Business Context and Reporting Period
The source filing identifies the registrant as Ocwen Financial Corporation, not Onity Group Inc. This unaudited Form 10-Q covers the three months ended March 31, 2018, with comparative results for the three months ended March 31, 2017. Ocwen originates and services forward and reverse residential mortgage loans, including servicing for New Residential Investment Corp. (NRZ), Fannie Mae, Freddie Mac and Ginnie Mae.
At March 31, 2018, Ocwen serviced or subserviced approximately 1.2 million residential loans with aggregate unpaid principal balance of $173.4 billion, down 14% from March 31, 2017. The company had approximately 7,200 employees at quarter-end.
Financial Performance and Position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $260.3 million | $321.9 million | Down 19% |
| Servicing and subservicing fees | $222.1 million | $272.5 million | Down 18% |
| Total expenses | $206.5 million | $276.4 million | Down 25% |
| Income before taxes | $5.0 million | $(30.5) million | Improved |
| Net income attributable to Ocwen stockholders | $2.5 million | $(32.7) million | Improved |
| Diluted earnings per share | $0.02 | $(0.26) | Improved |
| Net cash provided by operating activities | $99.4 million | $89.3 million | Up 11% |
Pre-tax margin was approximately 1.9% in Q1 2018 versus negative 9.5% in Q1 2017. Net margin attributable to Ocwen stockholders was approximately 1.0% versus negative 10.2% in the prior-year quarter. The effective tax rate was 47.3%, compared with negative 7.0% in Q1 2017.
- Cash was $285.7 million at March 31, 2018, compared with $259.7 million at December 31, 2017. Cash and restricted cash totaled $322.4 million.
- Total assets were $8.46 billion, including $1.07 billion of mortgage servicing rights, $1.28 billion of advances and match funded assets, and $4.99 billion of reverse mortgage loans held for investment.
- Total liabilities were $7.83 billion and total equity was $632.3 million. Ocwen stockholders’ equity increased 16% from December 31, 2017, principally because of an $82.0 million cumulative increase from the MSR fair value election and Q1 net income.
- Debt and financing balances included $4.84 billion of HMBS-related borrowings, $800.6 million of match funded liabilities, $793.9 million of other financing liabilities, $442.4 million of other secured borrowings and $347.5 million of senior notes.
- Operating cash flow was $99.4 million; investing activities used $135.9 million and financing activities provided $56.4 million. Cash increased by $19.9 million during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of servicing portfolio runoff. Average servicing UPB declined 14%, while completed loan modifications fell 37% and HAMP-related fees declined sharply following the expiration of the HAMP program.
- Expenses declined due to headcount reductions, lower legal and monitoring costs, lower servicing costs and the exit from the automotive dealer financing business. The company recorded $5.6 million of severance expense in Corporate Items and Other and $5.7 million in compensation and benefits expense.
- MSR valuation adjustments declined to $17.1 million from $40.5 million, partly because higher interest rates favorably affected Agency MSR valuations.
- Interest expense declined 40% to $50.8 million, principally because of lower NRZ financing liability expense, portfolio runoff and a $16.6 million favorable fair value adjustment related to the January 2018 NRZ payment.
- Effective January 1, 2018, Ocwen elected fair value accounting for MSRs previously carried at amortized cost. The election increased retained earnings by $82.0 million.
- Ocwen received a $279.6 million lump-sum payment from NRZ in January 2018 under the New RMSR Agreements. Aggregate lump-sum payments under the 2017 and New RMSR Agreements totaled $334.2 million.
- Forward loan production declined 74% as Ocwen exited correspondent and wholesale channels, while retail forward production increased 18%. Lending segment income before taxes increased to $8.8 million from $1.1 million because of lower expenses and improved retail margins.
- Ocwen terminated its automotive dealer floor-plan financing facility in January 2018 and expected to complete its exit from that business by the end of Q2 2018.
Guidance, Outlook, Risks and Unusual Items
Management stated that it expected sufficient liquidity to meet obligations and fund operations for the next twelve months, while acknowledging substantial uncertainty. Approximately $738.0 million of debt was scheduled to mature within the following 12 months, and the company expected to renew, replace or extend facilities consistent with historical practice.
- Ocwen entered into an agreement to acquire PHH Corporation, with closing anticipated in the second half of 2018, subject to stockholder, regulatory and other approvals. Estimated merger consideration was approximately $360.0 million, including an estimated $74.0 million funded from Ocwen cash, and Ocwen expected to assume approximately $119.0 million of PHH senior notes.
- The PHH transaction is intended to accelerate migration to Black Knight’s LoanSphere MSP platform, improve scale and margins, reduce redundant costs and support future servicing growth. Completion and anticipated benefits are not assured.
- Ocwen remained dependent on NRZ for substantial funding of servicing advances relating to approximately $98.3 billion of NRZ-associated UPB. Failure by NRZ or its financing sources to fund advances could materially affect Ocwen’s liquidity.
- Regulatory and litigation exposure remained significant. The company had accrued $46.3 million for probable and estimable legal and regulatory matters but stated that potential losses could materially exceed the accrued amount and that it could not estimate reasonably possible losses above recorded amounts.
- Ginnie Mae had declared an event of default related to state regulatory actions but continued to forbear from exercising remedies through July 24, 2018. Management reported that Ginnie Mae expected to evaluate the company’s compliance and potentially close the matter, but adverse action could impair funding and servicing operations.
- Servicer ratings were weak: Moody’s corporate rating was Caa1, S&P’s was B-, and Fitch’s was B- with a Negative outlook. Moody’s had the servicing ratings on Watch for Downgrade and Fitch’s servicing outlook was Negative.
- The company was transitioning from the REALServicing platform to Black Knight’s LoanSphere MSP, with an anticipated 24-month implementation timeline. Delays, cost overruns or operational disruption could affect customers, compliance and results.
- MSR valuation was sensitive to prepayment and discount-rate assumptions. A hypothetical 10% increase in prepayment speeds would reduce MSR fair value by approximately $94.7 million; a 10% adverse change in discount-rate assumptions would reduce fair value by approximately $30.9 million.
- Management disclosed full valuation allowances on U.S. and USVI deferred tax assets and stated that accounting for certain Tax Act provisions, including BEAT and GILTI, remained incomplete.
Most Important Facts to Verify
- Confirm the issuer identity: the provided filing is for Ocwen Financial Corporation, although the request metadata names Onity Group Inc.
- Verify completion, financing, regulatory approval and integration progress for the proposed PHH acquisition.
- Monitor refinancing or renewal of near-term maturities, including advance facilities and warehouse arrangements, and compliance with debt covenants.
- Track Ginnie Mae’s resolution of its notice of default and the status of state, CFPB, Florida and Massachusetts regulatory matters.
- Assess the sustainability of the return to quarterly profitability given continued servicing portfolio runoff, reduced modification activity and dependence on cost reductions and fair-value changes.
- Review the effect of NRZ’s servicing and advance-funding arrangements on future revenue, liquidity and interest expense.
- Reassess MSR fair values, prepayment speeds, delinquencies, discount rates and the company’s transition to the new servicing technology platform.