Business Context and Reporting Period
The supplied filing is Ocwen Financial Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019; it does not identify Onity Group Inc. The discrepancy in issuer name should be verified. Ocwen is a non-bank mortgage servicer and originator operating through PHH Mortgage Corporation and Liberty Home Equity Solutions. Its primary businesses are mortgage servicing, subservicing, forward lending and reverse-mortgage lending.
The filing reflects the October 2018 PHH acquisition, ongoing integration, completion of the remaining transfer from the REALServicing system to Black Knight MSP during the second quarter, and entity mergers into PHH Mortgage Corporation.
Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $274.3 million, up 8% | $578.2 million, up 13% |
| Net loss attributable to stockholders | $89.7 million, versus $29.8 million loss | $134.2 million, versus $27.3 million loss |
| Loss per share | $0.67 | $1.00 |
| Operating cash flow | Not separately presented for the quarter | $128.8 million, versus $196.6 million |
| Total assets at period end | $9.63 billion | |
| Total stockholders’ equity at period end | $422.9 million, down from $554.7 million at December 31, 2018 |
- Servicing and subservicing fees increased 8% in the quarter and 11% year to date, to $239.2 million and $495.0 million, respectively.
- Gain on loans held for sale declined 38% in the quarter and 26% year to date, to $15.1 million and $32.7 million.
- MSR valuation adjustments were an expense of $147.3 million in the quarter and $256.3 million year to date, compared with $33.1 million and $50.2 million in the comparable 2018 periods.
- Total expenses increased 61% in the quarter and 48% year to date. The principal driver was the MSR valuation adjustment, along with higher compensation, occupancy and integration-related costs.
- Approximate net loss margins were negative 32.7% for the quarter and negative 23.2% year to date, compared with approximately negative 11.7% and negative 5.3% in the 2018 periods.
- Cash was $287.7 million and restricted cash was $60.7 million at June 30, 2019. Cash and restricted cash totaled $348.4 million, down $48.6 million year to date.
- Cash flow from investing activities was an outflow of $287.8 million, including $99.4 million for MSR purchases and $194.5 million of net cash outflows related to HECM reverse mortgages. Financing activities provided $110.4 million.
- Major reported borrowings included $5.75 billion of HMBS-related borrowings, $671.8 million of match-funded liabilities, $516.5 million of other secured borrowings and $447.6 million of senior notes.
- MSRs at fair value were $1.31 billion, down from $1.46 billion at December 31, 2018. Loans held for investment were $5.90 billion, up 7%.
- The residential servicing portfolio was approximately 1.49 million loans with $229.3 billion of unpaid principal balance, up 37% from June 30, 2018. NRZ represented 53% of portfolio UPB and was the largest servicing client.
Material Changes Versus the Prior Comparable Period
- Revenue grew primarily from the PHH acquisition and MSR acquisitions, but profitability deteriorated substantially because of higher MSR fair-value losses and integration and restructuring costs.
- Lower interest rates contributed to unfavorable MSR valuation adjustments. The filing states that the 10-year swap rate declined 45 basis points in the second quarter and 75 basis points in the first six months.
- Other revenue increased to $20.1 million in the quarter and $50.5 million year to date, largely because of favorable fair-value changes in HECM loans and related HMBS financing liabilities.
- Interest expense fell 59% in the quarter and 20% year to date, mainly because of favorable fair-value changes and runoff in NRZ-related financing liabilities.
- Completed loan modifications declined 51% in the quarter and 39% year to date, while forward and reverse loan production also declined versus 2018.
- The company incurred $32.2 million of cost-reengineering expenses during the first six months, including $24.2 million of employee-related costs. It estimated total plan costs of $65.0 million, with $32.8 million remaining at June 30.
- Professional services expense benefited from a $30.7 million recovery from a service provider recorded in the first quarter.
Guidance, Outlook, Risks and Unusual Items
- Management’s stated near-term objective was to return to profitability while maintaining an appropriate risk and compliance environment. It targeted $340.0 million of annualized expense reductions against combined second-quarter 2018 expenses, but provided no earnings or revenue guidance.
- Management expected substantial expense reductions and remaining reengineering costs in the second half of 2019. It targeted a reduction of more than 2,100 employees by year-end 2019 and consolidation primarily into four U.S. and U.S. Virgin Islands locations.
- As of June 30, approximately $827.7 million of debt was expected to come due, begin amortizing or require partial repayment within the next 12 months. Management expected to renew, replace or extend the relevant facilities, but stated that failure to do so could materially affect liquidity.
- On July 1, 2019, the company established a committed MSR-backed financing facility with maximum borrowing capacity of $300.0 million, terminating in June 2020 unless extended. The filing states that $144.3 million had been borrowed under the facility by July 2.
- In July 2019, the company repurchased $29.4 million principal amount of 8.375% senior secured notes for $25.7 million.
- Management stated that it believed it had sufficient liquidity and access to capital to meet obligations and fund operations for the next 12 months, but noted that this conclusion depended on forecasts, refinancing access, covenant compliance, regulatory outcomes and continued business performance.
- Material risks include regulatory investigations and consent orders, litigation, servicing and seller/servicer requirements, dependence on NRZ for advance funding and servicing relationships, MSR fair-value volatility, interest-rate movements, loan repurchase obligations, technology migration risks, credit-rating actions and the ability to maintain required licenses and net worth.
- Accrued legal and regulatory matters were $53.1 million at June 30, 2019. The company could not estimate reasonably possible losses above recorded amounts.
- The company had $1.5 billion of additional borrower capacity under reverse-mortgage commitments and $95.8 million and $22.3 million of forward and reverse mortgage interest-rate-lock commitments, respectively.
Investor Verification Checklist
- Verify the issuer: the metadata names Onity Group Inc., while the filing identifies Ocwen Financial Corporation, ticker OCN.
- Verify the sustainability of operating cash flow after servicing advances, MSR purchases, HECM funding and debt repayments.
- Assess whether the $340.0 million expense-reduction target can offset recurring MSR volatility, integration costs and regulatory expenses.
- Review the maturity and renewal status of the approximately $827.7 million of borrowings affected within the next 12 months.
- Evaluate dependence on NRZ, including the $19.8 billion UPB of rights-to-MSR arrangements and NRZ’s advance-funding obligations.
- Review the sensitivity of MSR valuations to prepayment speeds, interest rates, delinquencies and discount rates; a 10% adverse shift in prepayment speeds was estimated to reduce MSR fair value by $130.9 million.
- Confirm the status and potential cost of CFPB, state attorney general, state regulator, TCPA, securities, loan repurchase and other legal matters.
- Assess whether regulatory commitments, licensing requirements and minimum tangible-net-worth covenants remain satisfied.