Ocwen maintains profitability with servicing income

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Ocwen Financial remained profitable in the second consecutive quarter despite downward pressure from thin correspondent lending margins and negative reverse-mortgage valuations.

The $8 million it earned in Q3 was nearly half its profit on a consecutive quarter basis, but that was due to one-time gain from a reverse whole loan deal that closed in the previous fiscal period. It earned $37 million a year earlier, but had recorded losses of $80 million and $40 million in the fourth quarter of 2022 and the first quarter of 2023 respectively.

The company also reported the renewal of key servicing partnerships with Rithm Capital and Oaktree as executives faced questions from analysts about how possible future events like a downward shift in rates or a proposed bank capital rule could affect the company's profitability.

The most recent quarter's earnings remained highly dependent on the company's main business line, Chairman, President and CEO Glen Messina said during a call with analysts.

"The majority of the returns are coming from our servicing platform period, full stop," he said.

However, the company is well positioned for a market shift, Messina added.

"Having both forward and reverse servicing and originations allows us to balance out the impact of the rate environment and we expect that will continue to serve us well on a go-forward basis," he said.

The company did manage to eke out an adjusted, pretax origination gain of $2 million in addition to $31 million from servicing, with the latter being even with the previous quarter's number when the $15 million from the aforementioned reverse whole-loan transaction was removed.

Ocwen last generated a pretax origination gain on an adjusted basis in the third quarter of last year, when the rate environment was more favorable for that business line and its gains were outpacing those from servicing. It recorded a $1 million adjusted, pretax loss in originations in 3Q23.

"The [quarter-over-quarter] improvement was primarily due to the correspondent and co-issue channels as volume in these channels increased +63% [over that period]," Bose George, Alexander Bond and Thomas McJoynt-Griffith, analysts at Keefe, Bruyette & Woods, noted in an early report on the results.

But while volume was up in correspondent, margins have remained thin despite the fact that some players have exited or scaled back, Messina acknowledged.

"We expect it's going to be a … highly competitive channel," he said.

The company's been approaching it as a vehicle for mortgage servicing rights and is not striving to be the price leader, said Messina.

"We expect to remain disciplined and continue to focus on originating MSRs as opportunity permits, consistent with our cost of capital," he said.

Bulk MSRs could experience some price pressure due to banks selling these assets partially in reaction to proposed capital rules and that change in dynamics wouldn't necessarily be advantageous, Messina said when asked about potential opportunities related to this trend.

"We expect, unfortunately, that the Basel III endgame rules are likely to put further pressure on banks who own MSRs and don't have the capacity within the Basel III endgame rules to hold them," Messina said.

Overall, KBW analysts anticipated a "fairly neutral reaction" on the part of investors to Ocwen's earnings.

Its shares were wavering but trading closer to the higher end of a range that started just below $24 and extended above $25 per share at deadline, slightly exceeding the previous day's high.


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