Ocwen Financial Corporation — Form 10-Q Summary
Business context and reporting period
The filing identifies the registrant as Ocwen Financial Corporation, not Onity Group Inc. It covers the three and nine months ended September 30, 2017. Ocwen originates and services forward and reverse residential mortgage loans, with reportable segments comprising Servicing, Lending, and Corporate Items and Other. The company had approximately 8,300 employees and serviced or subserviced residential assets with unpaid principal balance of $187.5 billion at quarter-end.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $284.6 million | $359.4 million | $917.8 million | $1,063.3 million |
| Net income attributable to Ocwen stockholders | $(6.3) million | $9.4 million | $(83.5) million | $(189.3) million |
| Basic and diluted EPS | $(0.05) | $0.08 | $(0.66) | $(1.53) |
| Net cash provided by operating activities | Not separately presented for the quarter | $401.2 million | $350.4 million | |
| Cash balance | September 30, 2017: $299.9 million | December 31, 2016: $256.5 million |
- Q3 revenue declined 21%; nine-month revenue declined 14%. Servicing and subservicing fees fell 23% in Q3 and 16% year to date.
- Q3 income before taxes was a loss of $26.6 million, compared with income of $2.4 million in the prior-year quarter. The nine-month pretax loss improved to $98.7 million from $196.2 million.
- Total expenses were $273.5 million in Q3, broadly unchanged year over year, and $830.3 million for nine months, down 16%.
- Interest expense decreased 57% in Q3 and 31% year to date, primarily because of lower NRZ-related financing expense, portfolio runoff, and a $37.6 million favorable fair-value adjustment to the NRZ financing liability.
- Operating cash flow was positive, but investing activities used $659.3 million, principally for reverse mortgage originations. Financing activities provided $301.5 million, resulting in a $43.3 million increase in cash during the nine months.
- Total assets were $8.1 billion and total liabilities were $7.5 billion at September 30, 2017. Total equity was $589.4 million, down from $655.3 million at December 31, 2016.
- HMBS-related borrowings increased to $4.36 billion from $3.43 billion, while match-funded liabilities decreased to $1.03 billion from $1.28 billion.
Material changes versus the prior comparable period
- The servicing portfolio declined 14% year over year to $187.5 billion of UPB, and the number of serviced assets declined 12% to 1.27 million.
- Completed loan modifications declined 69% in Q3 and 37% for the nine-month period. HAMP-related modifications fell sharply following the program’s expiration on December 31, 2016, reducing related servicing revenue.
- Servicing segment pretax income fell to $5.7 million in Q3 from $35.4 million, although the segment generated $18.0 million of pretax income for nine months compared with a $42.4 million loss in the prior-year period.
- Lending production shifted toward reverse mortgages and retail forward lending. Q3 forward production declined 56% to $541.2 million, while reverse production increased 7% to $227.8 million.
- Ocwen closed its forward correspondent channel, began selling wholesale forward originations servicing-released, and agreed to sell assets of the wholesale forward business with an intended exit after closing.
- In July 2017, Ocwen entered new agreements with New Residential Investment Corp. to transfer MSRs and convert existing Rights to MSRs arrangements into a subservicing relationship. Ocwen received a $54.6 million lump-sum payment for a September transfer of approximately $15.9 billion of MSRs and issued NRZ 6,075,510 common shares for $13.9 million.
- The company recorded a $6.8 million write-off related to internally developed software for the wholesale forward lending business and expects approximately $1 million to $2 million of additional severance expense related to the exit.
- Professional services expense declined materially because monitoring engagements with the California Department of Business Oversight and New York Operations Monitor ended, and legal expenses decreased.
Guidance, outlook, commentary, risks and unusual items
- Management expects to focus on mortgage servicing and retail forward-lending recapture, while evaluating potential sales or strategic alternatives for the reverse lending and automotive capital services businesses.
- Management stated that it believes liquidity is sufficient to meet obligations and fund operations for the next twelve months, but noted that this conclusion depends on refinancing or extending maturing facilities, continued access to funding, operating performance, regulatory developments, and expected MSR-related proceeds.
- Approximately $1.0 billion of debt was scheduled to mature within the following twelve months as of September 30, 2017. Available borrowing capacity was constrained by eligible collateral, including $41.9 million of usable capacity under servicing advance facilities and $29.3 million under committed warehouse capacity.
- Ocwen remained subject to CFPB litigation, state regulatory actions, cease-and-desist orders, state attorney general lawsuits, Ginnie Mae oversight, and other legal and regulatory matters. As of November 1, 2017, regulatory matters had been resolved with 22 jurisdictions, while nine states and two state attorneys general remained unresolved.
- Ginnie Mae had declared an event of default related to the state regulatory orders but granted an extended forbearance period. Adverse action could restrict or terminate Ocwen’s Ginnie Mae issuer or servicer status and impair funding.
- Litigation accruals totaled $31.9 million at September 30, 2017. Ocwen had also paid $49.0 million in July under a proposed securities class-action settlement, subject to final court approval, and paid $30.0 million in April to resolve False Claims Act-related matters.
- Management disclosed a material weakness in internal control over financial reporting relating to the review and disclosure of regulatory matters. Remediation controls had been implemented but had not operated long enough to be considered fully remediated.
- Fair-value estimates are highly sensitive to prepayment speeds, delinquencies, discount rates, interest rates, and credit assumptions. MSRs carried at fair value totaled $598.1 million, while total MSRs were $944.3 million.
- NRZ provided funding for a substantial portion of servicing advances related to transferred Rights to MSRs. Failure of NRZ or its financing facilities to fund advances could materially affect Ocwen’s liquidity and operations.
Most important facts for investors to verify
- Confirm the registrant and ticker: the supplied filing is for Ocwen Financial Corporation, NYSE: OCN.
- Assess whether recurring servicing revenue can stabilize despite portfolio runoff, lower modification activity, HAMP expiration, and restrictions on acquiring new MSRs.
- Review the sustainability of positive operating cash flow after considering reverse mortgage funding needs, debt maturities, collateral requirements, and expected NRZ payments.
- Monitor CFPB, state, Ginnie Mae, GSE, and attorney general proceedings, including potential fines, operating restrictions, license actions, or servicer termination.
- Evaluate refinancing and covenant compliance risks, particularly given low credit ratings and approximately $1.0 billion of debt maturities within twelve months.
- Verify the final approval and economic consequences of the securities litigation and other proposed settlements.
- Track remediation of the material weakness and the implementation, cost, and operational risk of the planned transition from REALServicing to Black Knight’s MSP servicing system.