expected credit loss standard on January 1, 2020 produced a $47.0 million increase to opening retained earnings related primarily to fair-value recognition of reverse mortgage future draw commitments.
Guidance, Outlook, Risks and Unusual Items
- Management stated that its priorities are returning to sustainable profitability, expanding originations and prudent MSR acquisitions, continuing cost re-engineering, managing liquidity and resolving regulatory and legal matters. No formal earnings guidance was provided.
- COVID-19 materially increased uncertainty. Forbearance plans increased from approximately 27,500 at March 31, 2020 to 114,600 at April 30, 2020, while estimated monthly principal-and-interest advance obligations rose from $29.2 million to $122.0 million.
- COVID-19-related forbearance and delinquencies could reduce servicing-fee and ancillary-income collections, increase servicing costs and advances, delay recoveries and further reduce MSR values.
- Approximately $789.0 million of debt was expected to mature, begin amortizing or require partial repayment within the following 12 months. Management had agreements to upsize and extend certain advance facilities through June 2021, but continued access depended on lender and collateral availability.
- NRZ represented approximately 55% of servicing portfolio UPB. NRZ gave notice terminating the PMC subservicing arrangement covering approximately $40.0 billion of UPB, with deboarding expected in stages beginning June 19, 2020 and continuing in August 2020. Management estimated approximately $6.0 million of deboarding fees.
- Ocwen reported compliance with its debt covenants at filing, but warned that COVID-19 conditions could make future compliance and refinancing more difficult. S&P placed Ocwen’s ratings on CreditWatch with negative implications on April 13, 2020.
- The NYSE notified Ocwen that its common stock did not meet the $1.00 minimum average price requirement. The cure deadline was extended to December 17, 2020, and the board sought authorization for a potential one-for-five to one-for-25 reverse stock split.
- Legal and regulatory exposure remains significant. Accrued legal and regulatory matters, including accrued legal fees, totaled $33.3 million. Ocwen disclosed ongoing CFPB and Florida litigation, regulatory examinations and other claims, but could not estimate reasonably possible losses above recorded amounts.
- Management concluded that no conditions raised substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the financial statements.
Important Facts for Investors to Verify
- Confirm that the filing relates to Ocwen Financial Corporation, not Onity Group Inc.
- Track the pace and cost of COVID-19 forbearance growth, servicing advances, advance-funding capacity and recoveries after forbearance periods.
- Verify completion and economics of the NRZ PMC servicing transfer, including deboarding timing, fees, revenue loss and required cost reductions.
- Assess MSR valuation sensitivity to interest rates, prepayment speeds, delinquencies, servicing costs and financing costs.
- Review refinancing and extension status for the approximately $789.0 million of near-term debt obligations and the availability of eligible collateral.
- Monitor NYSE listing compliance, any reverse stock split, share count changes and potential effects on liquidity and market capitalization.
- Review developments in CFPB, Florida, state regulatory, litigation, indemnification and loan repurchase matters beyond accrued amounts.