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, 2014. The request metadata identifies ONITY Group Inc., but the provided filing names Ocwen Financial Corporation as the registrant. Ocwen provides forward and reverse mortgage loan servicing, subservicing, origination and related financing services.
The company reported approximately $411.5 billion of residential and commercial assets serviced or subserviced at September 30, 2014, including $360.9 billion of owned servicing UPB and $50.6 billion of subservicing UPB.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $513.7 million, down 3% | $1.618 billion, up 9% |
| Income from operations | $58.7 million, down 68% | $468.3 million, down 10% |
| Net income attributable to Ocwen common stockholders | $(76.2) million | $49.3 million |
| Basic EPS | $(0.58) | $0.37 |
| Interest expense | $133.0 million | $409.1 million |
| Operating cash flow | Not separately presented | $559.0 million |
- Servicing and subservicing fees were $466.0 million in the third quarter, down 4%, and $1.448 billion for the nine-month period, up 9%.
- Gain on loans held for sale was $27.2 million in the quarter and $110.0 million year to date.
- Operating expenses increased 31% in the quarter to $455.0 million and 20% year to date to $1.150 billion. Professional services expense was $160.7 million in the quarter, including the impact of a $100.0 million regulatory contingency accrual.
- Cash was $299.2 million at September 30, 2014, compared with $178.5 million at December 31, 2013.
- Total assets were $8.356 billion, up 5% from December 31, 2013. Total liabilities were $6.741 billion, up 11%, while total equity declined 11% to $1.614 billion.
- Mortgage servicing rights totaled $1.959 billion. Advances and match-funded advances totaled $3.347 billion.
- Debt and financing liabilities included $2.036 billion of match-funded liabilities, $2.057 billion of financing liabilities, $1.666 billion of other secured borrowings and $350.0 million of senior unsecured notes.
- The company issued $350.0 million of 6.625% senior unsecured notes due May 2019 and received net proceeds of approximately $343.3 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter net income attributable to common stockholders declined from $54.7 million to a loss of $76.2 million, primarily because of higher professional services expense, regulatory accruals, higher interest expense and lower servicing revenue.
- Nine-month net income attributable to common stockholders declined 70%, from $164.1 million to $49.3 million.
- Interest expense increased 14% in the quarter and 28% year to date, reflecting higher financing liabilities, the OASIS transaction, Ginnie Mae early-buyout financing and the May 2014 senior notes issuance.
- The residential servicing portfolio declined 5% year over year to $411.3 billion, although average serviced UPB for the nine-month period increased 9%.
- Average prepayment speed declined to 12.8% in the quarter from 15.8% in the prior-year quarter, supporting servicing economics and reducing MSR amortization.
- The company completed 21,543 loan modifications in the quarter, down 33%, and 77,467 year to date, down 8%.
- Management completed the final transfer of remaining ResCap loans to the REALServicing platform in October 2014 and expected related operating costs to decline.
- Holders converted the remaining 62,000 Series A preferred shares into 1,950,296 common shares on July 14, 2014; Ocwen immediately repurchased those shares for $72.3 million. The company also repurchased 7,970,353 common shares under its repurchase program for $253.4 million during the first nine months.
- Prior-period financial information was restated for an accounting error involving the fair-value accounting of financing liabilities related to Rights to MSRs sold to HLSS. Restated nine-month 2013 net income declined by $13.7 million from previously reported results.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal quantitative earnings guidance. It expects an improving economy and higher interest rates, if sustained, to support MSR values by reducing delinquencies and refinancing-related prepayments.
- Management expects opportunities to acquire or subservice mortgage servicing assets as banks reduce non-core and credit-challenged servicing portfolios, but regulatory scrutiny may slow transactions and increase costs.
- A $100.0 million accrual was recorded for probable and reasonably estimable regulatory contingencies, principally related to matters involving the New York Department of Financial Services. The filing states that potential losses could materially exceed the accrued amount, but no additional range could be estimated.
- Ocwen remained subject to federal and state regulatory investigations, SEC inquiries and subpoenas, litigation and securities-fraud class actions associated with the restatement. Outcomes and potential losses were not predictable.
- Litigation accruals related to mortgage servicing practices totaled $19.1 million. Representation and warranty liabilities totaled $143.8 million, with outstanding repurchase demands covering $108.2 million of UPB.
- Liquidity depends substantially on financing servicing advances. Although $489.4 million of maximum capacity remained under servicing advance facilities, only $51.2 million was usable based on eligible collateral at September 30, 2014.
- The company stated that it was in compliance with debt, licensing and capital covenants. The most restrictive consolidated tangible-net-worth requirement was $957.1 million, compared with reported total Ocwen stockholders’ equity of $1.612 billion.
- Credit and servicer ratings had recently been downgraded or placed on negative outlook or review for downgrade. Further rating actions could increase borrowing costs or reduce funding availability.
- Management concluded that disclosure controls and internal control over financial reporting were not effective because of a previously disclosed material weakness involving financing-liability accounting. Remediation had begun but was not yet complete.
- The change in MSR amortization estimates reduced amortization expense by $21.3 million in the quarter and $69.2 million year to date, increasing common-stockholder net income by $14.9 million and $48.5 million, respectively.
Most Important Facts for Investors to Verify
- Confirm that the filing and financial data relate to Ocwen Financial Corporation rather than ONITY Group Inc.
- Review the restatement and assess the adequacy and operating effectiveness of remedial controls for Level 3 financing-liability valuations.
- Evaluate the possible ultimate cost of the $100.0 million regulatory accrual, pending investigations, securities litigation and other servicing-related claims.
- Assess liquidity against advance-financing capacity, collateral eligibility, near-term facility amortization dates and cross-default provisions.
- Reconcile reported profitability with the material benefit from the MSR amortization estimate change and the effect of unusual regulatory and legal charges.
- Monitor MSR fair values, prepayment speeds, delinquencies, advances, borrowing costs and changes in servicing and credit ratings.
- Consider the sustainability of share repurchases given the company’s leverage, regulatory obligations and reliance on secured financing.