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, 2016. The request metadata identifies “Onity Group Inc.,” but the filing itself identifies the registrant as Ocwen Financial Corporation (NYSE: OCN). Ocwen originates and services forward and reverse residential mortgage loans through Servicing and Lending segments, with additional corporate and other activities.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 | Comparable Period |
|---|---|---|---|
| Total revenue | $359.4 million | $1.063 billion | $404.9 million and $1.379 billion, respectively |
| Net income attributable to Ocwen stockholders | $9.4 million | $(189.3) million | $(66.9) million and $(22.8) million, respectively |
| Income per diluted share | $0.08 | $(1.53) | $(0.53) and $(0.18), respectively |
| Net cash provided by operating activities | Not separately reported | $350.4 million | $774.0 million |
| Cash balance | Not separately reported | $263.5 million at September 30 | $257.3 million at December 31, 2015 |
- Third-quarter revenue declined 11% year over year, while nine-month revenue declined 23%. Expenses declined 30% in the quarter and 12% year to date.
- The third quarter produced Ocwen’s first quarterly profit since the second quarter of 2015. The nine-month period remained loss-making.
- Servicing and subservicing fees were $302.2 million in the quarter and $907.0 million year to date, down 16% and 25%, respectively.
- Mortgage servicing rights totaled $1.037 billion, down from $1.139 billion at December 31, 2015. Advances and match-funded advances totaled $1.823 billion, down 15%.
- Reverse mortgages held for investment increased 34% to $3.340 billion, with related HMBS financing liabilities of approximately $3.225 billion.
- Total liabilities were $6.922 billion and total equity was $663.4 million at September 30, 2016. Senior unsecured notes totaled $346.5 million.
- The operating cash flow benefit largely reflected $343.1 million of net collections of servicing advances. Investing activities used $572.2 million, primarily because of $1.186 billion of reverse mortgage originations. Financing activities provided $228.0 million.
Material Changes Versus the Prior Comparable Period
- Servicing revenue fell primarily because the residential servicing portfolio declined to $216.9 billion from $288.1 billion, driven by Agency MSR sales and portfolio runoff.
- Cost reductions included lower compensation, technology and communications, servicing and origination, and occupancy expenses. Average employment declined 12% in the quarter, including a 30% reduction in U.S. employment.
- Servicing generated $33.2 million of pre-tax income in the third quarter versus a $12.7 million pre-tax loss in the prior-year quarter, but reported a $49.8 million pre-tax loss for the nine months versus $78.6 million of income.
- Lending pre-tax income declined to $3.6 million in the quarter and $13.1 million year to date, versus $8.6 million and $39.0 million, respectively. Forward lending was pressured by lower margins and channel volumes, partly offset by stronger reverse lending.
- Gain on sale of mortgage servicing rights declined to $5.7 million in the quarter and $7.7 million year to date, versus $41.2 million and $98.0 million, respectively.
- Professional services expense increased because of regulatory monitoring costs, a $30.0 million accrual related to the Fisher litigation settlement in principle, and a $25.0 million accrual related to discussions with the California Department of Business Oversight.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued cost reductions and further alignment of expenses with the smaller servicing portfolio, while investing in lending, reverse mortgages and Automotive Capital Services. Management states that sustained profitability is not assured.
- Management believed it had ample liquidity for the following twelve months and projected compliance with financial covenants through the remainder of 2016. However, available borrowing capacity generally could not be used because sufficient eligible collateral was not pledged.
- HAMP was scheduled to expire December 31, 2016, and HARP was extended to September 30, 2017. Management warned that expiration could reduce future servicing and origination revenue.
- Ocwen depends substantially on New Residential Investment Corp. for funding servicing advances associated with approximately $123.2 billion of MSR rights and approximately $4.3 billion of related advances. If New Residential cannot fund advances, Ocwen may be contractually required to provide them.
- Regulatory and litigation exposures remain significant. The filing describes CFPB, SEC, state regulatory and other investigations, ongoing monitorships, servicing termination risks, and accrued litigation losses of $44.6 million. The company could not estimate reasonably possible losses above recorded amounts.
- Ocwen accrued $25.0 million for a potential California regulatory settlement and $30.0 million for the Fisher Cases settlement in principle; the Fisher settlement remained subject to definitive documentation and government and court approval.
- The third quarter included a $12.8 million benefit from clean-up calls on four small-balance commercial mortgage securitization trusts, partly offset by a $2.5 million loss on related loan sales.
- The HUD Aged Delinquent Portfolio Loan Sale program resulted in $23.1 million of life-to-date losses recognized in servicing expense, partly offset by $18.1 million of negative MSR amortization in the quarter.
- MSR valuations are sensitive to prepayment speeds, delinquency, discount rates and interest rates. The company recognized $37.2 million of MSR impairment charges in the first nine months, net of a $1.9 million third-quarter reversal.
Most Important Facts for Investors to Verify
- Confirm the registrant identity: the supplied metadata says Onity Group Inc., while the filing is for Ocwen Financial Corporation.
- Assess whether quarterly profitability can continue after adjusting for unusual items, including the commercial trust clean-up call and MSR valuation effects.
- Review liquidity, collateral availability, debt maturities and covenant compliance, particularly advance facilities and warehouse agreements maturing or requiring renewal in 2016 and 2017.
- Monitor the relationship with New Residential and the potential effect of any change in advance funding or servicing rights.
- Track regulatory proceedings, monitorships, the CFPB matter, California and New York settlements, the Fisher Cases, and other litigation beyond recorded reserves.
- Evaluate the continuing decline in the servicing portfolio and whether cost reductions are sufficient to offset lower recurring servicing revenue.