Business Context and Reporting Period
The filing is Ocwen Financial Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. Although the request metadata identifies “ONITY GROUP INC.,” the filing identifies the registrant as Ocwen Financial Corporation (NYSE: OCN). Ocwen is a non-bank mortgage servicer and originator operating primarily through PHH Mortgage Corporation, with Servicing, Originations, and Corporate Items and Other segments.
At September 30, 2020, Ocwen serviced approximately 1.2 million loans with aggregate unpaid principal balance of $185.9 billion. New Residential Investment Corp. (NRZ) represented approximately 46% of servicing UPB and 54% of loan count.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $249.0 million, down 12% | $729.9 million, down 15% |
| Net loss | $9.4 million, versus $42.8 million loss | $33.0 million, versus $177.0 million loss |
| Loss per diluted share | $1.09 | $3.76 |
| Loss before income taxes | $11.4 million | $104.9 million |
| Operating expenses | $149.5 million, down 17% | $431.5 million, down 19% |
| MSR valuation adjustments, net | $33.8 million loss | $231.4 million loss |
| Net cash provided by operating activities | Not separately presented for the quarter | $248.0 million |
- Servicing and subservicing fees were $181.7 million in the quarter and $568.4 million year to date, down 27% and 24%, respectively.
- Gain on loans held for sale increased to $45.9 million in the quarter and $92.8 million year to date, versus $9.0 million and $26.3 million in the comparable 2019 periods.
- Reverse mortgage revenue, net declined to $14.5 million in the quarter and $51.1 million year to date.
- Cash and cash equivalents were $321.5 million at September 30, 2020, down from $428.3 million at December 31, 2019. Including restricted cash, cash available for the statement of cash flows was $383.0 million.
- Total assets were $10.4 billion and total liabilities were $10.0 billion. Stockholders’ equity was $424.5 million.
- Mortgage servicing rights declined to $1.07 billion from $1.49 billion at year-end 2019. Advances, net declined to $832.6 million from $1.06 billion.
- HMBS-related borrowings increased to $6.61 billion from $6.06 billion, while other financing liabilities declined to $588.3 million from $972.6 million.
- Cash flows included $328.1 million used in investing activities and $29.3 million used in financing activities. Cash, cash equivalents, and restricted cash decreased by $109.4 million during the nine months.
Material Changes Versus the Prior Comparable Period
- Originations materially improved: Originations segment income before taxes rose to $30.5 million in the quarter and $70.3 million year to date, compared with $8.9 million and $37.1 million in 2019.
- Forward loan production increased significantly, supported by correspondent and refinancing activity. Third-quarter forward origination volume was $6.49 billion, versus $341.6 million in the comparable 2019 period.
- The servicing portfolio declined 14% year over year to $185.9 billion, while the number of serviced loans declined 17% to approximately 1.2 million.
- MSR results deteriorated from the 2019 period. The 2020 nine-month MSR loss reflected $131.9 million of portfolio runoff and $164.5 million of losses from interest-rate and assumption changes, partly offset by $47.1 million of hedging gains.
- NRZ terminated the PHH subservicing agreement in February 2020. Related MSRs and financing liabilities were derecognized, and the remaining $16.0 billion of UPB was deboarded on October 1, 2020. The termination reduced concentration but also reduced servicing revenue.
- Operating expenses declined due to cost-reengineering, lower headcount, greater offshore utilization, facility rationalization, and the transition away from the REALServicing platform. These savings were partly offset by COVID-19 expenses and 2020 restructuring costs.
- The CARES Act produced an estimated $71.5 million tax benefit, contributing to a $71.9 million income tax benefit for the nine months. Ocwen collected $51.4 million of related tax refunds during the third quarter.
- Ocwen adopted the current expected credit loss standard on January 1, 2020. The adoption increased opening retained earnings by $47.0 million through recognition of fair value for certain reverse-mortgage future draw commitments.
- Ocwen completed a one-for-15 reverse stock split effective August 13, 2020 and regained NYSE minimum-price compliance on September 1, 2020.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management’s stated priority is to return to sustainable profitability through growth in Originations, continued cost improvement, balance-sheet and liquidity management, and resolution of regulatory matters. The filing does not provide formal earnings guidance.
- Management expects continued pressure from COVID-19 forbearance, foreclosure and eviction moratoria, elevated unemployment, delayed servicing-fee collections, higher advance requirements, market volatility, and potential margin calls.
- As of September 30, 2020, 106,300 loans were under forbearance, representing estimated monthly principal and interest advance obligations of $107.4 million. Ocwen itself was responsible for $36.7 million of the estimated monthly obligation.
- Approximately $780.6 million of debt was expected to come due, begin amortizing, or require partial repayment within the following 12 months. Management stated that recent financings and amendments were expected to provide sufficient liquidity under modeled scenarios, but renewal or replacement of facilities remains important.
- Available borrowing capacity totaled $2.11 billion, but only $485.6 million was committed and available based on facility terms and collateral. Actual availability was further constrained by eligible collateral.
- Debt agreements require, among other items, minimum liquidity of $125.0 million and minimum consolidated tangible net worth of $200.0 million under the most restrictive provisions. Management stated that it was in compliance with covenants as of filing, while noting that COVID-19 conditions could affect future compliance.
- NRZ concentration remains significant. NRZ-related agreements generally extend through July 2022, but NRZ has termination rights subject to notice, fees, and other conditions.
- Legal and regulatory matters remain material. Accrued legal and regulatory matters, including accrued legal fees, totaled $31.0 million. The filing states that reasonably possible losses above recorded amounts cannot currently be estimated.
- The CFPB lawsuit remains pending, with mediation conducted in October 2020 and potential summary judgment and trial dates extending into 2021 or later. Ocwen settled the Florida regulatory lawsuit for a $5.2 million payment plus potential borrower debt forgiveness obligations.
- Outstanding representation and warranty repurchase demands totaled $45.2 million of UPB covering 263 loans. The related liability was $42.9 million, and additional losses beyond recorded amounts were considered reasonably possible but not estimable.
- Management concluded that no known conditions raised substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the financial statements.
Important Facts for Investors to Verify
- Confirm that the registrant is Ocwen Financial Corporation, not the company name stated in the request metadata.
- Assess whether Originations growth can offset continued servicing runoff, lower ancillary income, and MSR valuation volatility.
- Monitor cash, committed borrowing capacity, collateral availability, debt maturities, margin requirements, and compliance with liquidity and tangible-net-worth covenants.
- Track post-September 30, 2020 effects of the final NRZ deboarding, including lost revenue, cost reductions, and remaining NRZ concentration.
- Evaluate the duration of COVID-19 forbearance activity and the resulting advance funding, delinquency, servicing-fee collection, and credit-loss trends.
- Review the CFPB litigation, Florida settlement implementation, other regulatory commitments, and potential losses beyond the $31.0 million accrued amount.
- Validate the sustainability of the $71.5 million CARES Act-related tax benefit and the company’s ability to generate recurring profitability excluding unusual tax and fair-value items.
- Consider the sensitivity of MSR valuations and earnings to prepayment speeds, interest rates, delinquencies, discount rates, and other Level 3 valuation assumptions.