ONITY GROUP INC. quarterly report, Q3 FY2015

Business Context and Reporting Period

The filing is an unaudited Form 10-Q for Ocwen Financial Corporation (the source text does not identify “Onity Group Inc.”), covering the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Ocwen services, originates, purchases, sells and securitizes forward and reverse mortgage loans through its Servicing and Lending segments.

Management reported that the business was undergoing substantial change, including significant Agency mortgage servicing rights (MSR) sales, portfolio runoff, regulatory constraints and efforts to reduce operating costs.

Financial Performance and Position

Metric	Three months ended September 30, 2015	Three months ended September 30, 2014	Nine months ended September 30, 2015	Nine months ended September 30, 2014
Total revenue	$404.9 million	$513.7 million	$1.379 billion	$1.618 billion
Net income attributable to common stockholders	$(66.9) million	$(76.2) million	$(22.8) million	$49.3 million
Basic EPS	$(0.53)	$(0.58)	$(0.18)	$0.37
Income before taxes	$(55.9) million	$(72.3) million	$(0.6) million	$76.6 million
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$774.0 million	$559.0 million

Servicing and subservicing fees declined 23% in the quarter and 17% year to date, primarily because of MSR sales, portfolio runoff and lower modification activity.
Gain on loans held for sale was $27.3 million in the quarter and $116.9 million year to date, up 6% year to date despite lower repurchased-loan gains.
Expenses declined 15% in the quarter and 3% year to date. The comparison benefited from the $100.0 million New York Department of Financial Services settlement charge recorded in the third quarter of 2014.
Interest expense declined 11% in both the quarter and year-to-date periods, principally because of lower NRZ financing liability balances and Senior Secured Term Loan prepayments.
Net gains on MSR sales were $41.2 million in the quarter and $98.0 million year to date.
At September 30, 2015, cash was $458.7 million versus $129.5 million at December 31, 2014. Total assets were $8.011 billion and total equity was $1.080 billion.
Mortgage servicing rights were $1.153 billion, down from $1.914 billion at December 31, 2014. Reverse mortgage loans held for investment increased to $2.320 billion from $1.550 billion.
Total liabilities were $6.931 billion. Major borrowings included $1.590 billion of match-funded liabilities, $2.954 billion of financing liabilities, $1.001 billion of other secured borrowings and $350.0 million of senior unsecured notes.
Operating cash flow was supported by $491.7 million of net servicing-advance collections, while investing cash flow included $598.1 million of net MSR-sale proceeds and $285.9 million from advance sales. Financing activities used $633.8 million, including debt repayments.

Material Changes Versus the Prior Comparable Period

The residential servicing portfolio declined 30% to $288.1 billion of unpaid principal balance from $411.3 billion at September 30, 2014. The decline primarily reflected Agency MSR sales, servicing transfers and runoff.
Ocwen sold Agency MSRs associated with approximately $87.6 billion of unpaid principal balance during the first nine months and received net proceeds of approximately $598.1 million from MSR sales.
The Servicing segment shifted from $44.5 million of pretax income in the third quarter of 2014 to a $12.7 million pretax loss in the third quarter of 2015. Nine-month pretax income declined 63% to $78.6 million.
The Lending segment improved to $8.6 million of pretax income in the quarter and $39.0 million year to date, compared with $6.6 million and $14.2 million, respectively, in 2014.
Average residential servicing and subservicing portfolio unpaid principal balance declined 26% in the quarter and 24% year to date. Completed loan modifications declined 10% in the quarter and 13% year to date.
Advances and match-funded advances declined 25% from December 31, 2014, while financing liabilities increased 31%, primarily because reverse mortgage securitizations were accounted for as secured financings.
Effective January 1, 2015, Ocwen elected fair-value accounting for a new class of non-Agency MSRs and recorded a $52.0 million cumulative-effect increase to retained earnings before deferred taxes.
The company recorded a $23.4 million third-quarter impairment charge on government-insured MSRs, primarily due to lower interest rates and higher projected prepayment speeds.

Guidance, Outlook, Risks and Unusual Items

Management announced a cost-improvement initiative targeting at least $150 million of 2016 expense reductions compared with 2015 expenses, while continuing to invest in borrower experience, risk management and compliance.
Management stated that it expected to have sufficient liquidity to meet obligations and fund operations for the next 12 months, but noted that this assessment depends on projected revenues, costs, asset sales, advance recoveries, facility renewals and loan production.
On October 16, 2015, the Senior Secured Term Loan was amended effective October 20, 2015. The amendment removed interest-coverage and corporate-leverage covenants through the quarter ending June 30, 2017, increased the interest margin by 0.50%, required 100% of qualifying future asset-sale proceeds to prepay the loan and added a 3% lender fee payable in March 2017. Ocwen also prepaid $50.0 million, leaving approximately $476.6 million outstanding on October 20, 2015.
Ocwen depends substantially on New Residential Investment Corp. (NRZ) to fund servicing advances related to approximately $146.0 billion of MSR rights. NRZ had approximately $5.1 billion of associated outstanding advances at September 30, 2015. Ocwen could be required to fund advances if NRZ does not perform.
Servicer-rating downgrades triggered termination rights in 663 non-Agency servicing agreements representing approximately $35.9 billion of unpaid principal balance. Four servicing agreements had already provided termination notices.
Regulatory and litigation exposure remains significant. The company accrued $16.7 million for probable and estimable mortgage-servicing litigation losses and $2.0 million for a proposed SEC settlement, while noting that additional losses could materially exceed recorded amounts.
Outstanding representation and warranty repurchase demands were $101.1 million of unpaid principal balance covering 516 loans. The company could not estimate reasonably possible losses above recorded reserves.
The company is subject to ongoing regulatory examinations, the National Mortgage Settlement, the NY DFS consent order, the California DBO consent order and other servicing-related investigations and litigation.
Interest-rate, prepayment, delinquency, servicing-transfer, counterparty, liquidity, debt-covenant and mortgage-loan repurchase risks could materially affect results. The company also relies on long-term technology and service arrangements with Altisource.

Most Important Facts for Investors to Verify

Confirm the registrant identity: the supplied filing is for Ocwen Financial Corporation, not Onity Group Inc.
Track whether the announced MSR sales close as expected and quantify the resulting recurring servicing-revenue reduction versus one-time gains.
Assess execution of the $150 million cost-reduction initiative and whether expenses decline in line with the smaller servicing portfolio.
Monitor NRZ’s ability and willingness to fund servicing advances and the effect of any future servicer-rating downgrades or servicing terminations.
Review liquidity, advance-facility renewal dates, available collateral-based borrowing capacity and compliance with remaining debt and regulatory covenants.
Follow regulatory proceedings, litigation, repurchase demands and potential losses above recorded reserves.
Evaluate the sensitivity of MSR valuations and earnings to interest rates, prepayments, delinquencies and other Level 3 assumptions.