The mortgage industry is going through another cyclical shift as rising interest rates bring with them the inevitable drop in refinancing activity. Yet a strong real estate market has supported volumes of purchase mortgages, and that gives mortgage servicing companies like Ocwen Financial (NYSE:OCN) the opportunity to find profitable business even as it looks for longer-term strategic solutions to some of its core challenges.

Coming into Wednesday's fourth-quarter financial report, Ocwen investors were prepared for significant drops in key financial metrics. The mortgage servicer wasn't able to avoid declines in revenue or wider losses, but some of the moves it has made have at least the potential to make the coming year better. Let's look more closely at Ocwen Financial and what its latest results say about its future.

Two people sitting across a table from each other, one with a laptop and files with documents, in a crowded room with similar pairs in the background.

Image source: Ocwen Financial.

Ocwen finishes a challenging year

Ocwen Financial's fourth-quarter results still reflected the difficulties the mortgage servicer has faced for quite a while. Total revenue was down 15% to $276.8 million, but that was actually quite a bit better than the $250 million on the top line that most of those following the stock had expected to see. Net losses more than quadrupled to $44.5 million, though, and the resulting loss of $0.34 per share was worse than the consensus forecast for $0.25 per share in red ink.

As we've seen in past quarters, mortgage servicing posed the biggest problem for Ocwen. Revenue for the segment was down close to 20%, and pre-tax income fell by more than 37% from year-ago levels. By contrast, the lending segment experienced a sizable gain of nearly 40% in segment revenue, and that helped the unit reverse a year-earlier pre-tax loss and post a modest profit for the division. Some of that boost came from the one-time restructuring costs a year ago, but better conditions in the reverse lending business from increased origination volume helped to lift Ocwen's prospects in the lending area.

Fundamentally, Ocwen continued to go through changes to its business. The company finished almost 45,700 loan modifications during 2017, with those pursuant to the Home Affordable Modification Program making up about 12,750 of them. With HAMP having officially ended at the beginning of 2017, the year's modifications represented runoff of the program, and that will force Ocwen to seek other pathways to drive volume. Delinquency rates fell slightly to 9.3%, with consumer assistance efforts helping to prevent customers from entering delinquent status. Prepayment rates of about 14.4% were lower slightly, with higher prepayment rates among higher credit-quality borrowers.

Can Ocwen do better?

CEO Ron Faris tried to emphasize the positives in his view of how the company did. "2017 was another challenging year for Ocwen and our industry," Faris said, but "we continued to make progress on a number of fronts, reducing our year-over-year loss by $70.9 million and helping over 45,000 struggling families retain their home through affordable loan modifications." The CEO also noted that the servicing portfolio is doing well even under slightly adverse conditions in the industry right now.

Ocwen will be looking to keep making changes going forward. The decision to exit the correspondent and wholesale mortgage businesses has led to lower forward loan originations, but the company thinks the net effect has been positive in terms of bottom-line impact. Similarly, Ocwen announced last month that it would exit its automotive capital services business sometime in the first half of this year. Efforts like this are designed to refocus the mortgage servicer on some of the key business opportunities that brought it success in the past.

Ocwen investors were quite happy with the results, and the stock soared 11% in pre-market trading following the announcement. The financial company still has a long way to go, but the progress it's making has been encouraging so far and has many shareholders thinking that Ocwen could eventually regain some of its former glory as a high-flying stock.

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