The housing boom in the 2000s taught investors about the mortgage market, with lenders profiting from transaction-based revenue, and often selling mortgages they originated in the secondary market. In the end, though, someone has to collect the payments on those mortgages, and Ocwen Financial (NYSE:OCN) has made it its business to service mortgages.
These mortgage-servicing rights are a valuable asset, but coming into Thursday afternoon's second-quarter financial report, Ocwen faced considerable uncertainty due to regulatory scrutiny and changing conditions in the market. Ocwen's results included weaker earnings than expected, but the company remains confident about the steps it has taken to turn its business around. Let's take a closer look at Ocwen Financial's latest results to find out what might be ahead for the mortgage servicer.
Ocwen sees its financials shrink
At a glance, Ocwen Financial's second-quarter results look troubling. Revenue fell 16%, to $463 million, just barely meeting investor expectations for the decline. The real disappointment came on the bottom line, where Ocwen posted net income of just $10 million, down by 85% from last year's net income. That worked out to $0.08 per share, which was less than half the consensus forecast for Ocwen's earnings for the quarter.
A closer look at Ocwen Financial's numbers shows some of the headwinds that are buffeting the mortgage-servicing company. The total unpaid principal balance of loans serviced dropped by more than a quarter, to $321.7 billion. While that has the benefit of leaving Ocwen less exposed to the mortgage-servicing market, it nevertheless weighs on its opportunity to earn revenue. The bigger problem is that, even as revenue in the servicing segment has fallen, expenses have remained relatively constant, so pre-tax operating income for the segment got cut in half compared to the year-ago quarter.
By contrast, the lending side of the business fared quite well during the second quarter. Revenue rose, while expenses stayed relatively stable, and pre-tax income doubled from year-ago levels. Lending only brings in about a tenth of the revenue that the servicing business does, though, so its ability to boost Ocwen's overall numbers is limited.
CEO Ron Faris highlighted the progress that Ocwen has made in trying to recover from its woes of the past few years. "We continue to work closely with our regulators and monitors," Faris said, and "our efforts to build out a strong 'bank-like' risk and compliance infrastructure are taking hold." Faris also noted that the company's asset-sale strategy resulted in the sale of $3 billion of non-performing servicing assets, and the company cut its debt by about a quarter-billion dollars, and got strong support from the financing market for a refinancing operation during the quarter.
What's ahead for Ocwen?
What's important for Ocwen Financial investors to understand is that the primary goal that the company needs to achieve right now is to satisfy its regulators by simplifying its operations. If that results in a somewhat smaller business overall, it should still be worth it if it results in the good favor of those who are overseeing the company.
Ocwen has also worked closely with its auditors to figure out whether harsh going-concern language is warranted in their opinion. The company remains hopeful that, regardless of the auditors' decision, it can continue to get the liquidity it needs to run its business successfully in the long run.
In that light, Ocwen's initiatives to do some cost-cutting are also welcome. The mortgage servicer said that it hopes to cut expenses by more than $150 million without sacrificing quality service to borrowers. Even as Ocwen aims to increase its origination volume capacity, the company also believes that it can reduce overhead, while still focusing on risk management, compliance, and developing high-quality business practices.
Ocwen investors weren't entirely sure how to react to the news, initially sending the stock higher immediately following the announcement, but then bidding shares downward by about 2% an hour-and-a-half into the after-market trading session. The stock has doubled from its lows just earlier this year, so some Ocwen shareholders might not want to risk any gains they might have. For longer-term investors though, Ocwen will need to work hard to recover what for many remains a loss of as much as 80% in just the past couple of years.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Ocwen Financial. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.