Ocwen should regain pretax profitability by the third quarter

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Ocwen Financial Corp. is on track to become profitable on a pretax basis by the third quarter without any special items enhancing earnings, according to a preliminary release of its fourth-quarter results.

Ocwen should report net income of $35 million for the fourth quarter, but the amortization of lump-sum payments from New Residential for the sale of mortgage servicing rights affected that.

The company expects to have pretax profits — excluding income statement notables and amortization of the New Residential payments — by the third quarter of this year. But including those items, Ocwen anticipates reporting $37 million of pretax income for the fourth quarter of 2019. If those items were excluded, Ocwen could have a $14 million pretax loss for the fourth quarter.

"This is roughly in line with our latest model that has the company reaching breakeven (GAAP basis) heading into the fourth quarter of 2020," said a report from Keefe, Bruyette & Woods analysts Bose George, Thomas McJoynt-Griffith and Eric Hagen.

In January 2018, Ocwen received a payment of $280 million from New Residential. This was in conjunction with the sale of a MSR portfolio from Ocwen to New Residential; at the time of the initial agreement in July 2017, the portfolio had an unpaid principal balance of $110 billion but by Jan. 1, 2018, run-off reduced that amount to $86.8 billion.

Investors welcomed the news, which was released after the market closed on Feb. 6.

On Feb. 6, the stock closed at $1.07 per share. The next morning it opened at $1.40 per share and in early trading was as high as $1.54 per share. The KBW analysts noted that Ocwen's stock price fell 22% since the start of the year.

Ocwen retained the subservicing rights on the MSRs it sold to New Residential.

"During 2019, we completed a detailed assessment of our servicing portfolio profitability by customer and loan type to support our capital allocation process," Ocwen President and CEO Glen Messina said in a press release. "Based on this analysis, we estimate the New Residential portfolio generated a pretax operating loss of approximately $8 million in the fourth quarter, after direct and allocated overhead costs. We were able to achieve strong fourth-quarter results, and expect to achieve our future profitability objectives despite the expectation of ongoing future losses from this portfolio, by continuing to drive an improved portfolio mix from our growth actions and the benefits from our continuous cost re-engineering actions."

Ocwen estimated its preliminary adjusted annualized run rate cost savings of $385 million in the fourth quarter should significantly exceed its target set earlier that year.

In January of this year, Ocwen issued $170 million of new MSR funding to repay $126 million of higher cost senior secured term loan debt.

Originations are another area of improvement at Ocwen. If looked at on an annualized basis, Ocwen's January production equates to $9 billion. That reflected its continued progress toward achieving its growth goals, so Ocwen is increasing its production targets for the year to at least $15 billion from $10 billion.

"We continue to see significant growth from our lending and flow MSR channels and expect we will generate enough volume to increase the size of our owned MSR portfolio, as well as to provide opportunities to grow and diversify our subservicing with the support of potential capital partners. The totality of our actions has enabled us to deliver fourth-quarter results that are better than our prior guidance," said Messina.

In the fourth quarter of 2018, Ocwen lost $71 million. At the start of that quarter, it closed on the purchase of PHH Corp.

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