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.
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.