ONITY GROUP INC. quarterly report, Q2 FY2017

Business Context and Reporting Period

The filing is Ocwen Financial Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The request metadata identifies “ONITY GROUP INC.,” but the filing itself identifies the registrant as Ocwen Financial Corporation (NYSE: OCN). Ocwen originates and services forward and reverse residential mortgage loans through its Servicing, Lending, and Corporate Items and Other segments. It had approximately 8,900 employees and serviced or subserviced approximately $194.9 billion of residential and commercial assets at June 30, 2017.

Financial Performance and Position

Metric	Three months ended June 30, 2017	Year-over-year change	Six months ended June 30, 2017	Year-over-year change
Total revenue	$311.3 million	Down 17%	$633.2 million	Down 10%
Net loss attributable to Ocwen stockholders	$44.5 million	Improved from $87.4 million loss	$77.2 million	Improved from $198.7 million loss
Loss per share	$0.36	Improved from $0.71	$0.62	Improved from $1.60
Operating expenses	$280.5 million	Down 27%	$556.9 million	Down 22%
Operating cash flow	Not separately presented	Not applicable	$280.7 million	Up from $172.2 million

Pre-tax loss was $41.6 million for the quarter and $72.1 million for the six-month period. The company recorded income tax expense of $2.8 million for the quarter and $5.0 million year to date despite its losses, principally because of jurisdictional earnings mix and uncertain tax positions.

Cash was $251.5 million at June 30, 2017, compared with $256.5 million at December 31, 2016.
Total assets were $7.93 billion and total liabilities were $7.35 billion. Total equity declined to $580.2 million from $655.3 million, primarily because of the year-to-date net loss.
HMBS-related borrowings increased to $4.06 billion from $3.43 billion, while match funded liabilities declined to $1.11 billion from $1.28 billion.
Loans held for investment, primarily reverse mortgages, increased 18% to $4.22 billion. Mortgage servicing rights declined 6% to $975.2 million.
Servicing and subservicing fees declined 17% in the quarter and 13% year to date, primarily because of servicing portfolio runoff and the expiration of the HAMP program.
Gain on loans held for sale increased 1% in the quarter and 18% year to date, supported by higher reverse-mortgage production and margins.
The servicing segment generated pre-tax income of $9.2 million in the quarter and $12.3 million year to date, compared with losses in the prior-year periods. Lending generated a $0.6 million quarterly loss and $0.5 million year-to-date income.

Material Changes Versus Prior Comparable Period

The residential servicing portfolio declined 15% year over year to $194.8 billion, and the number of serviced loans declined 13% to 1.31 million.
Completed loan modifications declined 44% in the quarter and 19% year to date. HAMP modifications fell sharply following the program’s December 31, 2016 expiration; HAMP fees declined 69% in the quarter and 44% year to date.
Expenses improved substantially because of lower headcount, reduced legal and regulatory-monitoring costs, technology cost reductions, facility consolidation, and lower servicing-related costs.
Professional services expense included a $56.0 million accrual related to a proposed settlement of the Securities Class Action, partly offset by $35.8 million of anticipated legal and insurance recoveries.
Government-insured MSR impairment charges declined to $4.7 million year to date from $39.0 million in the prior-year period, although MSR amortization increased to $25.4 million from $21.2 million.
Forward loan production declined 37% in the quarter and 19% year to date as Ocwen exited its correspondent channel and focused on wholesale and retail channels. Reverse loan production increased 33% in the quarter and 38% year to date.
Average headcount declined 19% year to date in servicing, while lending headcount increased as Ocwen expanded reverse lending and invested in its loan operating system.

Liquidity, Debt, Outlook, and Risks

Management stated that it believed liquidity was sufficient to meet obligations and fund operations for the next twelve months. This conclusion depends on renewing, replacing, or extending maturing financing facilities, continued operating cash flow, loan sales, and anticipated proceeds from the company’s agreements with New Residential Investment Corp. (NRZ).

Approximately $928.7 million of debt was scheduled to mature within twelve months of June 30, 2017. Management expected to renew, replace, or extend the facilities, but acknowledged that failure could require accelerated amortization or otherwise materially impair liquidity.
At June 30, 2017, none of the available borrowing capacity under the advance facilities or committed warehouse capacity could be used based on eligible collateral then pledged. Total warehouse borrowing capacity was $725.0 million, including $113.9 million of committed capacity available at that date.
Ocwen depended substantially on NRZ for funding servicing advances related to approximately $109.6 billion of non-Agency servicing rights, with approximately $3.4 billion of related advances outstanding.
On July 23, 2017, Ocwen and NRZ entered into agreements to convert NRZ’s existing rights to MSRs into fully owned MSRs for NRZ, with Ocwen continuing as subservicer for an initial five-year term. If all MSRs had transferred as of June 30, 2017, restructuring fees would have totaled approximately $400 million. NRZ also purchased 6,075,510 newly issued Ocwen shares for $13.9 million.
Regulatory pressure was significant. Since April 20, 2017, the CFPB, two state attorneys general, and 30 state mortgage and banking regulators had taken actions alleging compliance and licensing deficiencies. State orders restricted activities including MSR acquisitions, loan originations, and foreclosure activity in certain jurisdictions.
Ginnie Mae declared an event of default under certain guaranty agreements related to the state regulatory orders but granted a 90-day forbearance period. Ginnie Mae reserved the right to restrict or terminate Ocwen’s participation in its MBS program.
Credit ratings were weak: Moody’s rated Ocwen Caa1 and placed it on review for downgrade; S&P rated it B-; Fitch had the ratings on watch negative; and Kroll rated it CCC with a negative outlook.
Ocwen accrued $86.1 million for probable and estimable litigation losses, including $56.0 million related to the Securities Class Action settlement in principle. The filing states that potential losses could materially exceed accrued amounts.
Management reported a material weakness in internal control over financial reporting concerning the review and disclosure of regulatory matters. Remediation efforts had begun, but the weakness was not yet considered remediated.

Investor Verification Items

Verify the registrant identity because the supplied metadata names ONITY GROUP INC., while the filing is for Ocwen Financial Corporation.
Verify completion, approvals, economics, and cash proceeds of the July 2017 NRZ MSR restructuring and related equity issuance.
Monitor debt maturities, facility renewals, collateral availability, covenant compliance, and the company’s ability to maintain liquidity despite low credit ratings.
Track the CFPB litigation, state cease-and-desist orders, Ginnie Mae’s forbearance and potential remedies, licensing requirements, and any impact on servicing or lending volumes.
Assess whether expense reductions can offset continued servicing portfolio runoff and the loss of HAMP-related revenue.
Evaluate the sensitivity of MSR valuations and reverse-mortgage fair values to prepayment rates, delinquencies, interest rates, discount rates, and credit losses.
Follow the Securities Class Action and other litigation settlements, including the proposed cash and stock consideration and possible losses beyond recorded accruals.
Confirm remediation of the material weakness in regulatory-matter disclosure controls in subsequent filings.