Ocwen ends losing streak but warns of HECM headwinds

Ocwen Financial ended a losing streak with a slim profit in the second quarter, driven in part by the firm's first reverse mortgage securitization. 

The originator and servicer posted $15 million in net income during the second quarter, a leap over its $40 million loss at the end of March and an $80 million loss during the last three months of 2022. In addition to the spring gain under standard accounting principles reported Thursday, the company also recorded $46 million in adjusted pre-tax net income from servicing that included $21 million in reverse mortgage gains. 

The firm's PHH Mortgage subsidiary sponsored in June a $265 million reverse residential mortgage-backed security, after a pair of large asset purchases, executives said. Ocwen acquired a $133 million portfolio of reverse mortgages and real-estate owned assets, and combined it with $167 million of its own existing buyouts. The combined transactions produced around $15 million in adjusted pre-tax income, company leaders said during Thursday morning's conference call.  

"This is a terrific example of how our superior operating capabilities and diversified business allows us to capitalize on unique opportunities that are emerging in this environment," said Glen Messina, Ocwen chair, president and CEO. "However, the timing and the profitability of any such transaction cannot be estimated at this time."

The company ended June with pretax income of $23 million on an adjusted basis. That was an increase over the prior quarter's $6 million and a $38 million pretax loss in the second quarter last year.

The recent profit was diminished by a $33 million negative mortgage-servicing rights valuation adjustment, a small improvement from the $39 million subtraction to close March. In the second quarter last year, Ocwen reported a $46 million favorable adjustment.

"What we've seen during the course of 2023 has been a fair amount of volatility in what's called the discount margin or spread, essentially, that reverse mortgage-backed securities get priced off of," said Messina. "That spread volatility has impacted our originations business and frankly, has impacted the valuation of our MSR portfolio."

This second quarter's dip was however offset by $28 million in favorable adjustments from legal expenses, stemming from Ocwen's court victory over the Consumer Financial Protection Bureau in May. 

The market for MSRs in the second quarter favored buyers, Messina said. Ocwen was busy, also securing a subservicing agreement with Finance of America Reverse in May. 

"Potential client interest in subservicing remains stronger than ever and our opportunity pipeline continues to grow," said Messina. "However, We continue to see clients extending RFP processes and decision making due to market factors and conflicting priorities."

Another factor impacting seasonal changes in MSR runoff, he added, will be trends in property tax remittances and escalating insurance costs impacting escrow balances.

Ocwen counted a total, unpaid principal balance of $289 billion in servicing, down 3% quarter-over-quarter, including $158 billion in subservicing, which was down 2% over the same time period. The subservicing declines came from tiny dips in both reverse and forward loans. 

The company is still targeting up to $25 billion in subservicing additions through the first quarter of 2024, with executives touting a favorable servicing environment including record-low prepayments.

The servicer ended the second quarter with $256 million in cash and cash equivalents, and $272 million in revenue, both modest quarterly and annual increases. Ocwen also drove its expenses down from $114 million in March to $84 million, with a $17 million decrease in professional services costs.

The spring tailwinds could subside in the third quarter, company leaders warned, with reverse mortgage opportunities drying up. Homeowner equity has become less competitive with high interest rates, Messina said. 

The company reported a $1 million loss in adjusted, pretax origination income, a slight nudge up from last quarter's $2 million loss. 

Ocwen's stock fell post-earnings and ended Thursday down 5% at $32.82 a share.