The mortgage business has been fraught with problems in the recent past, and mortgage servicing specialist Ocwen Financial (OCN 5.68%) has had to deal with problems that have raised the attention of regulators. For years now, Ocwen has faced scrutiny from the Consumer Financial Protection Bureau and various state entities, but the company has worked hard to put its legacy issues behind it. Coming into Wednesday's fourth-quarter financial report, Ocwen investors were prepared for the company's bottom line to slip back into the red after a profitable third quarter, and Ocwen wasn't able to deliver a positive surprise on that front. Indeed, what investors want to see most is for the company simply to be able to move forward.
Let's look more closely at Ocwen Financial to see how it did and whether it can keep making progress toward a final resolution of its regulatory issues in 2017.
Image source: Ocwen Financial.
Ocwen posts a loss
Ocwen Financial's fourth-quarter results reverted to the more typical performance that investors have seen in the past. Revenue fell 11% to $323.9 million, and that was worse than the $334 million that those following the stock had wanted to see. Net losses narrowed to $10.4 million, and that worked out to an $0.08 per share loss. Despite the red ink, Ocwen's results were better than the consensus forecast for a $0.19-per-share loss.
Looking more closely at the numbers, the servicing segment saw the biggest drop in revenue but also had the best turnaround in terms of profitability. Segment revenue was down 14% to $295.4 million, but a huge decline in expenses allowed the unit to post a $43.3 million pre-tax profit. Ocwen said that its efforts to improve its cost structure during 2016 were able to offset runoff from lower unpaid principal balances on loans and reduced sales gains from mortgage servicing rights. The federal Home Affordable Modification Program also represented an opportunity that Ocwen capitalized on during the period.
Meanwhile, the lending segment made progress as well, although it failed to finish in the black. Revenue climbed by more than a quarter, and losses narrowed by about two-fifths to $3.1 million. Declining loan volume and falling margin weighed on the unit, and a decline in interest in the Home Affordable Refinance Program also hurt Ocwen's performance in lending. Automotive capital services also contributed to sales growth, with receivables climbing 45% sequentially.
From a business perspective, Ocwen noted several favorable events. Delinquencies fell slightly to 11.2%, and the company was able to reduce the number of complaints filed with the CFPB by more than a third compared to the year-ago period. For the year, Ocwen modified nearly 75,000 mortgage loans, the majority of which came from HAMP.
Can Ocwen Financial finally move forward?
CEO Ron Faris was pleased with Ocwen's achievements, but he emphasized that there's more work to do. "We continued to make progress toward resolving our major legacy legal and regulatory issues," Faris said, "but more progress is needed for us to complete our stabilization process." The CEO pointed to refinancing Ocwen's debt as a cost-saving measure as well as improving its overall expense structure.
Perhaps the best news came after the end of the quarter. In mid-February, Ocwen entered into a settlement agreement with the California Department of Business Oversight that terminated their independent auditor and took away restrictions on acquiring more mortgage servicing rights. That should help contribute to growth going forward. Yet Ocwen still has to find a way to resolve its larger issues with the Consumer Financial Protection Bureau, other state regulators, and securities regulators in order to get itself into position to refocus on its core business.
Ocwen investors weren't happy about the return to losses, and the stock plunged 18% on Thursday following the Wednesday night announcement. Ocwen's fundamental prospects look sound, but with the regulatory overhang, many investors are uncomfortable with the uncertainty that could hit the mortgage servicing specialist at any time.
