Companies in the mortgage industry have dealt with unprecedented levels of litigation and regulatory scrutiny over the past decade, and long after the end of the financial crisis, some players in the area still face considerable oversight. Ocwen Financial (OCN +2.83%) has had to work through numerous regulatory issues, yet the mortgage servicing company has made huge efforts to move beyond difficult times and find ways to return to a growth trajectory for its core business.
Coming into Thursday's third-quarter financial report, Ocwen investors didn't see the company completely bouncing back, but they wanted signs that the mortgage servicer was still making progress. Ocwen's numbers were somewhat better than expected. Yet investors need to be prepared to wait longer for a full recovery. Let's take a closer look at Ocwen Financial to see what's happening with the business right now.
Image source: Ocwen Financial.
Ocwen still deals with red ink
Ocwen Financial's third-quarter results looked fairly familiar to those who've followed the company for a while. Total revenue dropped 21% to $284.6 million, which was worse than the 18% decline that most investors were looking for. Ocwen posted a net loss of $6.25 million, reversing a year-ago profit. Yet the per-share loss of $0.05 was just half as large as the consensus forecast among those following the stock.
Ocwen's challenges showed up especially clearly in the mortgage servicing segment. Despite big declines of more than 20% on the segment's top line, servicing expenses rose from year-ago levels. Only a drop in the amount of miscellaneous costs allocated to the unit kept it from posting a pre-tax operating loss. The main challenge for the unit was the fall in fees collected from the Home Affordable Modification Program, which officially ended at the beginning of 2017 and has been gradually winding down over the course of the year.
The lending segment also continued to struggle. The division posted a pre-tax loss, much of which came from the write-off of proprietary software used for its Ocwen's wholesale lending business. Mortgage lending volume fell by nearly half following the company's decision to exit part of the lending business earlier in the year. An emphasis on higher-margin retail lending helped to offset some of the declines elsewhere, but it wasn't nearly enough to prevent contraction in that part of the business overall.
From a fundamental perspective, Ocwen saw various crosscurrents. The number of modifications completed fell to just over 6,500, which was down from 11,000 just three months ago. Yet delinquencies were down by nearly two percentage points to 9.4% as Ocwen's efforts to mitigate losses showed signs of success. Loan originations totaled $769 million, with about 70% of that total coming from regular mortgages and the remainder from reverse mortgages.
What's ahead for Ocwen?
CEO Ron Faris was upfront in his analysis of the company's status. "We transferred the first tranche of mortgage servicing rights under our July agreements with New Residential Investment Corp. (NRZ 0.37%), and we made progress settling some of our regulatory matters," Faris said. The CEO also pointed to good results in the servicing business as helping the company overall.
The New Residential deal's implementation had some interesting twists during the quarter. At the beginning of September, Ocwen transferred legal title for $15.9 billion in mortgage servicing rights to New Residential, with Ocwen receiving a lump-sum payment of $54.6 million. Ocwen will still service these loans under a new subservicing agreement with New Residential, but what it will receive under the subservicing agreements will be less than its previous fees. By freeing up capital, the deal should put Ocwen in a better and more flexible position to pursue future opportunities.
Ocwen investors appeared to be relatively content with the company's performance, and the stock climbed 2% on Thursday following the announcement. Ocwen is far from finished with its recovery efforts, but the fact that it's still making progress is noteworthy and justifies following the company in the coming quarter and beyond.
