Business Context and Reporting Period
The filing is Ocwen Financial Corporation’s unaudited Form 10-Q for the three months ended March 31, 2015. The request metadata identifies “ONITY GROUP INC.”, but the filing text identifies the registrant as Ocwen Financial Corporation (NYSE: OCN). Ocwen provides mortgage servicing, subservicing, forward mortgage lending and reverse mortgage lending through U.S., India and Philippines operations.
Ocwen’s principal segments are Servicing, Lending, and Corporate Items and Other. Its servicing portfolio totaled $382.2 billion of residential unpaid principal balance at March 31, 2015, down 15% from $449.6 billion a year earlier.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $510.4 million | $551.3 million | Down 7% |
| Servicing and subservicing fees | $446.5 million | $490.5 million | Down 9% |
| Total expenses | $378.4 million | $349.2 million | Up 8% |
| Income before taxes | $42.8 million | $71.7 million | Down 40% |
| Net income attributable to common stockholders | $34.4 million | $59.5 million | Down 42% |
| Basic diluted EPS | $0.27 | $0.44/$0.43 | Down |
| Net margin | 6.7% | 11.0% | Down |
| Net cash from operating activities | $325.0 million | $195.8 million | Up $129.2 million |
Operating cash flow benefited from net collections of servicing advances, loan sale proceeds and non-cash MSR valuation adjustments. Investing cash flow was negative $164.8 million, primarily due to $235.3 million of reverse mortgage originations. Financing cash flow was negative $47.4 million, including repayments of match-funded liabilities, secured borrowings and debt issuance costs. Cash increased to $242.3 million from $129.5 million at December 31, 2014.
Total assets were $8.39 billion and total liabilities were $7.27 billion at March 31, 2015. Total equity was $1.12 billion. Key assets included $1.82 billion of mortgage servicing rights, $3.20 billion of advances and match-funded advances, and $1.81 billion of reverse mortgages held for investment.
Debt and financing liabilities totaled approximately $6.44 billion, consisting principally of $2.00 billion of match-funded liabilities, $2.49 billion of financing liabilities, $1.60 billion of other secured borrowings and $350.0 million of senior unsecured notes. The filing states that the company believed it was in compliance with its debt covenants at the reporting date.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of the smaller servicing portfolio and fewer completed modifications.
- Servicing segment pretax income fell 39% to $46.7 million. Servicing expenses increased 10%, mainly from MSR valuation impacts, professional services, litigation, regulatory monitoring and compliance costs.
- Lending segment pretax income rose to $16.0 million from $0.6 million. Forward lending benefited from a more favorable channel mix and lower costs, while reverse lending returned to profitability.
- Forward mortgage originations declined 19% to $920.5 million, while reverse mortgage production increased 18% to $191.8 million.
- Mortgage servicing rights declined 5% from year-end, reflecting amortization, sales, fair-value declines and a $17.8 million impairment charge on government-insured MSRs.
- Effective January 1, 2015, Ocwen elected fair-value accounting for a new class of non-Agency MSRs, increasing retained earnings by $42.8 million after tax.
- Interest expense declined 15% to $119.4 million, primarily because of lower expense associated with the NRZ-related financing liabilities, partly offset by interest on the $350.0 million senior notes issued in May 2014.
Guidance, Outlook, Risks and Unusual Items
Management stated that it expected to have adequate liquidity through 2015, but this assessment depends on renewing, replacing or extending advance financing and warehouse facilities. Approximately $2.0 billion was outstanding under advance funding facilities, and the revolving periods for all such facilities ended in 2015. Management also expected materially higher ongoing interest costs as facilities were renewed or replaced.
Ocwen was executing a strategy to sell Agency MSRs, reduce interest-rate exposure, monetize MSR value and improve margins. Completed or announced Agency MSR sales totaled $9.1 billion and $84.2 billion of UPB, respectively, as of March 31, 2015. Management expected approximately $860.0 million of proceeds from described MSR transactions, with most proceeds intended for debt prepayments.
On April 6, 2015, New Residential Investment Corp. acquired substantially all of HLSS’s assets and assumed related rights and obligations. The amended arrangements extended Ocwen’s servicing term on relevant Rights to MSRs, generally by two years or until April 30, 2020, and imposed a standstill on certain replacement rights until April 6, 2017. Ocwen remained contractually exposed if NRZ failed to fund required servicing advances.
Material risks include regulatory settlements and examinations, potential servicing terminations following rating downgrades, litigation and investigations, debt covenant compliance, refinancing risk, reliance on NRZ for advance funding, MSR valuation sensitivity, interest-rate changes, representations and warranty claims, and possible loss of licenses or GSE-approved seller/servicer status.
- Servicer ratings had been downgraded by each of S&P, Moody’s, Fitch and Morningstar within the prior nine months. Approximately 400 non-Agency servicing agreements, representing about $25.0 billion of UPB, had termination rights triggered by ratings downgrades.
- Ocwen accrued $16.0 million for probable and reasonably estimable litigation losses, while stating that losses could materially exceed the accrued amount.
- The NYDFS settlement included a $100.0 million civil penalty and $50.0 million of borrower restitution, along with monitoring, governance and MSR acquisition restrictions.
- Representation and warranty and indemnification liabilities were $119.2 million at March 31, 2015; management could not estimate reasonably possible losses above recorded amounts.
- Outstanding representation and warranty repurchase demands covered $134.6 million of UPB across 696 loans.
- Management disclosed SEC investigations, securities litigation, RMBS-related claims and notices alleging servicing nonperformance.
- FHA’s reduction of mortgage insurance premiums contributed to higher projected prepayments and the $17.8 million MSR impairment.
Investor Verification Checklist
- Verify the registrant identity because the request metadata names ONITY GROUP INC., while the filing is for Ocwen Financial Corporation.
- Confirm completion, proceeds, holdbacks and debt-prepayment effects of the announced Agency and non-performing servicing portfolio sales.
- Assess renewal or replacement of 2015-maturing advance funding and warehouse facilities, including conditions attached to commitment letters.
- Review current servicer and corporate credit ratings and any resulting servicing termination, early amortization or collateral requirements.
- Evaluate NRZ’s ability and contractual obligation to fund advances, including the consequences if Ocwen must fund advances itself.
- Monitor regulatory settlements, compliance reports, litigation, SEC inquiries and potential penalties or license restrictions.
- Reconcile MSR fair values and sensitivity assumptions, including prepayment speeds, delinquency rates, discount rates and servicing costs.