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, 2018. The supplied metadata identifies “ONITY GROUP INC.,” but the filing itself identifies Ocwen Financial Corporation (NYSE: OCN). Ocwen services and originates residential mortgage loans through its Servicing and Lending segments, with substantial exposure to New Residential Investment Corp. (NRZ).
Ocwen reported approximately 6,400 employees and serviced or subserviced residential assets with unpaid principal balance of $161.0 billion at September 30, 2018, down 14% from September 30, 2017. On October 4, 2018, after the reporting date, Ocwen completed its acquisition of PHH Corporation.
Financial Metrics
| Metric | Three months ended September 30, 2018 | Three months ended September 30, 2017 | Nine months ended September 30, 2018 | Nine months ended September 30, 2017 |
|---|---|---|---|---|
| Total revenue | $238.3 million | $284.6 million | $752.1 million | $917.8 million |
| Total expenses | $217.5 million | $273.5 million | $629.7 million | $830.3 million |
| Loss before income taxes | $40.3 million | $26.6 million | $63.7 million | $98.7 million |
| Net loss attributable to Ocwen stockholders | $41.1 million | $6.3 million | $68.4 million | $83.5 million |
| Basic and diluted loss per share | $0.31 | $0.05 | $0.51 | $0.66 |
- Revenue declined 16% in the third quarter and 18% for the nine-month period. Servicing and subservicing fees declined 8% and 14%, respectively.
- Reported expense margin was approximately 91% of revenue in the third quarter and 84% for the nine-month period. Net loss margin was approximately 17% and 9%, respectively.
- Operating cash flow was $291.5 million for the nine months, compared with $405.4 million in the prior-year period. The 2018 inflow was supported primarily by $243.8 million of net collections of servicing advances.
- Investing activities used $371.9 million, principally reflecting $414.2 million of net cash outflows related to HECM reverse mortgages.
- Financing activities provided $58.1 million. Cash and restricted cash ended at $280.4 million, including unrestricted cash of $254.8 million, versus $349.9 million of cash and restricted cash at September 30, 2017.
- Total assets were $8.46 billion and total liabilities were $7.90 billion at September 30, 2018. Total equity was $560.7 million.
- Major borrowings included $5.18 billion of HMBS-related borrowings, $714.2 million of match-funded liabilities, $345.4 million of other secured borrowings and $347.7 million of senior notes. Approximately $520.4 million of debt was scheduled to mature within the following 12 months.
- Mortgage servicing rights were $999.3 million at fair value. Loans held for investment, primarily reverse mortgages, were $5.31 billion.
Material Changes Versus the Prior Comparable Period
- Servicing revenue fell primarily because of portfolio runoff; average residential servicing UPB and loan count declined approximately 14% and 13%, respectively.
- Loan production and gain-on-sale revenue declined following Ocwen’s exit from forward correspondent and wholesale lending channels, rising interest rates and changes to the FHA HECM program.
- Expense reductions were substantial: total expenses decreased 20% in the third quarter and 24% for the nine-month period, aided by headcount reductions, lower servicing volume and exit from the automotive dealer financing business.
- Interest expense increased 30% in the third quarter, largely because of fair-value changes and expense associated with NRZ-related financing liabilities, but declined 11% for the nine-month period.
- Effective January 1, 2018, Ocwen elected fair-value accounting for its remaining MSRs, increasing retained earnings by $82.0 million on adoption. ASU 2016-16 reduced retained earnings by $5.6 million.
- Ocwen exited the automotive dealer floor-plan lending business in January 2018 and terminated the related financing facility.
- Servicing portfolio concentration increased in importance: NRZ-related servicing represented $91.5 billion of UPB, or approximately 57% of the total serviced portfolio.
- The quarter and nine months benefited from lower legal and regulatory costs compared with 2017, although the company continued to incur significant compliance, litigation and settlement expenses.
Guidance, Outlook, Commentary and Risks
- Management stated that it expected sufficient liquidity to meet obligations and fund operations for the next twelve months, while acknowledging substantial uncertainty in forecasts and dependence on renewals, replacements or extensions of financing facilities.
- Management’s strategy is to integrate PHH, transition servicing operations to Black Knight’s MSP platform, reduce fixed costs, resolve regulatory and legal matters, replenish the servicing portfolio and manage the balance sheet.
- The PHH acquisition consideration was $358.4 million, funded with $325.0 million from PHH and $33.4 million from Ocwen. Ocwen expected a bargain purchase gain, but the amount had not been determined as of the filing date. Ocwen also assumed PHH senior notes with aggregate principal of $120.0 million.
- New York regulatory approval imposed requirements relating to reporting, management oversight and migration of New York loans from REALServicing to Black Knight MSP by April 30, 2020. New York MSR growth is limited to 2% annually until specified migration and infrastructure conditions are met.
- Ocwen remained subject to extensive federal and state oversight, consent orders, investigations, litigation and servicing obligations. Accrued legal and regulatory matters totaled $53.4 million; the company could not estimate reasonably possible losses above recorded amounts.
- Liquidity depends on servicing collections, advance financing, warehouse facilities, mortgage loan sales and continued access to capital markets. NRZ is contractually important for funding servicing advances related to approximately $91.5 billion of UPB; failure of NRZ or its funding sources could materially affect Ocwen.
- Credit ratings remained weak: Moody’s rated Ocwen Caa1 with a stable outlook, while S&P rated it B- with a negative outlook. Fitch withdrew its corporate ratings.
- Fair values are highly sensitive to interest rates, prepayment speeds, delinquencies, advance funding costs and discount rates. A hypothetical 10% adverse change in prepayment speeds would reduce MSR fair value by approximately $92.7 million.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the company identity discrepancy between the supplied metadata and the filing, which is for Ocwen Financial Corporation rather than Onity Group Inc.
- Assess whether the PHH integration, Black Knight MSP transition and expected cost savings are being achieved without customer, regulatory or operational disruption.
- Monitor servicing portfolio runoff, NRZ concentration, NRZ advance-funding performance and the effect of future servicing transfers on revenue.
- Review upcoming debt maturities, covenant compliance, borrowing-capacity availability and the renewal of short-term financing facilities.
- Track legal and regulatory proceedings, including CFPB, state attorney general, state regulator, Ginnie Mae and securities litigation matters, and compare potential exposure with the $53.4 million accrual.
- Evaluate the sensitivity of MSR valuations, reverse mortgage assets and related financing liabilities to interest rates, prepayments, delinquencies and fair-value assumptions.
- Verify the final accounting for the PHH acquisition, including the bargain purchase gain, assumed liabilities, transaction costs and subsequent integration expenses.