Business Context and Reporting Period
The filing is Ocwen Financial Corporation’s Form 10-K for the fiscal year ended December 31, 2019, filed February 26, 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 through PHH Mortgage Corporation and Liberty Home Equity Solutions. Its primary activities are residential mortgage servicing, subservicing, forward mortgage lending, and reverse mortgage lending. The company completed the PHH integration during 2019, migrated servicing to Black Knight MSP, simplified its legal-entity structure, reduced staffing, and continued cost-reengineering initiatives.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $1.123 billion | $1.063 billion | Up 6% |
| Servicing and subservicing fees | $975.5 million | $937.1 million | Up 4% |
| Gain on loans held for sale | $38.3 million | $37.3 million | Up 3% |
| Reverse mortgage revenue, net | $86.3 million | $60.2 million | Up 43% |
| MSR valuation adjustments, net | $(120.9) million | $(153.5) million | Loss improved $32.6 million |
| Operating expenses | $673.9 million | $779.0 million | Down 13% |
| Loss from continuing operations | $(142.1) million | $(72.0) million | Loss increased |
| Net loss attributable to Ocwen stockholders | $(142.1) million | $(70.8) million | Loss increased |
| Basic and diluted loss per share | $(1.06) | $(0.53) | Loss increased |
| Cash flow from operating activities | $151.9 million | $272.6 million | Down 44% |
The reported 2019 loss included approximately $65.0 million of PHH integration and cost-reengineering costs, a $120.9 million net MSR valuation loss, and $15.6 million of income tax expense despite a pretax loss. The effective tax rate was negative 12.4%.
Balance Sheet, Debt and Liquidity
- Total assets were $10.406 billion, up 11% from $9.394 billion.
- Total liabilities were $9.994 billion, up 13%.
- Stockholders’ equity declined 26% to $412.0 million, primarily because of the net loss.
- Unrestricted cash increased 30% to $428.3 million; cash, cash equivalents and restricted cash totaled $492.3 million.
- Mortgage servicing rights were $1.486 billion, up 2%.
- Advances and match-funded advances declined 11% to $1.057 billion.
- HMBS-related borrowings increased 13% to $6.063 billion, reflecting growth in the reverse mortgage business.
- Other secured borrowings increased to $1.026 billion from $448.1 million, largely because of new MSR financing and warehouse borrowings.
- Senior notes declined to $311.1 million from $448.7 million following repayment of $97.5 million of notes at maturity and repurchase of $39.4 million of senior secured notes.
- At December 31, 2019, approximately $1.2 billion of debt was scheduled to mature, begin amortizing, or require partial repayment before December 31, 2020.
- Management stated that it believed liquidity and access to capital were sufficient to meet obligations and fund operations for the following twelve months, while acknowledging substantial refinancing and execution risk.
Servicing and Lending Operations
- The residential servicing portfolio totaled 1,419,943 loans with $212.4 billion of unpaid principal balance, down from $256.0 billion at year-end 2018.
- NRZ represented 56% of serviced UPB, 61% of serviced loan count, and approximately 74% of delinquent loans serviced.
- 2019 forward loan production was $1.2 billion and reverse mortgage production was $729.4 million.
- The Lending segment generated $40.7 million of pretax income, compared with $11.2 million in 2018.
- The Servicing segment generated a $70.8 million pretax loss, compared with a $31.9 million loss in 2018.
- Corporate Items and Other generated a $96.5 million pretax loss, compared with a $50.7 million loss in 2018.
- Average total employment declined 14% to 4,518, and year-end headcount declined to approximately 5,300 from 7,200 at December 31, 2018.
Fourth-Quarter 2019 Results
| Metric | Q4 2019 | Q4 2018 |
|---|---|---|
| Total revenue | $261.2 million | $310.9 million |
| Operating expenses | $138.9 million | $241.1 million |
| Income before taxes | $37.2 million | $(7.8) million |
| Net income | $34.9 million | $(2.3) million |
| MSR valuation adjustments, net | $0.8 million gain | $61.8 million loss |
Fourth-quarter profitability benefited from lower operating expenses, including headcount and facility reductions, a favorable MSR valuation impact from higher interest rates, and $15.0 million of recoveries from a mortgage insurer and service provider. Revenue declined primarily because of lower serviced UPB and fewer completed loan modifications.
Material Changes Versus the Prior Comparable Period
- Revenue increased 6%, but net loss attributable to Ocwen stockholders more than doubled to $142.1 million, partly because 2018 included a $64.0 million PHH bargain-purchase gain.
- Operating expenses fell 13% as PHH integration, legal-entity simplification, facility closures, technology changes, and staffing reductions took effect.
- MSR valuation losses improved year over year but remained significant. The 2019 loss reflected $215.1 million of portfolio runoff and $175.6 million of losses from lower interest rates, partly offset by $269.8 million of favorable assumption updates.
- Reverse mortgage revenue increased materially because of favorable fair-value changes, higher UPB, lower interest rates, and the election to fair-value certain future draw commitments.
- The servicing portfolio contracted 17% by UPB despite $17.4 billion of MSR additions, primarily because of runoff and servicing transfers.
- The company’s leverage and secured financing increased, while equity declined 26%.
- Ocwen completed the transition from Altisource’s REALServicing platform to Black Knight MSP and reported that no loans remained on REALServicing at year-end.
Guidance, Outlook, Risks and Unusual Items
Management Outlook
Management’s stated objective is to return to sustainable profitability. Priorities include growing lending and profitable MSR acquisitions, reducing servicing and corporate costs, managing liquidity and leverage, and resolving regulatory and legal matters. No quantitative earnings guidance was provided.
- Management expects continued focus on Agency and government-insured MSR acquisitions and on expanding lending channels, including forward correspondent lending.
- Management expects cost reductions from staffing optimization, technology-enabled productivity, automation, strategic sourcing, offshore utilization, and facility rationalization.
- The company expects to renew, replace, or extend maturing financing facilities, but disclosed that there is no assurance that this will occur on acceptable terms or at all.
NRZ Relationship and Termination
On February 20, 2020, after year-end, NRZ provided notice to terminate the legacy PMC subservicing agreement. The affected portfolio represented $42.1 billion of UPB, or 20% of Ocwen’s serviced UPB at December 31, 2019. The termination was stated to be for convenience, not cause, with transfers expected on June 19, 2020 and August 18, 2020. Ocwen estimated approximately $6.1 million of deboarding fees.
Management estimated that operating expenses exceeded retained revenue for the total NRZ portfolio by approximately $10.0 million in the fourth quarter of 2019, excluding lump-sum payment amortization. For the PMC portfolio subject to termination, the estimated fourth-quarter shortfall was approximately $3.0 million. Management expects the termination could improve long-term servicing economics if the transfer and related expense reductions occur in an orderly manner, but disruption and additional costs remain possible.
Regulatory, Legal and Other Risks
- Ocwen remains in litigation with the CFPB and the Florida Attorney General and Florida Office of Financial Regulation concerning alleged servicing and consumer-finance violations.
- The company remains subject to regulatory settlements, consent orders, examinations, subpoenas, and ongoing reporting and remediation obligations.
- Accrued legal and regulatory matters totaled $30.7 million at year-end; the company could not estimate reasonably possible losses above recorded amounts.
- Representation and warranty and similar indemnification liabilities totaled $50.8 million. Outstanding repurchase demands were $47.0 million of UPB covering 285 loans.
- Reverse mortgage borrowers had approximately $1.5 billion of additional borrowing capacity, creating future funding commitments. HMBS repurchase obligations and foreclosure or REO liquidation timing could pressure liquidity.
- Approximately 77% of consolidated assets and 70% of liabilities were measured at fair value, with 97% of fair-value assets using Level 3 inputs. Valuation changes could materially affect earnings, equity, and covenant compliance.
- The company is exposed to interest-rate, prepayment, advance funding, foreign-currency, counterparty, cybersecurity, vendor, regulatory, and client-concentration risks.
- Management concluded that no known or reasonably knowable conditions raised substantial doubt about the company’s ability to continue as a going concern for one year after issuance of the financial statements.
Most Important Facts an Investor Should Verify
- Whether the NRZ PMC subservicing termination was completed on schedule, the final deboarding fees received, and the resulting revenue, cost, and restructuring impacts.
- Whether Ocwen renewed or replaced the 2020-maturing warehouse, advance financing, and MSR facilities without materially higher costs or restrictive terms.
- Progress toward sustainable profitability excluding temporary recoveries, fair-value gains, lump-sum amortization, and other unusual items.
- The sustainability and quality of MSR valuations, including sensitivity to prepayment speeds, interest rates, delinquency rates, and servicing costs.
- Whether regulatory litigation, the CFPB and Florida proceedings, escrow remediation, and other legal matters produce additional fines, settlements, restrictions, or licensing consequences.
- Actual cash generation after servicing advances, reverse mortgage funding, debt repayments, collateral requirements, and margin calls.
- The company’s ability to reduce expenses in line with the smaller servicing portfolio without impairing servicing quality or regulatory compliance.
- Future utilization of federal and state NOLs and tax credits, including the impact of Section 382 ownership limitations.
- The effect of the January 2020 SSTL amendment, including the $126.1 million paydown, $200.0 million facility size, higher interest margins, and new liquidity covenants.