Ocwen Financial Corporation
Q3 2021 Earnings Call Transcript

Published: 8 Nov 2021

[Operator:]

Greetings and welcome to the Ocwen Financial Corporation third quarter earnings and business update conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Dico Akseraylian, Senior Vice President, Corporate Communications. Thank you sir, you may begin.

[Dico Akseraylian:]

Good morning and thank you for joining us for Ocwen’s third quarter 2021 earnings call. Please note that our third quarter earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen’s Chief Executive Officer, Glen Messina, and Chief Financial Officer, June Campbell. As a reminder, the presentation and our comments today may contain forward-looking statements made pursuant to the Safe Harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are to differing degrees uncertain. You should bear this uncertainty in mind when considering such statements and should not place undue reliance on such statements. Forward-looking statements involve assumptions, risks and uncertainties, including the risks and uncertainties described in our SEC filings, including our Form 10-K for the year ended December 31, 2020 and our current and quarterly reports since such date. In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. Our forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. In addition, the presentation and our comments contain references to non-GAAP financial measures such as adjusted pre-tax income and adjusted expenses, among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition and an alternate way to view certain aspects of our business that is instructive. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company’s reported results under accounting principles generally accepted in the United States. A reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures may be found in the press release and the appendix in the investor presentation. Now I will turn the call over to Glen Messina.

[Glen Messina:]

Thanks Dico. Good morning everyone and thanks for joining us. We’re looking forward to sharing our progress with you this morning, so we’ll get started with some highlights for the third quarter, if you could please turn to Slide 4. I’m really proud of what our team has accomplished and really appreciate all their hard work. We delivered strong GAAP net income and adjusted pre-tax income, and our ROE exceeded guidance largely due to strong top line performance. I believe this demonstrates the strong operating leverage we have in our business. This was our eight consecutive quarter of positive adjusted pre-tax income. Our team continue to execute well against our operating objectives. Strong originations growth and servicing additions, solid operational execution and performance, cost reduction is tracking ahead of targets. We also closed our planned call rights transaction for the third quarter and have deployed more than 50% of MAV’s investment commitment. October as well, we had some milestones. In October, we closed our acquisition of the RMS - reverse mortgage servicing platform, and also in October, I’m pleased to announce that we exceeded our recapture rate objective. We continue to make solid progress on our actions to expand our addressable market. We’re growing in higher margin channels, services and products, giving us strong momentum, and the RMS platform acquisition gives us access to a potential $86 billion reverse mortgage sub-servicing market, which is an exciting new growth opportunity for us. Finally, we continue to navigate a volatile and unpredictable environment, and I’ll talk a bit more about that later. Let’s turn to Slide 5 for some highlights on originations. Originations again delivered really solid performance against our operating objectives. We closed $20 billion in total servicing additions in the third quarter with very strong performance in sub-servicing additions. With the closing of the TCB acquisition, correspondent volume doubled versus last quarter. The TCB team is off to a really strong start, and I’m so glad to have them with us and appreciate the contributions they’re making to the business. We’re seeing great results from our actions to grow sub-servicing. We secured $20 billion in new awards and expect this volume to commence boarding in the fourth quarter. Our sub-servicing pipeline has never been more robust. Our top 10 prospects represent roughly $63 billion in opportunity and our total prospect pipeline has grown to slightly over $200 billion. We’re excited about this activity level and believe we have a very compelling value proposition. I’ll spend a little bit more time on our sub-servicing value prop a little bit later. Our enterprise sales approach and the TCB acquisition have allowed us to grow our base of sellers to 700 at the end of Q3, and that’s roughly 2.5 times over third quarter last year, and we’re continuing to grow. Non-delegated and best efforts delivery services were rolled out as expected and we’re seeing steady adoption. As well, our Ginnie Mae product mix is improving - it’s up to about 10% of total originations, excluding co-issue. We’re still well below industry mix in Ginnie Mae, so I believe we have room for improvement here. We recently attend the MBA Mortgage Bankers Association annual convention, and client attendance at our meeting room exceeded our expectations, and the response to the quality of our team and operating execution was very positive, so many thanks to all our correspondent, co-issue and sub-servicing clients for choosing us as one of their key business partners. We look forward to serving them and supporting new clients as we expand our addressable market. Our consumer direct team continues to improve recapture performance. We did see a little bit of slippage in the third quarter versus the second quarter due to accelerated runoff in select client portfolios versus Q2. That said, we saw a very strong recovery in October with refinance recapture rate achievement of 36%, which is a milestone for us, and a huge congratulations to our recapture team. We believe we’re on track to meet our 30% refinance recapture rate objectives in the fourth quarter. Overall, our originations team is making terrific progress against their objectives for this year and they’re energized for the fourth quarter and for 2022. Let’s turn to Slide 6 for a progress update on our margin and market expansion actions. The team continues to make strong progress in growing higher margin products, channels and services. These actions do help us expand our addressable market, as well as deflect margin pressure as industry volume levels contract. Year-over-year, consumer direct volume in both forward and reverse is up 61%. Both forward and reverse delivered record retail funding and LOC volumes in October. The marketing eligible population for our forward recapture business increased about 43% from the second quarter to the third quarter, and we now have roughly 174,000 loans where borrowers could save $100 or more per month by refinancing, and our team will be focused on trying to help these borrowers. Total reverse originations are up 86% year-over-year. Our team is executing very well. Our reverse market share is up from 6.5% in third quarter 2020 to 7% in third quarter 2021, and this compares to about 4.2% in the third quarter of 2019, so great progress by the team growing our share and our business. In forward correspondent, we have meaningful opportunity to grow our best effort and non-delegated delivery services. Our team is focused there and we launched those recently. Today, these services are just a fraction of the levels we see across the industry generally. Our long term goal is to get best effort and non-delegated to roughly 25% to 30% of volume and about 40% to 50% of our gain on sale revenues. Let’s turn to Slide 7 to cover some highlights on our servicing business. In servicing, continuing to improve cost and customer experience are the key objectives for us, and the team is performing really well. To achieve these objectives, we’re focused on moving the needle in four key areas

[June Campbell:]

Thank you Glen. Please turn to Slide 13. We reported $37 million in adjusted pre-tax income and 32% in adjusted pre-tax ROE, which is the eighth consecutive quarter of positive adjusted pre-tax income. Net income in the quarter was $22 million, including $27 million in unfavorable notables largely driven by MSR fair value changes from higher actual prepayments than modeled, negative effects of basis risk partially offset by higher market interest rates of hedging. We achieved 19% after-tax GAAP ROE, exceeding our low double digit to mid-teen guidance. Our earnings per share was $2.35, beating analyst consensus by over two times. On the top right bar chart, you can see that we’re delivering on our growth objectives and cost leadership. Revenue increased 38% year-over-year largely due to higher servicing fees on an additional $66 billion in UPB and executing the call right transactions. Operating expense as a percentage of average UPB was favorable year-over-year after absorbing costs to maintain capacity for both the new bulk volume that boarded in August and September, incurring temporary interim sub-servicing expense on MSR bulk acquisitions, and as I mentioned in previous quarters, carrying excess cost during foreclosure in expectation of borrower need. Equity increased to $470 million and book value per share increased $2 to $51 per share. Please turn to Slide 14. This slide demonstrates that our balanced business model is operating well with originations growth replenishing our servicing portfolio more than offsetting runoff. The replenishment rate in the quarter was 170%. On the left side of the slide, you can see that volume is up across all channels approximately 77% versus the same quarter last year. Adjusted pre-tax income was impacted by lower revaluation gains on MSR cash window and full purchases and expected margin normalization. You can see on the margins graph, consumer direct margins increased slightly versus last quarter, but lower than this time last year. Mix-adjusted correspondent lending margins were relatively flat versus last quarter. The adjustment in the second quarter correspondent margins is attributed to gains recognized in the second quarter on certain loans that were acquired under favorable circumstances, resulting in higher than market average margins for these loans. Adjusting for these loans, second quarter margins were consistent with the first quarter at approximately 12 basis points. As Glen mentioned, we’re growing higher margin products, channels and services which we believe will help deflect margin pressure as industry volume levels contract. On the right side of the slide, you can see the results in our servicing segment from building scale. Third quarter total servicing UPB is $248 billion, a $62 billion increase over the third quarter of 2020. Sub-servicing plus MAV UPB, and as you know, we began sub-servicing MAV this quarter, doubled year-over-year, largely replacing the NRZ UPB decline. NRZ UPB concentration dropped from 46% to 24% year-over-year. We expect this trend to accelerate as we grow sub-servicing for other clients in MAV. Servicing adjusted pre-tax income of $41 million was largely driven by higher servicing fees from higher UPB, expanding servicing revenue with approximately $23 million in call right gains as well as cost leadership. You saw earlier the servicing operating costs are down 3 basis points year-over-year and we expect continued improvement, which I’ll show you on the next slide. Please turn to Slide 15. This is our road map page. We told you last quarter that we are positioned for step function change in profitability in the second half of the year, and we delivered on this in the third quarter with GAAP earnings and 19% ROE. This is our operating framework for 2022, assuming a stable interest rate environment and no adverse changes in market conditions or legal and regulatory environments. The page is broken down by our operating objectives in the origination servicing and corporate segments. I’ll provide a few highlights, but please let me know if any of you want to review in more detail separately and I’d be happy to. We reflect the full quarterly impact for the bulk transactions closed in June we talked about last quarter. Flow MSR volume was redirected to MAV in the third quarter, and we continue to grow performing sub-servicing which results in a mix shift to higher margin consumer direct and reverse channels. We expect EBO, call rights, and other revenue diversification in the range of $20 million to $25 million and the segments continue to achieve productivity targets. Now I’ll turn it back over to Glen.

[Glen Messina:]

Thanks June. If you could all please turn to Slide 16, a couple of comments just to wrap up before questions. We had a great quarter, delivered really strong financial performance. I’m proud of how the team is executing and we’re excited about the opportunities ahead. We’re demonstrating a solid track record of delivering on our operational and financial commitments and continued development of our balanced and diversified business model. We’re focused on a few straightforward strategies to navigate this dynamic market environment

[Operator:]

Our first question comes from the line of Bose George with KBW. You may proceed with your question.

[Bose George:]

Hey everyone, good morning. I just wanted to ask first about gain on sales trends, what you guys are seeing in October by channel, and then what you’re sort of expecting going into next year.

[Glen Messina:]

Sure Bose. In forward retail, our consumer direct platform, channels were roughly flat, maybe up slightly. In correspondent on the surface, it did look like margins came down. You’ll see in our Q and on June’s presentation, it looks like margins reflected down, although in the second quarter we did have an opportunistic purchase of a pool of loans that had an extraordinarily large margin embedded in them, so if you normalize out for that, basically 2Q forward correspondent margins were about 12 basis points, 3Q was again about that 12 basis points range, third quarter was about 10 basis points, so maybe a little bit of pressure, but I think within the range of reasonableness. Don’t get me wrong - it’s competitive. We fight for every deal with every customer, so we’ve got to keep our pencils sharp, but it’s been pretty consistent like that for the past six months or so. In reverse, we’re seeing a little bit of volatility. When you look at our K, you’ll see we had--you know, discount margin affects the tail gains, and that tends to move around a little bit. It’s moved around a little bit during the third quarter with the interest rate volatility I spoke about, so those margins came down a little bit. Generally again, nothing out of line that we would expect to see in this environment, and frankly relatively stable on the forward side.

[Bose George:]

Okay, great. Thanks. Then on the correspondent, you noted the mix shift, more best efforts versus mandatory. Could you just talk about what that implies, like what are the margin differences there, how that could impact your margin outlook in correspondent?

[Glen Messina:]

Yes. June, do you want to address that?

[June Campbell:]

Sure. We are expecting the best efforts in non-delegated margins to improve period over period. What we reported last quarter in our deck is that the non-delegated is about two times the mandatory correspondent margins, and we expect to continue at that level.

[Bose George:]

Okay, great. Thanks. Then just one last one, the comments you guys made on Deutsche Bank and the call rights, just in terms of how that’s playing into your expectation for call rights in the fourth quarter and next year, is that sort of pushing out some of the call rights into next year? How is that going to impact you operationally in terms of when those are called?

[Glen Messina:]

Sure Bose. Look - we agreed to cooperate with Deutsche Bank. We believe we’ve calculated the call price correctly. We’ve done it consistent with our past practice, we’ve done it consistent with our prior dealings with Deutsche Bank, and frankly very consistent with how other industry participants who own these legacy private calls perform their calculations. It will, I think, push out our fourth quarter transactions, so we did agree to put that on hold, so we do expect to push that--it’s going to be pushed into next year. June, do you have some--?

[June Campbell:]

Yes, just one thing to add. In Q2, we provided some guidance that EBO and call rights would achieve about $35 million to $40 million, and actual to date we’re at about $40 million, so we don’t expect the call rights delay to have an impact on our Q4 results.

[Bose George:]

Okay, great. Thanks a lot.

[Operator:]

Our next question comes from the line of Marco Rodriguez with Stonegate Capital. You may proceed with your question.

[Marco Rodriguez:]

Good morning everybody. Thank you for taking my questions. I was wondering, are you guys seeing any increased competition in the reverse mortgage market, just given the favorable demographic outlook?

[Glen Messina:]

Marco, the answer is yes. While market competition has increased, we have been successful in increasing our market share over the past two years, and we’ve delivered about 86% growth year-over-year in the third quarter in total endorsement volume. The RMS transaction will position Ocwen as the only reverse originator issuer and direct servicer in the industry. We think this unique ability will allow us to capitalize on the demographic outlook and positions us very well as compared to competitors.

[Marco Rodriguez:]

Got in. In that same kind of line of thinking here, maybe you can broadly outline what differentiates you from your competitors, and why do you actually think that you’re going to be the winners in this industry?

[Glen Messina:]

Look Marco, I believe we’re entering 2022 from a position of strength. We are new--we’ve built a very high performing correspondent, consumer direct, and reverse mortgage business. With that said, we are a new entrant in originations and we believe we can generate growth by expanding our addressable market, and we’re doing that with expansion into higher margin products and services and growing our client base. Our sales team has been very effective with the enterprise sales model, helping to grow sub-servicing, and we have demonstrated terrific performance vis-à-vis the MBA and Moody’s reported statistics across multiple dimensions of our servicing operating performance. We believe we’ve got a technology enabled, controlled, scalable servicing platform that delivers leading operating and cost performance, and as I just mentioned with the acquisition of the RMS reverse serving platform, we are the only end-to-end reverse mortgage provider, giving us access to an estimated $86 billion in potential reverse sub-servicing opportunities. Then lastly, look - we’ve got a relationship, a strategic alliance with financial and capital partners to help support our business as we go forward, so I’m excited about how we’re positioned and looking forward to competing effectively in 2022.

[Marco Rodriguez:]

Fantastic, great information there. Any plans to improve your brand awareness going forward?

[Glen Messina:]

Yes Marco, I’ll say a bit more about this later, but we are such a different company today than we were just a few short years ago, so we are re-thinking the company brand. It’s something we’re considering. We’ve transformed our business -it’s now a balanced business model. We do both performing and special, it’s not quite Ocwen and it’s not quite PHH. We really are something completely different, so we do want to ensure our brand reflects who we are today and our vision, so we’re evaluating our potential opportunities here.

[Marco Rodriguez:]

Got it. Thank you very much, I appreciate your time.

[Glen Messina:]

Yes sir, thank you.

[Operator:]

Our next question comes from the line of Matt Howlett with B. Riley. You may proceed with your question.

[Matt Howlett:]

Thanks for taking my question, and congrats to you, Glen, and the team for really turning around the story here. The question is on capital. capital, the guidance with the owned, and I realize sub-servicing doesn’t require much capital, but what are your options, Glen, to pursue new capital, if you could talk a little bit about what might be available and if you’d look to that at some point in ’22?

[Glen Messina:]

Sure. Look, we are--first and foremost, thank you for your kind words and your comments. The team really appreciates it. Look, we are focused on driving prudent, sensible growth in the business. June’s laid out the framework we have for the business and we believe we have the capital base to support that operating framework for 2022. We’ve been very successful in capital deployment through MAV, so we’ve deployed about 50% of the targeted investment commitment for MAV. I have really enjoyed the working relationship with Oak Tree - they’re great partners. To the extent MAV performs well, we certainly wouldn’t be shy about going to--you know, exploring with Oak Tree, expanding MAV, and there’s capability or capacity there. Look, if the opportunity presents itself for something that is special for our business and can really drive extraordinary growth and extraordinary performance, assuming it’s in the best interest of our shareholders, we would evaluate options to take advantage of the growth of the business and explore different mechanisms on raising capital if the situation permits, and again if it makes sense for shareholders.

[Matt Howlett:]

Thanks for that. That was my question on MAV, if you’d look to expand it, and it sounds like it’s off to a great start. We look forward to hearing more about that. Have you talked to rating agencies in terms of capabilities, preferred work, there’s a peer of yours in the market for unsecured debt now. I mean, all that, is that open for discussion or is it something that needs a lot of work with the rating agencies and so forth?

[Glen Messina:]

Look, we’ve been in touch with--we always stay in touch with the rating agencies and with our banking partners, so to speak, investment banking partners. A preferred is something we would consider - again, it’s a way to not dilute common shareholders, right, so that makes a lot of sense. Pricing is attractive, I know a number of our competitors have issued preferred at attractive prices, so it definitely is something we would consider. We are talking to the rating agencies every quarter with our financial performance and reminding them of how strong the business performance is. They gave us great remarks, great comments on the servicer performance ratings, but for the total corporate ratings, again we are continuing to pound the message home that we are a different company, we are driving superior performance in our business. We certainly would consider all options, and preferred being one of them to take advantage of growth opportunities if they present themselves.

[Matt Howlett:]

Really appreciate that and look forward to hearing more about it. Then on that topic, on the bulk market, we read the industry reports that the bulk market is opening back up and you guys are right in the mix. Could you talk a little bit about the dynamics that are going on, pricing, whether or not that’s going to accelerate as we get potentially consolidation in the mortgage industry?

[Glen Messina:]

I think it will. It’s one of the things I mentioned in my overview of the industry - as rate’s back up, a lot of originators have kept MSRs on their balance sheet, and as cash margins in the origination space continues to compress at this part of the market cycle, people who have held MSRs tend to sell MSRs, so we are seeing a bit of a pick-up in the bulk market. I think pricing is tight, it’s competitive. I think people are leaning into prepayment speed assumptions. Interest rates are at record lows. The expectation is for rates to continue to go up. Personally I believe we’re going to see speeds--if rates go up the way the industry is predicting, speeds will be the slowest probably that the industry has ever seen, and I don’t think I’m unique in sharing that perspective. I think a lot of others share that perspective, so I expect to see some increase in bulk, I expect it’s going to be competitive. I think people will be leaning into speeds, and we’re going to be prudent in our approach and work with our partners, Oak Tree to prudently acquire business that delivers the appropriate returns for MAV and for Oak Tree and our shareholders.

[Matt Howlett:]

Glen, I appreciate it. It’s good to see Ocwen back in the mix.

[Glen Messina:]

Thanks Matt, appreciate it.

[Operator:]

As a reminder, if you would like to ask a question, please press star, one on your telephone keypad. One moment while we poll for questions. Our next question comes from the line of Drew Mackintosh with Mackintosh Investor Relations. You may proceed with your question.

[Drew Mackintosh:]

Hi guys. My questions have actually already been answered, but great job on the quarter.

[Glen Messina:]

Thanks Drew, appreciate it.

[Operator:]

Ladies and gentlemen, we have reached the end of today’s question and answer session. I would like to turn this call back over to Mr. Glen Messina for closing remarks.

[Glen Messina:]

Thanks Laura. To wrap up, I just completed three years with Ocwen in October, and looking back from where we came, the transformation is incredible. We faced 2019 when I joined the company with a mountain of challenges in front of us. We were digging out of a 2Q 2018 pro forma annualized adjusted pre-tax loss of over $300 million for Ocwen and PHH combined. We faced a large scale integration that affected every function in the business, where we had to convert a million loans onto a new servicing system, enterprise-wide technology and telephony modernization, cutting our cost structure almost in half, massive single client concentration risk, building sustainable origination capabilities from scratch, inadequate recapture performance, refinancing our capital structure, addressing legacy regulatory matters. It was just a mountain of things that this team had to overcome, and here we are today. I believe we’re entering 2022 from a position of strength. We’ve delivered eight consecutive quarters of positive adjusted pre-tax income. We’re winning in our target markets, we’re delivering on our growth and return objectives, and our origination and servicing platforms have capacity for growth and strong operating leverage. Our multi-channel origination platform is focused on expanding our addressable markets through new products and services and expanding our client base. Our servicing platform delivers industry-leading performance in multiple loan types, has a highly competitive cost structure, and we are relentless in our pursuit of delivering on our commitments. We’ve modernized our technology platform with proprietary centers of excellence driving automation and lean process reengineering, and I just couldn’t be more excited about our potential for 2022, and really couldn’t be more proud of the Ocwen team and just so thankful for what they have accomplished and helped us do in the business. Thank you for your continued interest in Ocwen, and I look forward to speaking with you on the next quarterly business update.

[Operator:]

Thank you for joining us today. This concludes today’s conference. You may disconnect your lines at this time.