Ocwen and its PHH unit returned to profitability in 3Q, may rebrand

Ocwen Financial returned to profitability during the third quarter, recovering from past losses by offsetting thinner production margins with servicing scale and other strategic moves that could lead to a rebranding.

On a net basis, income at the company and its PHH Mortgage subsidiary rose to $22 million compared to losses of $10.3 million in the second quarter and $9 million a year earlier, surprising some analysts who had expected lower earnings. Keefe, Bruyette & Woods estimated the company would produce just $6 million in net income when adjusted for non-recurring items. Instead, Ocwen’s adjusted net income was $37 million.

That may bode well for a company that has faced wide-ranging regulatory actions and business concentrations it is working to dilute. More headwinds lie ahead, but the company is in an improved position to address them, executives said during the company’s earnings call, noting that its consumer-responsiveness numbers, which regulators watch closely, have been above industry averages recorded by the Mortgage Bankers Association.

“We delivered strong GAAP net income and adjusted pretax income, and our [return on equity] exceeded guidance, largely due to strong top-line performance,” President and CEO Glen Messina said, while noting that the company is still navigating “a volatile and unpredictable environment.”

The company’s unpaid principal balance of servicing at quarter-end was $248 billion, slightly outpacing KBW’s $234 billion estimate. Ocwen added $20 billion in servicing during the third quarter of this year, inclusive of $11 billion in subservicing from its joint venture with Oaktree Capital Management. A year ago, Ocwen was adding mortgage servicing rights at a slower pace, with $11 billion acquired overall.

“We've increased our total servicing UPB about 33% versus the third quarter of 2020, and our percentage of prime servicing is now 70% of our total servicing UPB. In terms of portfolio composition, increasing the percentage of agency loans is helping to increase average loan balance and decrease delinquencies. Both of these trends will improve our ratio of operating expenses as a percent of UPB,” said Messina.

The company also is continuing to reduce its reliance on New Residential as a subservicing client, with its revenue concentration down to 17% from 35% a year ago.

Client diversification, scale, technology and a shift in focus toward agency loans also helped counterbalance a decline in its forward gain-on-sale margins for loans to 48 basis points from 86 the previous quarter. Those thin margins were largely the result of a concentration of loans from the correspondent channel, which experienced a drop to 10 basis points from 12, KBW analysts noted. Consumer-direct margins, in contrast, increased to 448 basis points from 442.

Ocwen did increase originations in this channel during the quarter for both traditional and reverse mortgages, according to its earnings presentation. Consumer-direct originations for both product types were up 61% compared to a year ago, at $667 million. Reverse mortgage originations, which tend to be higher-margin products, in total were up 86% at $428 million.

The company also has been investing in call rights from legacy private-label securities transactions to diversify its revenue streams, but has run into a dispute with certain certificateholders in trusts overseen by Deutsche Bank that could delay the receipt of some profits, Messina said. Call rights allow the holder to pay off the securities at a price set in the governing documents in exchange for the underlying collateral, and Deutsche Bank is analyzing the competing positions regarding the call price in one of these transactions.

However, because Ocwen has already achieved its fourth quarter target for call rights and early buyouts of loans in forbearance from Ginnie Mae securitizations, it doesn’t expect the delay to affect fourth-quarter earnings, Chief Financial Officer June Campbell said during the earnings call.

“In Q2, we provided some guidance that EBO and call rights would achieve about $35 million to $40 million and … to date we're at about $40 million. So we don't expect the call rights delay to have an impact on our Q4 results,” said Campbell.

All the diversification going on at Ocwen since it acquired PHH could eventually lead to the company to change its name, Messina said.

“We are rethinking the company brand. It’s something we’re considering,” he said. “We’ve transformed our business. It’s now a balanced business model. We do both performing and special [servicing]. It’s not quite Ocwen and it’s not quite PHH. We really are something completely different, so we do want to ensure our brand reflects who we are today and our vision.”