Business context and reporting period
The supplied filing is Ocwen Financial Corporation’s Form 10-K, not Onity Group Inc. It covers the fiscal year ended December 31, 2017; the filing also reports fourth-quarter 2017 results. Ocwen services and originates residential mortgage loans through its Servicing and Lending segments, with most revenue generated by mortgage servicing.
- Residential servicing portfolio at year-end: 1,221,695 loans with $179.4 billion of unpaid principal balance, down 14% from 2016.
- 2017 production: $2.5 billion of forward mortgages and $1.0 billion of reverse mortgages.
- Management exited forward correspondent and wholesale lending during 2017 and planned to exit Automotive Capital Services by the end of the second quarter of 2018.
Financial performance and condition
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $1,194.6 million | $1,387.2 million | Down 14% |
| Servicing and subservicing fees | $989.4 million | $1,186.6 million | Down 17% |
| Gain on loans held for sale | $103.4 million | $90.4 million | Up 14% |
| Total expenses | $998.6 million | $1,223.3 million | Down 18% |
| Loss before taxes | $144.0 million | $206.4 million | Loss narrowed 30% |
| Net loss attributable to Ocwen stockholders | $128.0 million | $199.8 million | Loss narrowed 36% |
| Loss per share | $1.01 | $1.61 | Improved |
| Operating expense ratio | 83.6% | 88.2% | Improved |
| Net margin | (10.8%) | (14.4%) | Improved |
Operating cash flow was $412.0 million, compared with $474.7 million in 2016, primarily reflecting $330.1 million of net servicing-advance collections. Investing activities used $839.2 million, principally due to $833.2 million of net cash outflows for HECM reverse mortgages. Financing activities provided $430.4 million. Year-end cash was $259.7 million, versus $256.5 million in 2016.
- Total assets: $8.4 billion, up 10%.
- Total liabilities: $7.9 billion, up 12%.
- Total equity: $546.9 million, down 17%; Ocwen stockholders’ equity was $545.0 million.
- HMBS-related borrowings: $4.6 billion, up from $3.4 billion, reflecting reverse-mortgage securitizations accounted for as secured financings.
- Match-funded liabilities: $998.6 million, down from $1.3 billion.
- Other secured borrowings: $545.9 million; senior notes: $347.3 million.
Material changes versus the prior comparable period
- Servicing revenue declined $197.2 million because of portfolio runoff, MSR restrictions and lower modification activity following the expiration of HAMP. Completed modifications fell 39% to 45,682, and HAMP modifications fell 70%.
- Cost reductions partially offset revenue pressure. Compensation and benefits declined 6%, professional services declined 25%, servicing and origination expense declined 49%, and total expenses declined 18%.
- Regulatory-monitoring expense fell to $6.4 million from $81.7 million as the California auditor and New York operations monitor engagements ended. However, legal fees and settlements increased.
- Servicing generated $46.7 million of pretax income, compared with $3.4 million in 2016. Lending posted a $4.4 million pretax loss, compared with near break-even results in 2016. Corporate Items and Other generated a $186.2 million pretax loss.
- Forward loan production declined 40% to $2.5 billion as the company exited correspondent and wholesale channels. Reverse production increased 26% to $1.0 billion, and reverse-loan gains increased 76%.
- On September 1, 2017, Ocwen transferred MSRs with $15.9 billion of UPB to New Residential Investment Corp. and received $54.6 million. The January 2018 agreements produced an additional $279.6 million lump-sum payment, but shifted a larger portion of future servicing economics to NRZ.
- Ocwen issued 6.1 million common shares to NRZ for $13.9 million and ended 2017 with 131.5 million shares outstanding.
Guidance, outlook, risks and unusual items
No formal earnings or revenue guidance is provided. Management stated that it expects sufficient liquidity to meet obligations and fund operations for the next twelve months, but this depends substantially on renewing, replacing or extending approximately $1.0 billion of debt facilities coming due within twelve months and maintaining compliance with debt, regulatory and counterparty requirements.
- Regulatory and litigation exposure: The CFPB, Florida and Massachusetts authorities and other agencies had ongoing actions or investigations. Ocwen had accrued $51.1 million for probable and estimable legal and regulatory matters and paid $174.9 million during 2017 for settlements, judgments, penalties and fines. It could not estimate reasonably possible losses above accrued amounts.
- Ginnie Mae: Ginnie Mae declared an event of default related to the 2017 state regulatory actions but continued to forbear through April 29, 2018. Restriction or termination of Ginnie Mae issuer or servicer status could materially affect funding and operations.
- Growth restrictions: Multi-state settlements generally prohibited new residential MSR acquisitions until April 30, 2018, required a transition away from REALServicing, escrow testing of approximately 9,000 loan files and continuing financial-condition reporting through September 2020.
- NRZ concentration: Ocwen serviced approximately $101.8 billion of UPB for which MSR rights had been sold to NRZ, with approximately $3.2 billion of associated advances. NRZ termination rights and its obligation to fund advances are important liquidity and revenue dependencies.
- Technology transition: Ocwen planned a roughly 24-month transition from REALServicing to Black Knight’s LoanSphere MSP platform. Delays or errors could increase costs, disrupt servicing and impair regulatory compliance.
- PHH acquisition: After year-end, Ocwen agreed to acquire PHH for approximately $360 million, expected to close in the second half of 2018 subject to approvals and other conditions. Ocwen expected to fund approximately $74 million from its own cash, assume approximately $119 million of PHH senior notes and incur integration costs.
- Unusual valuation item: A fourth-quarter benchmarking update increased the value of non-Agency MSRs by approximately $84.4 million and largely offsetting increases in the NRZ financing liability were recognized as interest expense. The fourth quarter also included a $28.5 million recovery of previously recognized indemnification losses.
- Reverse mortgage commitments: Future HECM equity-draw commitments were $1.4 billion, and estimated unrecognized future value was $70.7 million. Failure to fund or securitize future draws could pressure liquidity.
- Controls and accounting: Management and Deloitte concluded that internal control over financial reporting was effective at December 31, 2017, and management stated that a previously reported material weakness concerning regulatory disclosures had been remediated.
Most important facts for an investor to verify
- Confirm the issuer identity: the source filing is for Ocwen Financial Corporation, whereas the request identifies Onity Group Inc.
- Review the maturity schedule and renewal status for the approximately $1.0 billion of facilities due within twelve months, including the amount of borrowing capacity supported by eligible collateral.
- Track CFPB, state attorney general, Ginnie Mae and remaining state regulatory matters, including potential losses beyond the $51.1 million accrual.
- Assess the sustainability of servicing revenue after the NRZ restructuring, portfolio runoff and transfer of future servicing economics.
- Evaluate execution risk and total cash requirements for the PHH acquisition, integration and assumed debt.
- Reconcile reported liquidity with the $1.4 billion of future reverse-mortgage draw commitments and dependence on NRZ for advance funding.
- Review the sensitivity of MSR valuations and earnings to prepayment speeds, delinquencies, servicing costs, discount rates and interest rates.