Home Career Ocwen’s strategy shift delivers a modest 2Q earnings win

Ocwen’s strategy shift delivers a modest 2Q earnings win

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Ocwen Financial posted a profit in the second quarter thanks to cost reductions, increased mortgage servicing rights and a shift to higher-margin correspondent products, which offset challenging market conditions that were particularly difficult for reverse mortgages.

During this period, the company earned $10 million, compared to $58 million last year the first quarter but improves the net loss by $10 million a year ago. Its earnings per share of $1.12 were at the bottom of the range of analysts’ estimates and below the Wall Street Journal consensus of $2.29.

“We have seen higher rates positively impact MSR growth in our own service book, as well as strong performance in our correspondent generation business, offsetting the … negative factors,” Sean O’Neill, Ocwen’s new CFOanalysts said in an earnings report on Thursday.

Ocwen’s biggest challenges in the second quarter included mark-to-market accounting adjustments, reduced production due to higher rates and the sale of delinquent loans bought into Ginnie Mae securities to reduce exposure.

In a rate hike like the one in the second quarter, production will take a backseat to service as a priority, executives said on the call.

“During this part of the market cycle, origination will be less of a profit driver, but…an important element of our business to complement and expand our portfolio of services,” said Glenn Messina, president and CEO of Ocwen.

However, a downturn in the economy can change the credit risk and interest rate environment, and Ocwen is mindful of that by ensuring that some of its growth comes from servicing, he added.

Even as the economic downturn creates greater demand for its distressed service expertise, it can also create cost management and balance sheet issues for the company. Subservicing helps Ocwen solve this problem because it allows companies to handle the operational responsibilities of managing loan payments while eliminating the risk of fluctuating MSR values ​​and the need to advance funds if borrowers default, Messina said.

“Because more than 50% of our service portfolio is subservicing, our exposure to higher costs and progress in a recession is reduced compared to a 100% owned service portfolio,” Messina said.

Ocwen added $79 billion in additional loans with outstanding principal over the past 12 months, he said, and plans to add another $14 billion over the next six months.

Reverse mortgages contributed to this growth in servicing volumes, but the second quarter was also difficult.

“While the long-term reverse mortgage opportunity remains attractive due to borrower demographics and the reverse countercyclical behavior of MSRs during declining home prices, there are near-term headwinds in this business,” O’Neill said.

Not only did reverse mortgage rates increase 125 basis points during that period, spreads in the secondary market were four times wider than they were in 2021, Messina said.

In addition, some large correspondents have also switched to issuing securities backed by Home Equity Conversion Mortgages instead of selling their loans to third parties, O’Neill said.

“All of these headwinds are reflected in the drop in profits in the second quarter compared to the first quarter and the accompanying decline in margins,” O’Neill said. “It’s still a profitable business, but a lower contribution to earnings this quarter.”

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