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Ocwen Financial Sees More Red Ink as Revenue Sinks

By Dan Caplinger - Oct 30, 2015 at 8:45PM

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The mortgage-servicing company still thinks it's on track for a turnaround, but the quarter's results didn't make its progress obvious.

Image: Ocwen Financial.

The mortgage-servicing business has proven to be a tough one to master, with many companies having fallen prey to the housing bust and subsequent financial crisis. Ocwen Financial ( OCN -1.68% ) managed to survive the market meltdown in 2008 and saw explosive growth in 2012 and 2013, but since then, its stock has plunged as scrutiny from regulators made shareholders ask tough questions about the company. Coming into Wednesday's third-quarter financial report, Ocwen investors could only hope that the company would be able to reduce its losses gradually, and although the mortgage servicer succeeded in part, its results didn't show as much progress as most of those following the stock had wanted to see. Let's look more closely at how Ocwen Financial did last quarter and whether its turnaround efforts are likely to bear fruit in the near future.

Ocwen can't get out of the red
Ocwen Financial's third-quarter results showed the depths that the company has sunk to lately. Revenue fell 21% to $405 million, which was only $5 million short of the consensus sales forecast among investors. Yet the company saw its net loss come in at $66.8 million, working out to $0.53 per share, or $0.18 per share worse than what investors were expecting to see.

Looking more closely at Ocwen Financial's financials, you can see signs of the efforts that the company is taking to try to get itself into better shape. The company's total unpaid principal balance of loans serviced dropped another 10% to $288.1 billion during the quarter compared to end-of-June figures, continuing a trend that has cut the company's exposure to the residential servicing market by nearly a third over the past year. Once again, though, the decline in revenue from the servicing segment hasn't led to a drop in expenses related to the segment, with servicing and origination fees doubling from year-ago levels. As a result, pre-tax operating income for the mortgage servicing business actually went negative during the third quarter.

The lending side of Ocwen Financial's business continued to stand out positively, with 10% higher revenue producing a 30% gain in pre-tax operating profits. Yet even those gains weren't enough to offset the losses from the much larger servicing segment.

CEO Ron Faris continued to emphasize that Ocwen is on track to keep executing on its broader turnaround strategy. "Our asset sale strategy has succeeded in generating proceeds and gains for the company," Faris said, "enabling us to reduce leverage and focus on simplifying our operations." In particular, Ocwen pointed to sales of mortgage servicing rights relating to loans with unpaid principal balances totaling $22 billion as helping to further the company's broader strategic goals. Faris also noted the progress it has made in boosting its lending capabilities and looking to cut operating expenses.

Can Ocwen pull out of its tailspin?
Ocwen has also been moving aggressively to participate in government programs aimed at helping homeowners with their mortgage liabilities. The company completed 19,470 loan modifications under the federal Home Affordable Modification Program, with nearly half of the modifications that Ocwen made including at least some reduction in outstanding principal balances. In addition, Ocwen highlighted customer engagement efforts like its Ocwen Cares website and its joint initiative with the NAACP to encourage struggling homeowners to get the assistance they need to stay in their homes.

One problem, though, is that some of Ocwen's competitors have managed to put up more attractive financial results recently. Nationstar Mortgage Holdings (NYSE: NSM), for instance, has been able to generate increases in revenue as well as positive net income from its servicing segment, and Nationstar's delinquency rates have been below Ocwen's. Indeed, Nationstar has in the past bought up servicing rights from Ocwen, looking to take advantage of Ocwen's need to reduce leverage.

Ocwen investors have remained patient during 2015 even given the sometimes-slow pace of its recovery efforts, but the mortgage-servicing specialist still needs to demonstrate that its actions will pay off eventually. Incremental progress is encouraging, but Ocwen will need to stem its losses soon in order to maintain investor confidence for the long haul.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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