Please ensure Javascript is enabled for purposes of website accessibility

The Simple Thing That Made Ocwen Shareholders Happy

By Dan Caplinger - May 3, 2018 at 10:49AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Find out the latest from the mortgage servicing specialist.

Investing can seem complicated, but at its heart, it's not. Investors want to put their money into businesses that will make money. That's been a huge struggle for Ocwen Financial (OCN 4.72%) recently, and the mortgage servicing specialist has had to look at big moves to get itself back on track despite facing difficult industry conditions.

Coming into Wednesday's first-quarter financial report, Ocwen investors didn't expect the red ink to stop flowing for the company. They were therefore pleasantly surprised to see even a modest profit from the mortgage servicer, and Ocwen seems optimistic that the good performance won't be an isolated event going forward.

Toy house, keys, and calculator on top of spread-out $100 bills.

Image source: Getty Images.

Ocwen gets back into the black

Ocwen Financial's first-quarter results represented a big milestone for the company. Revenue plunged 19% to $260.3 million, accelerating its pace of decline from the fourth quarter of 2017, but still faring much better than the 26% drop that many investors had expected to see. Yet even with that top-line decline, Ocwen reversed a year-ago loss with net income of $2.55 million, and that worked out to a $0.02 per share profit. That defied expectations among those following the stock for a substantial loss.

Ocwen's servicing business makes up the bulk of its overall operations, and there, the turnaround was evident. Segment sales were down more than 20% from year-ago levels, but the unit's pre-tax profit rose sixfold to lift the entire company higher. The lending segment wasn't able to escape revenue declines, but at just 5%, the impact wasn't very big, and pre-tax income jumped almost eightfold there as well.

Ocwen's residential servicing metrics were mixed. The company reported $173.4 billion in unpaid principal balances on debt it services, down 14% from where the figure was a year ago. Yet credit quality has continued to improve, with delinquency rates falling almost 2 full percentage points to 9%, and rising rates have slowed prepayment speed from 14% this time last year to 12.9% now. Loan modification counts came in at about 11,600, but Ocwen originated about $380 million in forward and reverse mortgage loans during the quarter.

CEO Ron Faris highlighted numerous accomplishments. "The first quarter of 2018 was an important one for Ocwen," Faris said, "and we accomplished a great deal." The CEO pointed to its quarterly profit and another cash infusion from New Residential in helping to push the servicing specialist forward.

What's next for Ocwen?

Yet perhaps the most important move during the quarter came when Ocwen agreed to acquire industry peer PHH (NYSE: PHH) in late February. The $11 per share cash buyout will cost Ocwen about $360 million, but much of that money will come from PHH's own coffers. At the time, Ocwen noted that the purchase comes at a discount to PHH's book value, representing a big potential opportunity if the post-merger company can get full value from its assets. In the earnings announcement, Faris said that "we are also making steady progress toward closing our acquisition" and expects the deal to go through in the second half of 2018.

Ocwen should also see positive impacts from the fact that it has taken a big bite out of all the controversy it faced in the past. The mortgage servicer said that it has resolved all of the cease-and-desist orders that various state entities imposed on it around this time last year. Related litigation is still outstanding, but Ocwen's a lot more optimistic that it can operate more freely to take advantage of its best opportunities going forward.

Ocwen investors were pleased with the progress that the company has made, and the stock jumped 5% on Wednesday following the announcement. If Ocwen can keep benefiting from its efforts to build out a stronger servicing portfolio, then it could go a long way toward seeing the company mount a full comeback.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ocwen Financial Corporation Stock Quote
Ocwen Financial Corporation
$25.94 (4.72%) $1.17

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.