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, 2019. The request metadata identifies “Onity Group Inc.,” but the filing itself identifies the registrant as Ocwen Financial Corporation (NYSE: OCN). Ocwen is a non-bank residential mortgage servicer and originator operating through PHH Mortgage Corporation and Liberty Home Equity Solutions.
Ocwen serviced approximately 1.45 million residential loans with aggregate unpaid principal balance of $216.8 billion at September 30, 2019. The PHH acquisition, completed October 4, 2018, materially affected year-over-year comparability.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $283.5 million, up 19% | $861.7 million, up 15% |
| Net loss attributable to Ocwen stockholders | $42.8 million, versus $41.1 million | $177.0 million, versus $68.4 million |
| Loss per share | $0.32 | $1.32 |
| Operating expenses excluding MSR valuation adjustments | $179.3 million, up 2% | $534.6 million, down 1% |
| MSR valuation adjustments, net | $134.6 million gain | $121.7 million expense |
| Interest expense | $285.9 million, up 367% | $387.9 million, up 105% |
| Net cash provided by operating activities | Not presented for the quarter | $184.1 million, versus $291.5 million |
Servicing and subservicing fees were $247.7 million in the third quarter and $742.8 million for the nine-month period. Gain on loans held for sale was $16.0 million and $48.7 million, respectively. Other revenue was $19.8 million for the quarter and $70.3 million year to date, benefiting from fair-value changes in reverse mortgage loans and related HMBS financing.
At September 30, 2019, total assets were $10.0 billion, total liabilities were $9.6 billion, and stockholders’ equity was $381.2 million, down from $554.7 million at December 31, 2018. Cash and cash equivalents were $345.1 million; cash, cash equivalents and restricted cash totaled $403.7 million.
Major balance-sheet amounts included $1.46 billion of mortgage servicing rights, $1.04 billion of advances and match-funded advances, $6.07 billion of loans held for investment, $5.90 billion of HMBS-related borrowings, $1.07 billion of other financing liabilities, $708.9 million of other secured borrowings, and $310.8 million of senior notes.
Material Changes Versus Prior Comparable Period
- Revenue increased primarily because the PHH acquisition and MSR purchases expanded the servicing portfolio. Average serviced UPB rose 35% in the third quarter to $221.1 billion.
- The third-quarter MSR valuation result changed from a $41.4 million loss in 2018 to a $134.6 million gain in 2019, primarily due to favorable non-Agency MSR assumption updates and improved collateral performance. For the nine months, MSR valuation adjustments remained a $121.7 million expense.
- Interest expense increased substantially, principally because of fair-value changes in financing liabilities associated with NRZ-related MSR transactions. These changes were largely offset by fair-value changes in the related MSRs, but the effects are reported in different statement-of-operations lines.
- Loan-sale gains declined 5% in the quarter and 20% year to date because of margin compression and increased price competition, despite higher quarterly production.
- Completed loan modifications declined 32% in the quarter and 37% year to date, reducing modification-related servicing revenue.
- Operating cost initiatives produced reductions in professional services, technology and communications, and other expenses, but were partly offset by PHH-related costs and $50.6 million of cost-reengineering expenses through September 30.
- Operating cash flow declined year over year, while investing cash use increased to $397.3 million, including $292.1 million of net cash outflows related to HECM reverse mortgages and $112.4 million for MSR purchases.
Guidance, Outlook, Risks and Unusual Items
Management’s stated near-term priority is to return to profitability while maintaining appropriate risk and compliance controls. Key initiatives include integrating PHH, re-engineering costs and processes, acquiring MSRs with targeted returns, expanding lending, managing liquidity, and resolving regulatory and legal matters.
Management reported approximately $808.7 million of debt outstanding that would come due, begin amortizing, or require partial repayment during the following 12 months. This included $25.4 million of SSTL repayments, $243.2 million of warehouse borrowings, $402.5 million of advance-facility borrowings entering amortization, and $137.6 million under the MSR financing facility terminating in June 2020 unless renewed or extended. Management stated that it believed liquidity and access to capital were sufficient for the next twelve months, while acknowledging dependence on renewals, replacements and extensions of financing.
Ocwen entered into a committed MSR financing facility of up to $300.0 million on July 1, 2019, with $137.6 million outstanding at quarter-end. The company also increased its SSTL by $120.0 million, issued $470.0 million of fixed-rate advance term notes, redeemed $97.5 million of maturing PHH senior unsecured notes, and repurchased $39.4 million of senior secured notes for $34.3 million, recognizing a $5.1 million gain.
Beginning in September 2019, management implemented a partial hedge of net MSR interest-rate exposure using forward MBS and Agency TBA trades. The stated hedge coverage was approximately 30%. MSR fair values remain sensitive to prepayment speeds, delinquencies, discount rates, interest rates and servicing costs.
Principal risks include continued losses and eroded equity, refinancing and covenant compliance, reliance on NRZ for servicing-advance funding and servicing revenue, regulatory investigations and settlements, litigation, potential loss of servicing or lending licenses, counterparty and rating-agency actions, technology and data-security failures, loan repurchase and indemnification claims, and the ability to execute the PHH integration and cost-reduction program.
Accrued legal and regulatory matters totaled $39.0 million at September 30, 2019. Management could not estimate reasonably possible losses above recorded amounts. The CFPB and Florida Attorney General matters remained active after amended complaints were filed, and the company continued to face other regulatory inquiries and legal proceedings.
Most Important Facts for Investors to Verify
- Verify the registrant identity: the supplied filing is for Ocwen Financial Corporation, not Onity Group Inc.
- Assess whether management can return to profitability despite a $177.0 million nine-month net loss, $381.2 million of equity, and continued exposure to MSR fair-value volatility.
- Review the maturity, renewal and collateral requirements for the approximately $808.7 million of borrowings requiring action within 12 months.
- Evaluate the economic impact of NRZ-related MSR arrangements, including the concentration of servicing activity and reliance on NRZ advance funding.
- Test the sustainability of the $134.6 million third-quarter MSR valuation gain, particularly the assumptions regarding non-Agency collateral performance, prepayments and interest rates.
- Monitor the CFPB, Florida Attorney General, state regulatory, litigation and loan repurchase matters for losses or business restrictions beyond current accruals.
- Assess whether PHH integration, headcount reductions, facility closures and the $65.0 million total cost-reengineering plan deliver the expected savings without disrupting servicing operations.
- Review the company’s full Form 10-K risk disclosures, debt covenants, fair-value assumptions and subsequent filings for developments after November 5, 2019.