ONITY GROUP INC. annual report, FY2018

Business Context and Reporting Period

Filing: Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed February 27, 2019. The supplied metadata identifies “ONITY GROUP INC.,” but the filing is for Ocwen Financial Corporation (NYSE: OCN); this issuer discrepancy should be verified.

Ocwen services and originates residential mortgage loans through Servicing and Lending segments. Its residential servicing portfolio totaled 1,562,238 loans with unpaid principal balance of $256.0 billion at year-end. The company completed its acquisition of PHH Corporation on October 4, 2018 for $358.4 million in cash and recorded a $64.0 million bargain purchase gain.

Financial Performance and Key Metrics

Metric	2018	2017	Change
Total revenue	$1,063.0 million	$1,194.6 million	Down 11%
Servicing and subservicing fees	$934.3 million	$989.4 million	Down 6%
Gain on loans held for sale	$77.7 million	$103.4 million	Down 25%
Total expenses	$932.5 million	$998.6 million	Down 7%
Loss from continuing operations	$72.0 million	$128.5 million	Improved 44%
Net loss attributable to Ocwen stockholders	$70.8 million	$128.0 million	Improved 45%
Loss per share	$0.53	$1.01	Improved

Revenue declined primarily because of servicing portfolio runoff, fewer completed loan modifications following the expiration of HAMP, reduced lending production, and lower REO referral commissions. Cost reductions in compensation, professional services, servicing, occupancy and other expenses partly offset the revenue decline. MSR valuation adjustments increased to $153.5 million from $53.0 million, largely because 2017 benefited from an $86.7 million favorable valuation assumption update.

Segment results: Servicing generated a $31.9 million pretax loss versus $46.7 million of pretax income in 2017. Lending generated $11.2 million of pretax income versus a $4.4 million loss. Corporate Items and Other produced a $50.7 million pretax loss versus $186.2 million in 2017.
Cash flow: Operating activities provided $272.6 million, investing activities used $344.9 million, and financing activities provided $166.7 million. Ending cash was $329.1 million, compared with $259.7 million at year-end 2017; cash and restricted cash totaled $397.0 million.
Balance sheet: Total assets were $9.394 billion, total liabilities were $8.840 billion, and total equity was $554.7 million. MSRs were $1.457 billion, advances and match-funded advances were $1.187 billion, and loans held for investment were $5.499 billion.
Debt and liquidity: Match-funded liabilities were $778.3 million, other secured borrowings were $382.5 million, and senior notes were $448.7 million. Approximately $898.3 million of borrowings were scheduled to mature or enter amortization periods in 2019. Management stated that it expected to renew, replace or extend required facilities.
Margins and valuation: The filing does not present a single consolidated operating-margin measure. Based on reported revenue and expenses, the operating expense ratio was approximately 87.7% in 2018 versus 83.6% in 2017, before other income and expense.

Fourth-Quarter Information

For the quarter ended December 31, 2018, revenue was $310.9 million, expenses were $302.8 million, and loss from continuing operations before taxes was $7.8 million. Net loss attributable to Ocwen stockholders was $2.3 million, or $0.02 per share. The quarter included PHH results from October 4 through December 31 and the $64.0 million bargain purchase gain.

Material Changes Versus the Prior Comparable Period

PHH added 537,225 loans and $119.3 billion of UPB to the servicing portfolio at acquisition, contributing $72.5 million of revenue and a $24.8 million net loss from continuing operations during the post-acquisition period.
The year-end servicing portfolio increased 43% in UPB and 28% in loan count, primarily because of PHH, despite $28.5 billion of runoff and servicing transfers.
Forward loan production fell 65% to $870.3 million, primarily reflecting Ocwen’s exit from forward correspondent and wholesale channels. Reverse loan production declined 43% to $593.7 million.
Average employment declined 17% to 5,225, reflecting headcount reductions and cost-reduction initiatives, although total employees at year-end were approximately 7,200 after including PHH.
Effective January 1, 2018, Ocwen elected fair-value accounting for its remaining MSRs, producing an $82.0 million cumulative increase to retained earnings and increasing earnings sensitivity to prepayment, delinquency, servicing-cost and discount-rate assumptions.
Ocwen received a $279.6 million lump-sum payment from New Residential Investment Corp. in January 2018 under revised servicing arrangements. NRZ accounted for 51% of residential servicing UPB and 70% of servicing and subservicing fee revenue.

Guidance, Outlook, Risks and Unusual Items

Management’s stated near-term objective was to return to profitability and resume growth through five initiatives: integrate PHH, reengineer costs, establish funding for growth, replenish portfolio runoff, and fulfill regulatory commitments. Management targeted completion of the remaining transfer to Black Knight MSP in the second quarter of 2019; approximately 240,000 loans had been transferred by February 27, 2019.

Regulatory and litigation exposure: Ocwen remained subject to CFPB, Florida and Massachusetts legal actions, ongoing examinations, subpoenas and settlement obligations. The company had accrued $62.8 million for probable and estimable legal and regulatory matters but could not estimate reasonably possible losses above accrued amounts.
California obligation: Approximately $15.0 million of a $198.0 million California borrower debt-forgiveness commitment remained at December 31, 2018. Failure to complete it by June 30, 2019, absent an extension, could require cash payment of the remaining amount.
Liquidity and refinancing: The company depended on renewing or replacing advance facilities, warehouse lines and other borrowings. Available advance-facility capacity was $46.7 million, and none was usable based on pledged eligible collateral at year-end. Management nevertheless concluded that liquidity was adequate for the next twelve months.
Counterparty concentration: NRZ was the largest servicing counterparty, with termination and transfer rights over a substantial portion of the portfolio. A loss or reduction of the relationship could materially affect revenue and liquidity.
Technology transition: The migration from REALServicing to Black Knight MSP created operational, data-integrity, customer-service and regulatory-compliance risks. Ocwen also remained dependent on Altisource under agreements extending through August 2025.
Reverse mortgage commitments: Future borrower draw commitments were $1.4 billion, with estimated unrecognized future value of $68.1 million. The company also had HMBS issuer obligations and exposure to property values, foreclosure timelines and FHA reimbursement processes.
Tax matters: The company reported NOL carryforwards of approximately $428.1 million in the risk discussion, but Section 382 ownership changes in January 2015 and December 2017 limit the usability of certain tax attributes.
Unusual items: The 2018 results included the $64.0 million PHH bargain purchase gain, $13.7 million of PHH acquisition costs, substantial PHH integration and severance costs, and elevated MSR valuation adjustments.

Important Facts for Investors to Verify

Confirm the issuer identity because the metadata names Onity Group Inc., while the filing identifies Ocwen Financial Corporation.
Review whether PHH integration, Black Knight MSP migration and planned cost reductions delivered the projected operating synergies.
Monitor refinancing and renewal of 2019 maturities, including approximately $898.3 million of debt subject to maturity or amortization events.
Assess the effect of NRZ’s termination, transfer and advance-funding rights on future servicing revenue and liquidity.
Track outcomes of the CFPB, Florida and Massachusetts proceedings and the potential costs of escrow remediation and other regulatory commitments.
Evaluate the sensitivity of MSR valuations and earnings to interest rates, prepayment speeds, delinquencies, servicing costs and discount rates.
Verify completion of the remaining California debt-forgiveness obligation and the transition of New York loans off REALServicing by April 30, 2020.
Review the detailed debt covenants, tangible-net-worth requirements, servicer ratings and available collateral capacity before assessing liquidity risk.