Ocwen Financial Corporation Form 10-Q Summary
Filing identification: The supplied filing is for Ocwen Financial Corporation (NYSE: OCN), although the request metadata identifies “ONITY GROUP INC.” The report covers the unaudited three months ended March 31, 2017, compared with March 31, 2016; balance-sheet comparisons are to December 31, 2016.
Business Context and Reporting Period
Ocwen is a mortgage servicing and lending company operating through servicing, lending, and corporate/new-business activities. At March 31, 2017, it serviced or subserviced approximately 1.35 million residential assets with $202.4 billion of unpaid principal balance and had approximately 9,400 employees.
The company originates, purchases, sells and securitizes conventional, government-insured forward mortgages and reverse mortgages. It also operates Automotive Capital Services, which provides inventory-secured financing to used-car dealers.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $321.9 million | $330.8 million | Down 3% |
| Operating expenses | $276.4 million | $328.7 million | Down 16% |
| Loss before income taxes | $30.5 million | $102.1 million | Loss narrowed 70% |
| Net loss | $32.6 million | $111.2 million | Loss narrowed 71% |
| Net loss attributable to Ocwen stockholders | $32.7 million | $111.3 million | Loss narrowed 71% |
| Diluted loss per share | $0.26 | $0.90 | Improved |
| Net cash provided by operating activities | $85.7 million | $140.9 million | Down 39% |
| Cash at period end | $268.3 million | $280.5 million | Q1 2016 comparison |
Total revenue declined primarily because servicing and subservicing fees decreased 8% to $272.5 million as the servicing portfolio ran off. Gain on loans held for sale increased 47% to $22.9 million, supported by higher reverse-lending volumes and margins. The implied net margin was approximately negative 10.1% in Q1 2017 versus negative 33.6% in Q1 2016.
Expense reductions were led by lower servicing and origination costs, professional services costs, occupancy costs, headcount, monitoring expenses and MSR impairment. Interest expense declined 21% to $84.1 million, partly because of lower NRZ-related financing costs, lower match-funded liabilities and the absence of $6.2 million of prior-year payments related to an earlier servicer-rating downgrade.
At March 31, 2017, total assets were $7.86 billion, total liabilities were $7.24 billion and total equity was $623.4 million. Cash was $268.3 million. Mortgage servicing rights totaled $1.01 billion, loans held for investment totaled $3.92 billion, and advances plus match-funded advances totaled approximately $1.60 billion.
Borrowings included $4.30 billion of financing liabilities, $1.22 billion of match-funded liabilities, $738.4 million of other secured borrowings and $346.9 million of senior notes. Management stated that it believed the company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Servicing revenue fell $25.0 million, primarily from portfolio runoff. Residential servicing UPB declined 15% year over year to $202.4 billion.
- Total expenses fell $52.3 million. MSR amortization and valuation adjustments declined $31.6 million, including a reduction in government-insured MSR impairment from $30.0 million to $1.4 million.
- Professional services expense declined $29.1 million, primarily because of lower regulatory-monitoring and legal costs, including the termination of the California auditor engagement.
- Servicing income before taxes improved to $3.1 million from a $65.7 million loss; lending income before taxes improved to $1.1 million from a $0.6 million loss.
- Forward loan production increased 7% to $840.5 million, while reverse loan production increased 43% to $273.1 million.
- Automotive dealer financing was expanded through new financing facilities, but the company recorded a $6.1 million provision for losses on dealer financing notes because of deteriorating credit quality.
- Loans held for investment increased 10% from December 31, 2016, primarily from reverse-mortgage originations and securitizations accounted for as secured financings. Related HMBS borrowings increased to approximately $3.7 billion.
- The company adopted FASB ASU 2016-09 relating to employee share-based payments. The adoption did not materially affect the financial statements.
Cash Flow, Liquidity and Outlook
Operating activities generated $85.7 million, principally reflecting $106.0 million of net collections of servicing advances. Investing activities used $275.0 million, primarily for net reverse-mortgage funding of $266.8 million, ACS activity and capital expenditures. Financing activities provided $201.1 million, including proceeds from reverse-mortgage securitizations and warehouse borrowings, partially offset by repayments of match-funded liabilities and other debt.
Management stated that it believed available liquidity was sufficient to meet obligations and fund operations for the next twelve months. However, approximately $1.1 billion of debt was expected to mature within the next twelve months, including servicing match-funded liabilities and mortgage warehouse facilities. Management expected to renew, replace or extend these facilities based on historical experience.
Management expected loan-origination volumes to decline in the near term because of regulatory restrictions. HAMP expired on December 31, 2016; HAMP fees were $21.0 million, or approximately 7% of servicing segment revenue, in Q1 2017, and are expected to decline over time.
Ocwen was negotiating a potential new arrangement with New Residential Investment Corp. (NRZ) that would transfer legal ownership of MSRs to NRZ, extend the relationship to at least 2022, provide Ocwen with upfront payments based on an indicated $425.0 million amortized value, and include an NRZ equity investment equal to 4.9% of Ocwen's outstanding shares after issuance. No definitive agreement had been executed, and the filing states that there could be no assurance that the proposed terms would be completed.
Regulatory, Legal and Other Risks
- After the quarter ended, the CFPB, Florida Attorney General and Massachusetts Attorney General filed lawsuits or actions alleging servicing-related violations. Thirty state mortgage and banking regulators also took regulatory action involving licensing, escrow, servicing, origination and foreclosure matters.
- Regulatory orders could restrict MSR acquisitions, loan originations or foreclosure activity and could ultimately require servicing transfers or cessation of servicing in certain states.
- Credit-rating agencies downgraded or placed negative reviews on Ocwen's corporate ratings after the regulatory actions. Further downgrades could increase borrowing costs, restrict liquidity and affect approved-servicer status.
- Ocwen depends substantially on NRZ to fund advances related to approximately $114.3 billion of NRZ-associated servicing UPB. If NRZ cannot fund advances, Ocwen could be contractually required to fund them.
- Accrued probable litigation losses totaled $57.9 million at March 31, 2017. The company could not estimate reasonably possible losses above recorded amounts. The $30.0 million Fisher Cases settlement was paid in April 2017.
- The company recorded a $12.5 million accrual related to CFPB discussions but stated that losses from the CFPB matter could be lower or materially higher.
- Management disclosed a material weakness in internal control over financial reporting related to controls over the review and disclosure of regulatory matters. Management was evaluating remediation and expected to update investors in the June 30, 2017 Form 10-Q.
- MSR values are sensitive to prepayment speeds, delinquencies, servicing costs, discount rates and interest rates. A 10% adverse change in assumed MSR prepayment speeds would reduce the fair value of fair-value MSRs by approximately $63.5 million.
Most Important Facts for Investors to Verify
- Confirm that the issuer is Ocwen Financial Corporation rather than the company named in the request metadata.
- Track the resolution, financial exposure and operating restrictions arising from the CFPB, state attorney general and state regulatory actions initiated after March 31, 2017.
- Verify renewal, replacement or extension of the approximately $1.1 billion of borrowings coming due within twelve months and monitor covenant compliance.
- Determine whether the proposed NRZ MSR transfer, relationship extension and 4.9% equity investment were finalized and assess their effect on servicing economics, liquidity and leverage.
- Monitor continued servicing-portfolio runoff, the post-HAMP revenue trajectory and the ability of lending growth to offset declining servicing revenue.
- Assess the material internal-control weakness, remediation progress and any effect on regulatory disclosures or financial reporting.
- Review potential losses beyond recorded reserves for litigation, regulatory matters, loan repurchases, indemnification obligations and automotive dealer financing.