Onity, which generated $11 million in net income during the second quarter, has specifically agreed to buy servicing with an unpaid principal balance of around $3 billion from Waterfall Asset Management. The buyer will issue new, non-convertible cumulative preferred stock to Waterfall with a par value of $51.7 million in return for the servicing. 

The assets, which Onity has been subservicing through its PHH Mortgage unit, come from Mortgage Assets Management. MAM is a subsidiary of investment funds Waterfall manages, and Onity rival Mr. Cooper has sold assets to it.

The stated aim of the acquisition from Onity's perspective is to add to holdings in this area that it positions as a hedge to traditional servicing rights. That's a strategy in line with the rate-agnostic diversification its new name is designed to reflect.

"The difference of where we are today versus where we come from is stark," Glen Messina, Onity's chair, president and CEO said during the company's earnings call. "Five years ago, we were a special servicer with large client concentrations, shrinking portfolio, uploading, a bloated cost structure, and limited new business sources. Today, we're a growing, balanced and diversified mortgage servicer and originator."

Onity is considering additional transactions aimed at diversification along the lines of the MAM deal, Messina added.

The company's current diversification strategy produced earnings under standard accounting principles that, while a little lower than the first quarter's $30 million and $15 million in 2Q23, marked a big improvement from the $89.7 million net loss it took five years ago.

Its bottom line might've looked even stronger if it hadn't been weighed down by an unfavorable change to the value of its servicing rights and some related hedging costs. Onity's adjusted, pre-tax income for the quarter with the impact of that change removed was $30 million.

So Ocwen, as Onity, has come a long way from its past as a distressed mortgage specialist that faced and settled a large wave of state regulatory actions in the wake of the Great Recession.

Its challenges today center more on the interest rate questions that are arising for mortgage companies whose businesses benefit from rising financing costs. There are growing signals that federal officials are considering easing rates in September, which can hurt traditional servicers

Diversification in countercyclical areas like originations may help address that concern but the balance can be tricky to get right. 

Remaining largely focused on servicing may make sense given the existence of a large number of outstanding loans originated at historically low rates could limit the upside to originations if financing costs fall. That same factor has limited the damage to outstanding servicing portfolios that occurs when the borrowers refinance into new loans. Also, servicers with origination units can help limit the damage from such runoff by engaging in efforts to keep refinancing borrowers with their current mortgage company.

One aspect of Onity's strategy that analysts on its earnings call had questions about was its use of financing secured by traditional servicing rights given that their valuations fall as rates do. Company executives noted that it uses a derivative portfolio as a hedge to address the concern.

Overall, the company produced $246.4 million in total revenue between April and June of this year, up from the previous quarter's $239.1 million but down from $272 million a year earlier.