Filing Overview
The provided Form 10-Q is for Ocwen Financial Corporation (NYSE: OCN), not Onity Group Inc. It covers the three and six months ended June 30, 2020, with comparative periods ended June 30, 2019. Ocwen is a non-bank mortgage servicer and originator operating through PHH Mortgage Corporation and Liberty Home Equity Solutions.
Financial Performance and Position
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Total revenue | $227.0 million | $274.3 million | Down 17% |
| Operating expenses | $144.8 million | $184.2 million | Down 21% |
| MSR valuation adjustments, net | $(23.4) million | $(147.3) million | Lower loss |
| Loss before taxes | $(6.2) million | $(84.3) million | Improved |
| Net income (loss) | $2.0 million | $(89.7) million | Improved |
| Diluted EPS | $0.02 | $(0.67) | Improved |
| Metric | Six months 2020 | Six months 2019 | Change |
|---|---|---|---|
| Total revenue | $480.9 million | $578.2 million | Down 17% |
| Operating expenses | $282.0 million | $355.3 million | Down 21% |
| MSR valuation adjustments, net | $(197.6) million | $(256.3) million | Lower loss |
| Loss before taxes | $(93.5) million | $(125.4) million | Improved |
| Net income (loss) | $(23.5) million | $(134.2) million | Improved |
| Diluted EPS | $(0.18) | $(1.00) | Improved |
- Q2 revenue declined primarily because servicing and subservicing fees fell 27% to $175.2 million and reverse mortgage revenue fell 33% to $13.8 million. Gain on loans held for sale increased 303% to $33.5 million.
- Originations generated pre-tax income of $29.4 million in Q2, compared with $8.4 million in the prior-year quarter. Forward loan production was $978.3 million and reverse loan production was $213.9 million.
- Servicing generated Q2 pre-tax income of $10.4 million versus a $59.0 million loss in the prior-year quarter, aided by lower operating expenses and reduced MSR valuation losses.
- Cash flow from operating activities was $224.8 million for the first six months, versus $128.8 million in the prior-year period. Investing cash flow was $(243.4) million and financing cash flow was $(96.2) million.
- Cash and cash equivalents were $313.7 million at June 30, 2020, down from $428.3 million at December 31, 2019. Cash, cash equivalents and restricted cash totaled $377.5 million.
- Total assets were $10.31 billion and total liabilities were $9.88 billion. Stockholders’ equity was $432.8 million, or approximately $3.33 per share before the planned reverse split.
- MSRs declined 30% from year-end to $1.045 billion, while loans held for investment increased 7% to $6.731 billion, primarily reflecting growth in reverse mortgages.
Debt, Liquidity and Capital
- Major liabilities at June 30, 2020 included $6.478 billion of HMBS-related borrowings, $612.7 million of advance match funded liabilities, $847.3 million of other secured borrowings and $311.5 million of senior notes.
- Approximately $900.1 million of debt was expected to come due, begin amortizing or require partial repayment during the following 12 months, including warehouse facilities, advance financing notes, MSR facilities, SSTL payments and PLS Notes amortization.
- The senior secured term loan was reduced by a $126.1 million prepayment in January 2020, leaving a maximum outstanding balance of $200.0 million and extending maturity to May 2022.
- Management reported compliance with debt covenants as of the filing date. Key requirements included minimum unrestricted cash of $125.0 million and minimum consolidated tangible net worth of $200.0 million under certain agreements.
- Management stated that liquidity projections under base, adverse and severely adverse COVID-19 scenarios supported the conclusion that recent financing actions would provide sufficient liquidity. However, borrowing capacity was subject to eligible collateral and lender discretion, and no additional amounts could be borrowed against certain available facilities at June 30 based on pledged collateral.
Material Changes and Unusual Items
- COVID-19: At June 30, 2020, approximately 131,400 loans were in forbearance, associated with an estimated $135.9 million of monthly principal-and-interest advance obligations. Ocwen reported that 35% of borrowers in forbearance continued making payments.
- NRZ termination: New Residential Investment Corp. terminated the PHH/PMC subservicing agreement in February 2020. The affected portfolio represented approximately $37.1 billion of UPB. Planned deboarding was expected in September and October 2020, subject to requirements that could delay the process.
- NRZ represented 53% of Ocwen’s servicing portfolio UPB and 60% of loan count at June 30, creating significant client concentration risk.
- The total servicing portfolio declined to $206.0 billion from $229.3 billion at June 30, 2019. Non-performing loan UPB increased 92% year over year to $12.5 billion.
- Ocwen adopted the current expected credit loss standard on January 1, 2020 and recorded a $47.0 million opening equity adjustment related to fair-valuing certain future reverse-mortgage draw commitments.
- The CARES Act generated a preliminary estimated income tax benefit of approximately $65.0 million, contributing to the six-month income tax benefit of $70.0 million. The amount remained subject to further IRS guidance and analysis.
- Cost-reengineering actions in Q2 included a $2.9 million accelerated depreciation charge, a $3.2 million facility exit liability and a $1.0 million employee severance liability.
- On July 28, 2020, the company approved a one-for-15 reverse stock split, expected to become effective in August 2020, in response in part to NYSE minimum share-price requirements. The NYSE cure deadline was December 17, 2020.
Outlook, Risks and Contingencies
Management’s priorities were to expand originations, replenish and diversify the servicing portfolio, reduce costs, maintain liquidity and resolve regulatory and legal matters. Management stated that it was exploring strategic options with the assistance of bankers and believed it could continue as a going concern for at least one year after issuance of the financial statements.
- Key risks include prolonged COVID-19 disruption, borrower forbearance and delinquency, rising servicing advances, foreclosure moratoria, margin calls, MSR valuation volatility and difficulty refinancing or extending borrowings.
- Additional risks include loss of NRZ servicing volume, dependence on NRZ to fund certain advances, negative credit or servicer-rating actions, covenant breaches, regulatory restrictions, litigation and loss of servicing or lending licenses.
- Ocwen had accrued $27.8 million for probable and estimable legal and regulatory matters but could not estimate reasonably possible losses above accrued amounts.
- Ongoing matters included CFPB and Florida litigation, state regulatory proceedings, TCPA-related claims, RMBS-related indemnification claims and loan repurchase or representation-and-warranty obligations. Outstanding representation-and-warranty demands totaled $43.7 million of UPB covering 262 loans.
- Fair value measurements were significant: 78% of total assets and 72% of total liabilities were carried at fair value, and 97% of fair-value assets used Level 3 inputs. Changes in prepayment speeds, delinquencies, discount rates and interest rates could materially affect reported results.
Investor Verification Items
- Confirm the issuer identity, because the supplied filing is Ocwen Financial Corporation rather than Onity Group Inc.
- Assess whether the Q2 net income was sustainable or largely influenced by lower MSR losses, tax benefits and unusually strong loan-sale gains.
- Verify the timing, economics and final impact of the NRZ PMC portfolio deboarding and any related deboarding fees or lost servicing revenue.
- Monitor forbearance volumes, advance obligations, advance recoveries and the availability of collateral-based borrowing capacity.
- Review upcoming maturities and amortization requirements totaling approximately $900.1 million, including the August 2020 advance financing amortization and December 2020 Ginnie Mae MSR facility maturity.
- Reconcile liquidity and covenant headroom under changing MSR values, interest rates, margin requirements and COVID-19 scenarios.
- Track the CFPB and Florida proceedings, regulatory settlements, repurchase claims and potential losses beyond the $27.8 million accrued amount.
- Confirm implementation terms and market effects of the planned one-for-15 reverse stock split and the company’s ability to maintain NYSE listing compliance.