Ocwen Financial Corporation — Form 10-Q Summary
Filing and period: Quarterly report for the three and six months ended June 30, 2016, filed July 27, 2016. The request metadata identifies “Onity Group Inc.,” but the filing is for Ocwen Financial Corporation (NYSE: OCN).
Business context
Ocwen originates and services forward and reverse residential mortgage loans, including servicing for Fannie Mae, Freddie Mac, Ginnie Mae and private-label securitizations. Operations are organized into Servicing, Lending, and Corporate Items and Other. The company’s servicing portfolio declined materially following Agency mortgage-servicing-rights sales and portfolio runoff, while management pursued cost reductions and expansion of forward and reverse lending.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Total revenue | $373.1 million | $463.3 million | $703.8 million | $973.7 million |
| Net income attributable to Ocwen stockholders | $(87.4) million | $9.7 million | $(198.7) million | $44.1 million |
| Diluted earnings per share | $(0.71) | $0.08 | $(1.60) | $0.35 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $172.2 million | $535.0 million |
- Second-quarter total revenue declined 19%, while first-half revenue declined 28% year over year.
- Second-quarter expenses increased 9% to $385.0 million; first-half expenses decreased 2% to $713.7 million. The second quarter included $30.0 million for the Fisher Cases settlement in principle and $15.0 million related to a proposed California regulatory settlement.
- Interest expense was $91.0 million in the second quarter and $197.1 million for the first half, down 27% and 19%, respectively, primarily because of lower borrowings and a reduced NRZ financing liability.
- Cash declined to $218.9 million at June 30, 2016, from $257.3 million at December 31, 2015. Investing activities used $376.6 million, partly because of $675.7 million of reverse mortgage originations.
- Total assets were $7.49 billion and total liabilities were $6.84 billion at June 30, 2016. Total equity was $653.2 million, down from $854.6 million at year-end 2015, mainly because of the six-month net loss and share repurchases.
- Major liabilities included $1.43 billion of match-funded liabilities, $3.57 billion of financing liabilities, $737.5 million of other secured borrowings and $346.2 million of senior unsecured notes.
Material changes versus the prior comparable period
- Servicing and subservicing fees fell 23% in the second quarter and 28% for the first half, primarily from the reduction in the servicing portfolio, lower modification volume and portfolio runoff.
- Total residential assets serviced declined to $229.3 billion at June 30, 2016, from $321.7 billion a year earlier. Average serviced UPB declined 35% in the second quarter and 36% for the first half.
- Servicing segment pre-tax income changed from $44.6 million of income to a $14.7 million loss in the second quarter, and from $91.3 million of income to an $83.0 million loss for the first half.
- Lending segment pre-tax income declined to $7.5 million in the second quarter and $9.5 million for the first half, although reverse-lending results improved and partly offset weaker forward lending.
- Mortgage-servicing-rights impairment charges increased substantially: $39.0 million for the first half of 2016 versus $1.6 million in the prior-year period, primarily because lower interest rates reduced the value of government-insured MSRs.
- Headcount declined 17% on average year over year in the second quarter, including a 29% reduction in U.S. headcount, as part of the cost-improvement initiative.
Guidance, outlook, risks and unusual items
- Management stated that the servicing business was unlikely to achieve meaningful near-term profitability without a significant structural change. The company plans further cost reductions, operational efficiencies and investments in lending and adjacent businesses.
- Management said it believed liquidity was adequate to meet obligations and fund operations for the following twelve months, but this assessment depends on refinancing or renewing maturing facilities, asset sales, operating performance and access to funding.
- At June 30, 2016, the company had a below-Average S&P servicer rating. Unless upgraded to Average or better before April 7, 2017, New Residential Investment Corp. could direct transfers of affected servicing agreements, potentially eliminating future servicing-fee revenue. These Rights to MSRs covered approximately $128.1 billion of UPB.
- NRZ had approximately $4.6 billion of outstanding advances associated with the Rights to MSRs. Ocwen remained contractually obligated to fund relevant servicing advances if NRZ failed to do so.
- The CFPB issued a Notice and Opportunity to Respond and Advise letter concerning potential enforcement action related to servicing practices. The filing also describes ongoing federal and state examinations, investigations, consent orders and monitoring.
- The company accrued $58.8 million for probable and reasonably estimable litigation losses, including $30.0 million for the Fisher Cases settlement in principle. The proposed settlement required final documentation and government and court approval.
- Ocwen accrued $15.0 million related to discussions with the California Department of Business Oversight regarding possible resolution and early termination of its consent order. Potential losses could exceed recorded amounts, but the company could not estimate the additional exposure.
- HAMP and HARP were scheduled to expire December 31, 2016, subject to any extension. HAMP-related revenue and modification activity remained important to servicing results.
- On July 19, 2016, after the reporting date, Ocwen repaid $26.3 million of its senior secured term loan using proceeds from an MSR sale; approximately $342.7 million remained outstanding.
Important facts for investors to verify
- Whether the servicing portfolio can stabilize and whether cost reductions are sufficient to restore the Servicing segment to profitability.
- The status and ultimate financial impact of the CFPB matter, California and New York regulatory matters, National Mortgage Settlement monitoring and related litigation.
- Whether NRZ, GSEs, trustees or other counterparties exercise rights to transfer servicing because of ratings or alleged contractual noncompliance.
- The company’s ability to renew or replace advance-funding and warehouse facilities maturing in 2016, including approximately $500.0 million of one-year term notes and $196.6 million of warehouse borrowings maturing in 2016.
- The sustainability of liquidity given continuing net losses, cash of $218.9 million, substantial secured financing and dependence on asset sales and external funding.
- The sensitivity of MSR valuations and earnings to prepayment speeds, interest rates, delinquency rates, discount rates and other Level 3 valuation assumptions.
- The final approval and settlement amount for the Fisher Cases and any losses above recorded litigation, repurchase and indemnification reserves.