Ocwen Financial Corporation 2021 Form 10-K Summary
Business context and reporting period
The filing identifies the registrant as Ocwen Financial Corporation (NYSE: OCN), although the request metadata identifies “Onity Group Inc.” The report covers the fiscal year ended December 31, 2021, with comparative results for 2020 and 2019.
Ocwen is a non-bank mortgage servicer and originator operating primarily through PHH Mortgage Corporation and Liberty Reverse Mortgage. Its reportable segments are Servicing, Originations, and Corporate Items and Other. At December 31, 2021, it serviced approximately 1.4 million loans with aggregate unpaid principal balance of $268.0 billion and had approximately 5,700 employees.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $1,050.1 million | $960.9 million | Up 9% |
| Net income (loss) | $18.1 million | $(40.2) million | Improved $58.3 million |
| Diluted earnings (loss) per share | $1.93 | $(4.59) | Improved |
| Income (loss) before taxes | $(4.4) million | $(105.7) million | Improved $101.3 million |
| Operating expenses | $609.3 million | $575.7 million | Up 6% |
| MSR valuation adjustments, net | $(109.9) million | $(251.9) million | Loss narrowed |
| Net cash used in operating activities | $(472.2) million | $261.0 million | Declined $733.2 million |
| Cash and cash equivalents | $192.8 million | $284.8 million | Down 32% |
| Total assets | $12.15 billion | $10.65 billion | Up 14% |
| Total liabilities | $11.67 billion | $10.24 billion | Up 14% |
| Stockholders’ equity | $476.7 million | $415.4 million | Up 15% |
Servicing segment income before taxes was $19.9 million versus a $75.8 million loss in 2020. Originations segment income before taxes was $93.9 million versus $104.2 million in 2020. Corporate Items and Other generated a pretax loss of $118.1 million versus $134.1 million in 2020.
Servicing and subservicing fees increased to $781.9 million from $737.3 million. Gain on loans held for sale increased to $145.8 million from $137.2 million, while reverse mortgage revenue increased to $79.7 million from $60.7 million. The forward origination gain-on-sale margin declined to 64 basis points from 142 basis points, reflecting a greater mix of lower-margin correspondent production.
MSRs at fair value increased 74% to $2.25 billion, primarily due to bulk acquisitions and newly capitalized MSRs. Servicing advances, net, declined 7% to $772.4 million. Loans held for sale increased 139% to $928.5 million.
Debt, liquidity and capital
- Debt and financing liabilities included $6.89 billion of HMBS-related borrowings, $1.09 billion of mortgage loan warehouse borrowings, $900.8 million of MSR financing facilities, $512.3 million of advance match-funded liabilities and $614.8 million of senior notes, net.
- Approximately $2.09 billion of borrowings were scheduled to mature, begin amortizing or require partial repayment during 2022, including warehouse facilities, advance financing and Agency and Ginnie Mae MSR facilities.
- Total borrowing capacity under advance, warehouse and MSR facilities was $3.50 billion, but availability was constrained by eligible collateral. The filing states that no committed warehouse capacity and no committed advance capacity was available based on pledged collateral at year-end; uncommitted capacity was subject to lender discretion.
- Management stated that it expected to renew, replace or extend maturing facilities, consistent with historical experience, but cautioned that there is no assurance this will occur on acceptable terms or at all.
- The most restrictive debt liquidity covenant was $125.0 million of consolidated liquidity, and the most restrictive tangible net worth requirement was $275.0 million. Management reported compliance with debt covenants at December 31, 2021.
- In March and May 2021, Ocwen refinanced corporate debt, issued $400.0 million of 7.875% senior secured notes due 2026 and $285.0 million of senior secured notes due 2027, and repaid or redeemed approximately $498 million of existing indebtedness.
- Ocwen did not pay cash dividends and stated that it did not intend to pay dividends in the foreseeable future.
Material changes versus the prior comparable period
- Ocwen returned to consolidated net income in 2021 after reporting losses in 2020 and 2019. The result included a $22.4 million income tax benefit, primarily from CARES Act-related benefits and the favorable resolution of uncertain tax positions; the benefit was not representative of current operating profitability.
- The servicing portfolio expanded substantially. Year-end serviced and subserviced UPB rose 42% to $268.0 billion, while owned MSR UPB increased to $127.9 billion from $90.2 billion.
- Ocwen launched the MAV MSR joint venture with Oaktree. Oaktree owns 85% and Ocwen owns 15%; total capital contributions to MAV Canopy were $131.2 million at year-end, and Ocwen’s equity-method investment was $23.3 million.
- Ocwen acquired a reverse mortgage subservicing platform from Mortgage Assets Management, LLC in October 2021. The transaction added approximately 57,000 reverse mortgages representing $14.3 billion of UPB, with additional boarding expected in the first half of 2022 subject to approvals.
- Originations volume increased materially. Total 2021 servicing and subservicing additions were $152.0 billion of UPB, compared with $57.4 billion in 2020. Bulk MSR purchases increased to $55.1 billion from $16.6 billion, and total forward and reverse loan production increased substantially.
- COVID-19-related forbearance declined to approximately 28,500 loans at year-end from 81,900 loans at year-end 2020. Nonetheless, forbearance, foreclosure restrictions and delayed borrower payments continued to affect servicing fee and ancillary income recognition.
- Operating cash flow deteriorated to a $472.2 million use, largely because higher originations required $623.0 million of net cash investment in loans held for sale. Investing cash use increased to $1.0 billion, including $831.2 million for MSR purchases and $27.9 million invested in MAV Canopy.
Guidance, outlook, risks and unusual items
Management expects to continue growing and replenishing the servicing portfolio through originations, MSR purchases, MAV and new subservicing relationships. It expects reverse mortgage servicing revenue to increase following the MAM transaction and expects 2022 originations to shift toward purchase production as refinancing activity declines. Management also expects competitive pressure and lower origination margins as industry refinancing volumes contract.
Management expects the MSR portfolio’s runoff-related valuation loss to increase in 2022 because the portfolio is larger. MSR values remain highly sensitive to interest rates, prepayment speeds, delinquency rates, servicing costs and discount rates. A 25-basis-point parallel rate move produced an estimated net fair value sensitivity of approximately $(38.7) million for a rate decrease and $35.1 million for a rate increase.
- NRZ concentration: NRZ represented 21% of servicing UPB, 31% of loan count and approximately 66% of delinquent loans at year-end. The relevant agreements were subject to renewal or termination provisions around July 2022, creating material client concentration and revenue risk.
- Funding and refinancing risk: Liquidity depends on continued access to warehouse, advance and MSR financing. Collateral requirements, margin calls, facility maturities and rising interest rates could restrict liquidity.
- Regulatory and legal exposure: The CFPB appealed a favorable district-court judgment in Ocwen’s favor. Oral argument occurred in February 2022. Ocwen also remained subject to regulatory examinations, consent orders, licensing requirements and private litigation.
- Contingencies: Accrued probable and estimable legal and regulatory matters totaled $44.0 million. Management stated that losses could materially exceed accrued amounts but could not estimate a range of reasonably possible additional losses.
- Repurchase obligations: Outstanding representation and warranty repurchase demands covered 288 loans with $52.5 million of UPB. The related recorded liability was $49.4 million.
- HMBS obligations: As an HMBS issuer, Ocwen must repurchase certain HECM loans when balances reach 98% of maximum claim amount. Total HMBS repurchase balances were $129.1 million at year-end, and future repurchases are expected to increase as the portfolio seasons.
- Fair value concentration: Approximately 86% of assets and 66% of liabilities were measured at fair value, with most fair value measurements classified as Level 3. The auditors identified MSRs and reverse mortgage loans as critical audit matters.
- Tax items: Ocwen had approximately $256.9 million of U.S. federal and USVI NOL carryforwards and maintained substantial valuation allowances against deferred tax assets. Future utilization may be restricted by ownership changes under Section 382.
Most important facts for an investor to verify
- Whether NRZ renews, reduces or terminates its remaining servicing arrangements and the resulting impact on revenue, staffing and fixed-cost absorption.
- Whether Ocwen renews or replaces the approximately $2.09 billion of borrowings requiring action in 2022, and the amount of collateral-based borrowing capacity actually available.
- The sustainability of 2021 profitability excluding the $22.4 million tax benefit, fair value movements and other nonrecurring items.
- The sensitivity of the $2.25 billion MSR portfolio and related financing to interest rates, prepayments, delinquencies, valuation assumptions and margin calls.
- The cash-flow impact of originations growth, MSR purchases, reverse mortgage draws, HMBS repurchases and servicing advances.
- The status and potential exposure from CFPB appellate proceedings, private class actions, regulatory examinations and other legal contingencies.
- The ability of the MAV joint venture and the MAM reverse servicing acquisition to generate the expected subservicing volume, earnings and returns.
- The company’s continuing compliance with minimum net worth, liquidity, agency, licensing and debt covenant requirements.