Business Context and Reporting Period
The source text is a Form 10-Q for Ocwen Financial Corporation, not ONITY Group Inc.; investors should verify the requested company identifier. The report covers the quarter and six months ended June 30, 2018, with comparable periods ended June 30, 2017. Ocwen originates and services forward and reverse residential mortgage loans through Servicing, Lending, and Corporate Items and Other segments.
Ocwen serviced approximately 1.1 million loans with aggregate unpaid principal balance of $167.1 billion at June 30, 2018, down 14% from $194.8 billion a year earlier. New Residential Investment Corp. represented approximately $94.7 billion, or 57%, of the serviced portfolio.
Key Financial Metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Total revenue | $253.6 million | $311.3 million | $513.8 million | $633.2 million |
| Net loss attributable to Ocwen stockholders | $(29.8) million | $(44.5) million | $(27.3) million | $(77.2) million |
| Loss per share, basic and diluted | $(0.22) | $(0.36) | $(0.20) | $(0.62) |
| Total expenses | $205.7 million | $280.5 million | $412.2 million | $556.9 million |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $196.6 million | $282.6 million |
- Servicing and subservicing fees declined 13% in the quarter and 16% year to date, primarily due to portfolio runoff and lower modification activity.
- Gain on loans held for sale declined 14% for both the quarter and six months.
- Total expenses declined 27% in the quarter and 26% year to date, reflecting headcount reductions, lower legal and professional costs, lower lending activity, and cost-reduction initiatives.
- Loss before income taxes was $28.4 million for the quarter and $23.4 million for the six months. Income tax expense was $1.3 million and $3.7 million, respectively.
- Cash was $228.4 million at June 30, 2018, compared with $259.7 million at December 31, 2017. Cash and restricted cash totaled $256.1 million at June 30, 2018.
Balance Sheet, Debt and Liquidity
- Total assets were $8.42 billion and total liabilities were $7.82 billion at June 30, 2018. Total equity was $601.2 million, including $600.0 million attributable to Ocwen stockholders.
- Mortgage servicing rights were $1.04 billion, up from $1.01 billion at December 31, 2017. Effective January 1, 2018, Ocwen elected fair value accounting for its remaining MSRs and recorded an $82.0 million cumulative increase to retained earnings.
- Loans held for investment, primarily reverse mortgages, increased 9% to $5.14 billion. HMBS-related borrowings increased 10% to $5.04 billion.
- Match funded liabilities declined 25% to $750.7 million, while other secured borrowings declined 38% to $340.4 million. Senior notes were substantially unchanged at $347.6 million.
- Approximately $642.2 million of debt was scheduled to mature within the following 12 months. Management expected to renew, replace, or extend facilities as necessary and stated that it believed liquidity was sufficient for the next twelve months.
- Six-month financing cash flow was positive $23.2 million, including $499.6 million from reverse mortgage securitizations accounted for as secured financings, offset by $247.9 million of match-funded liability repayments and other debt repayments.
Material Changes Versus the Prior Comparable Period
- The servicing portfolio continued to run off, with total serviced UPB down 14% year over year and average serviced UPB down 14% for both the quarter and six months.
- HAMP-related modification activity fell sharply after the program expired; total completed modifications declined 3% in the quarter and 24% year to date, despite higher non-HAMP activity.
- Ocwen exited forward correspondent and wholesale lending and the automotive dealer floor-plan lending business. Forward loan production declined 69% in the quarter and 72% year to date.
- Average headcount declined 19% in the quarter and 20% year to date, while six-month compensation expense declined 19%. The company recognized $7.3 million of severance expense in Corporate Items and Other during the first six months.
- Ocwen received a $279.6 million lump-sum payment from NRZ in January 2018 under amended Rights to MSRs agreements. The arrangements shift a larger portion of future servicing economics to NRZ and increased dependence on NRZ.
- Ocwen exited the ACS automotive dealer financing business in January 2018 and terminated the related financing facility.
- Professional services expense declined materially because of lower legal and monitoring costs, although the company incurred $4.9 million of PHH merger-related costs during the first six months.
Guidance, Outlook, Risks and Unusual Items
- Ocwen entered into a merger agreement to acquire PHH Corporation and was targeting closing in the third quarter of 2018, subject to regulatory and other conditions. Expected consideration was approximately $360.0 million, with approximately $74.0 million expected to be funded from Ocwen cash, and approximately $119.0 million of PHH debt expected to be assumed.
- Management stated that sustained profitability would likely require revenue growth rather than cost reductions alone. The PHH transaction was expected to support scale, cost reductions, a transition to Black Knight’s LoanSphere MSP platform, and renewed growth.
- Major risks include continued servicing portfolio runoff, dependence on NRZ for servicing economics and advance funding, debt refinancing and covenant compliance, regulatory restrictions, litigation, loan repurchase obligations, interest-rate sensitivity, and execution risk related to the PHH acquisition and servicing-platform transition.
- Ocwen reported a $54.3 million accrual for probable and estimable legal and regulatory matters at June 30, 2018, but stated that reasonably possible losses above recorded amounts could not currently be estimated.
- The CFPB, Florida Attorney General, Massachusetts Attorney General, state regulators, HUD, the Department of Justice, and other agencies had ongoing or unresolved matters involving servicing, foreclosure, fees, escrow, insurance, discrimination, and other practices.
- Ginnie Mae had previously declared an event of default related to state regulatory actions but, on July 17, 2018, informed Ocwen that it considered the matters resolved, subject to possible continuing oversight criteria.
- Credit ratings were weak and carried negative outlooks: Moody’s Caa1, S&P B-, and Fitch B- as of the report’s ratings discussion. Ocwen announced it would not renew its corporate rating by Fitch.
- Fair value measurements were heavily dependent on Level 3 inputs. A hypothetical 10% adverse change in MSR prepayment speeds would reduce MSR fair value by approximately $94.5 million.
Facts Investors Should Verify
- Confirm that the filing belongs to Ocwen Financial Corporation rather than ONITY Group Inc.
- Verify completion, funding, assumed debt, integration costs, and expected benefits of the PHH acquisition.
- Assess the sustainability of liquidity given near-term maturities, dependence on facility renewals, debt covenants, and lender discretion over uncommitted capacity.
- Evaluate the impact of continued portfolio runoff and the revised allocation of servicing economics to NRZ.
- Review the ultimate resolution and potential losses from CFPB, state, HUD, securities, TCPA, fee-related, and other litigation and regulatory matters.
- Test the sensitivity of MSR valuations, reverse mortgage assets, and financing liabilities to interest rates, prepayments, delinquencies, and discount rates.
- Reconcile the reported improvement in net loss with the continuing decline in revenue, negative earnings, and reliance on cost reductions and unusual transactions.