Ocwen records $10M net loss as it positions acquisitions for growth

Ocwen Financial returned to a net loss in the second quarter due in part to costs related to strategic moves aimed at producing future gains.

The company’s $10 million net loss followed a return to profitability in the first quarter, when it earned $9 million. In the second quarter of 2020, Ocwen produced nearly $2 million in net income.

However, when Ocwen’s earnings are adjusted for non-recurring charges, quarterly numbers look more consistent, and its recent investments position the company for growth in the second half, executives said in an earnings call.

“We accomplished a lot in the quarter: record servicing additions and seller growth, improved scale in ... originations, cost reduction, strong operating execution growth in higher margin channels, services, and products; all of which have given us strong momentum,” President and CEO Glen Messina said.

To fuel growth and lower costs through scale, Ocwen is counting on investments in mortgage servicing rights, direct-to-consumer and correspondent lending and reverse mortgages used by borrowers age 62 and up to withdraw home equity. The purchase of a $48 billion bulk MSR portfolio helped push its total servicing additions to a record high of $69 billion in the second quarter. In comparison, servicing additions totaled $9 billion during the same period last year and $14 billion in the first quarter.

The company’s buildout of its operations also includes plans for non-delegated services on track to be launched in the fourth quarter, Messina said. (Non-delegated correspondent originations involve loans sold and underwritten to the buyer’s guidelines.)

Overall, origination margins are “normalizing” at Ocwen after rising to extraordinary high in response to record-low rates put into effect as a form of economic stimulus, Chief Financial Officer June Campbell said during the earnings call. The average origination margin in the second quarter was 54 basis points, a little over one third of what it was a year ago when it was 149, and down slightly from the first quarter, when it was 67. At Ocwen, a shift to lower-margin third-party origination channels accounted for some of the decline. Margins in the reverse mortgage business and direct-to-consumer channel also were lower. However, reverse margins are high compared to other channels.

Ocwen is also investing in re-performing assets such as mortgages in forbearance that have been bought out of securitized pools insured by government agency Ginnie Mae. The company also is investing in call rights to private-label residential mortgage-backed securities, Messina said. Call rights permit the holder to pay off the securities involved at par and in exchange for the underlying collateral.

In addition to costs associated with strategic transactions, Ocwen noted those associated with legal and regulatory matters on its list of notable expenditures. The company has been battling federal, state, and local allegations regarding its servicing practices. It’s also been reviewing proposed changes to capital standards at Ginnie Mae. (Servicing is a business known to have regulatory sensitivities, and Ocwen in particular has a track record of facing and resolving numerous allegations.)

“The regulatory focus is intensifying, I think that’s as expected, and the focus seems to be around convenience fees, capital requirements, forbearance compliance, and foreclosure moratoria,” Messina said.

If no material change occurs in the legal and regulatory environment, and industry forecasts pan out, Ocwen will likely be able to deliver positive income under generally accepted accounting principles for the full year, he said.

Ocwen’s stock was trading at nearly $27 per share around midday on the East Coast Tuesday, roughly even from where it opened the day after dipping by a dollar or so earlier in the morning.