Ocwen Financial Corporation
Q3 2019 Earnings Call Transcript

Published: 5 Nov 2019

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Ocwen Financial Third Quarter Earnings Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]I would now like to turn the conference over to Hugo Arias, Senior Vice President, Treasurer and Head of Investor Relations. Please go ahead.

[Hugo Arias:]

Good morning, and thank you for joining us for Ocwen’s third quarter 2019 earnings call. Please note that our third quarter 2019 earnings release and slide presentation have been released and 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 a forward-looking terminology. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Our business has been undergoing substantial change, which has magnified such uncertainties. You should bear these factors in mind when considering such statements and you should not place undue reliance on such statements.Forward-looking statements involve several assumptions, risks and uncertainties that could cause actual results to differ materially. In the past, actual results have differed 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 statements, 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 expenses, excluding MSR valuation adjustments net and expense notables; and pre-tax loss, excluding income statement notables and amortization of NRZ, lump sum cash payments, among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial conditions.We also believe these non-GAAP financial measures provide 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.For an elaboration of factors I just discussed, please refer to our presentation and today's earnings release as well as the Company's filings with the Securities and Exchange Commission, including Ocwen's 2018 Form 10-K, and once filed, its third quarter 2019 Form 10-Q.Now, I will turn the call over to Glen Messina.

[Glen Messina:]

Thank you, Hugo. Good morning and thank you for joining us.Today, I'll provide an update regarding our progress in executing our key business initiatives and the actions we are to reposition Ocwen for profitability and long-term value creation. Our CFO, June Campbell, will follow with the review of our third quarter 2019 financial results. I will then close the call with some brief remarks before opening it up for questions.Please turn to slide four. During the third quarter, we made substantial progress against our key business initiatives while proactively addressing a more volatile and uncertain and straight environment. With integration activities winding down, we are intensifying our focus and resource allocation on growth and continuous cost improvement. I continue to be encouraged by our high level of execution. Our integration efforts are largely complete. And in the fourth quarter, we expect to finalize our facilities consolidation and begin the final phase of our legal entity simplification.In the third quarter, we realized $268 million of annualized expense savings excluding net MSR valuation adjustments and expense notables compared to the second quarter of 2018 adjusted expenses for the combined Ocwen NPA change. We remain on track to achieve at least $300 million of annual adjusted -- run rate expense savings by the fourth quarter 2019. At approximate our current servicing UVB levels, we are increasing our annualized total cost reengineering target to $400 million and expect to achieve this objective by the third quarter 2020.Volume for our lending channels was up 29% over the same quarter last year, despite the loss of HARP and NRZ recapture volume. We believe we can originate up to $10 billion of funded volume from our lending and flow MSR trials in 2020 as soon as we execute on our plan and there is no change in the current market environment.Since the end of the second quarter, we’ve been awarded $3 billion and closed $1 billion in bulk MSR purchases. We continue to be prudent and patient in our capital deployment in bulk MSRs, considering the volatile interest rates and what we believe to be lower returns and higher potential risks in the current market.Due to the heightened interest rate volatility in the third quarter, we implemented a derivative-based hedging program that partially hedges the exposure for interest rate sensitive portfolio, while we build a national hedge through our lending channels. We continued to reduce our cost of debt and improved match funding through the implementation of MSR financing solutions and enhancements to our existing structured finance programs.We closed the third quarter with $345 million of cash on hand and believe that our liquidity position and planned capital actions can support our near-term investment objectives. We continue to proactively engage our regulators and track our progress as it relates to our regulatory commitments.As detailed on slide 22, our actions to date have reduced the annualized pretax loss excluding income statement notables and amortization of NRZ lump sum cash payments by nearly 50%. We expect pretax income excluding income statement notables but including amortization of NRC lump sum payments to approach breakeven in the fourth quarter of 2019. Lastly, we also believe we are on track to achieve pretax profitability, excluding income statement notables and amortization of NRZ lump sum payments by the third quarter of 2020, both pretax income targets assume we achieve our objectives and there are no adverse changes to current market and industry conditions or legal and regulatory matters.Please turn to slide five. We believe the actions we have taken over the past 12 months are reshaping Ocwen into a diversified independent mortgage servicer and originator that can deliver performance through mortgage industry cycles. We are very quickly building multiple channels to drive portfolio replenishment and growth, including correspondent lending, agency co-issue programs, flow MSR relationships, participations in the bulk market, and portfolio retention.Our product and service offerings include forward and reverse mortgages, agency government and private investor products, residential and small balance commercial mortgage servicing and subservicing with a core competency in performing and special servicing. With the diversified product and service offering, a servicing portfolio of over $200 billion and 1.4 million customers, high servicer range the agencies we service for and an improving cost structure, we believe we have meaningfully improved our competitive position due to the acquisition of PHH and the implementation of our plans.Please turn to slide six. We believe we are implementing a clear and actionable roadmap to enhance our financial performance and competitive position. This roadmap is grounded in what we believe are critical success factors for our business including competitive cost structure, customer focus and satisfaction, reputation with key stakeholders, operational execution, portfolio replenishment and recapture performance, ancillary income generation and access to cost effective capital. We have identified several objectives that align with the critical success factors including an industry top quartile cost structure, maintaining a high level of customer satisfaction, building a multichannel and multiproduct portfolio replenishment capability, leveraging structured financing and MSR capital vehicles for capital efficiency and maintaining a roughly 50-50 mix of own servicing and subservicing over time. Our key initiatives are intended to position Ocwen as a high-quality mortgage servicer and originator with an industry top quartile cost structure.Now, please turn to slide seven. Despite more unpredictable bulk MSR volume and lower asset yield expectations for MSR investment, we continue to target achieving profitability on a pretax basis, excluding income statement notables and the amortization of NRZ lump sum payments by the third quarter of 2020. We expect the improvement in adjusted pretax earnings will be driven by a combination of factors that we currently estimate as approximately $132 million annualized expense reduction from additional cost reengineering, $10 million of lower interest expense due to corporate debt, and $30 million annualized revenue increase from higher lending volume and MSR mix.Our profitability roadmap assumes we maintain a servicing portfolio UPB of at least $200 billion and achieve a roughly 50-50 owned and subservice mix over time. However, we expect MSR replenishment rates will vary quarter-over-quarter, especially while we are dependent on the bulk MSR market. As a result, our servicing UPB may also vary from quarter-to-quarter.I will now provide additional details on our actions to achieve our cost structure, growth, capital and regulatory objectives.Please turn to slide eight. We are focused on executing three categories of actions to achieve a highly competitive cost structure

[June Campbell:]

Thank you, Glen.My comments today will focus on our third quarter results as compared to the prior quarter. As previously noted, our third quarter investor presentation includes more details on our results and is available on our website.Please turn to slide 13. Our third quarter 2019 reported net loss of $43 million was impacted by $18 million of reengineering costs, $6 million of unfavorable net valuation impacts, and a $5 million gain on repurchase of senior secured notes, among other items.Third quarter net loss compares favorably to net loss of $90 million in the second quarter of 2019, largely driven by lower unfavorable net valuation impacts. The positive pre-tax earnings impact from the amortization of the lump sum cash payments received from NRZ in 2017 and 2018 was $24 million in the third quarter and $31 million in the prior quarter.The amortization of these lump sum cash payments will have a $61 million positive impact to our pre-tax income over future period April 30, 2020. Revenue of $284 million increased by $9 million from the prior quarter. This included $5 million less of favorable reverse portfolio of fair value change compared to the prior quarter.Non-MSR expenses of $179 million was $5 million lower than the prior quarter as we continue to make progress on our cost reengineering actions, which remain ahead of our expectations.The favorable MSR valuation adjustment of $135 in the quarter is primarily due to a $252 million favorable valuation adjustment to our non-agency MSRs associated with continued improved collateral performance, which was confirmed by our third-party valuation provider and recent market trading activity.This favorability was partly offset by a $63 million unfavorable adjustment, primarily due to a 40 basis points decline in the 10-year swap rate and other valuation updates. The remaining $55 million reduction in MSR value was due to portfolio runoff. The favorable MSR valuation adjustment in the quarter was offset by $198 million of unfavorable NRZ financing liability valuation change, which was recorded in interest expense. We have provided additional information related to the MSR valuation impacts on slide 27.I would now like to provide comments on our servicing and lending segment results. As outlined on slide 14, our servicing segment recorded a $13 million pre-tax loss compared to $59 million in the prior quarter, largely driven by a $39 million lower net unfavorable fair value change compared to the second quarter. Servicing revenue of $250 million increased by $8 million, largely driven by timing of servicing fee collections in connection with the final MSP loan boarding in June. Approximately $6 million of the higher servicing revenue was related to NRZ and offsetting interest expense.The servicing business remains focused on providing sustainable loan modification solutions to qualifying borrowers in need. We completed 6,245 modifications in the quarter, 15% of which resulted in some type of debt forgiveness, totaling $33 million.As of September 30th, the total UPB of our servicing portfolio stood at $217 billion, which is down from $229 billion at June 30th. This reduction is largely driven by portfolio run off of $9 billion and a net $4 billion decrease in subservicing, primarily due to a legacy PHA subservicing client termination, which we disclosed last quarter. We do not currently anticipate any additional material subservicing terminations.Please turn to slide 15. The lending segment recorded a pretax income of $9 million, $1 million favorable to the prior quarter. Forward lending reported close to breakeven results in the quarter, which is $3 million favorable to prior quarter. Revenue of $8 million was $1 million favorable, primarily due to higher margins recapture, and costs were lower due to cost and productivity improvement initiatives. We successfully ramped up our relaunch correspondent channel to $93 million of funded volume in the quarter. The reverse lending business recorded pretax income of $9 million compared to $12 million in the prior quarter, largely driven by $5 million less of favorable net fair value change compared to the second quarter.Reverse lending revenue of $21 million was in line with prior quarter. Excluding the less favorable net fair value change, revenue improved $5 million, driven in part by 32% higher volumes in the quarter.As you can see on slide 16, we ended the quarter with $345 million of unrestricted cash. At quarter end, we were fully funded on our servicing advance and committed warehouse facilities based on available collateral. Our liquidity was $34 million higher than prior quarter, driven by $136 million of cash from the new MSR financing facility and $40 million from a better advance rate on the refinanced OMART ABS offset by a $138 million cash used for the repayment PHH bond matured in September 2019, repurchase of senior secured notes and scheduled amortization of our SSTL. Our working capital needs will continue to change as we support the growth of our lending business.We continue to closely monitor our balance sheet changes and look for opportunities to improve working capital requirements as part of our liquidity management initiatives. We ended the quarter with corporate debt outstanding of $645 million following the repayment of $98 million of PHH bond and repurchases of $39 million of senior secured notes and a corporate debt to equity ratio of 1.7 times.I’ll now turn it back over to Glen.

[Glen Messina:]

Thank you, June. Please turn to slide 17.Since our last earnings call, we have continued to make substantial progress with respect to our key business initiatives to position the Company for profitability and growth. Our team is excluding well and committed to delivering on the objectives of our key initiatives. We're taking actions to grow our lending platform, diversify our MSR sources, further reduce costs, lower our cost of capital, and maintain a disciplined approach to capital allocation.We believe our actions and plans can result in a more diversified business that can deliver performance through the mortgage industry cycle and capitalize on growth opportunities. Our integration efforts are largely complete. In the fourth quarter, we expect to finalize our facilities consolidation and begin the final phase of our legal entity simplification.In the third quarter, we realized $268 million of annualized expense savings, excluding net MSR valuation adjustments and expense notables, compared to the second quarter of 2018 adjusted expenses for the combined Ocwen and PHH. We remain on track to achieve at least $300 million of the annualized adjusted run rate expense savings by the fourth quarter 2019.At approximately our current servicing UPB levels, we are increasing our annualized total cost reengineering target to $400 million and expect to achieve this objective by the third quarter 2020. Volume from our lending channels was up 29% over the same quarter last year, despite the loss of HARP and NRZ recapture volume. We believe we can originate up to $10 billion of funded volume from our landing and flow origination channels in 2020, assuming we execute our plans.Since the end of the second quarter, we've been awarded $3 billion and closed $1 billion in bulk MSR purchases. We continue to be prudent and patient in our capital deployment and bulk MSRs. We implemented a derivative based hedging program that partially hedges the exposure for interest rate sensitive MSR portfolio while we build a natural hedge through our lending channels.We continue to reduce our cost of debt and improve match funding through the implementation of MSR financing solutions and enhancements to our existing structured finance programs. And we continue to proactively engage our regulators and track our progress as it relates to our regulatory commitments.Our actions to-date have reduced the annualized pretax loss, excluding income statement notables and amortization of NRZ lump sum cash payments by nearly 50%. We expect pretax income excluding income statement notables, but including amortization of NRZ lump sum payments to approach breakeven in the fourth quarter of 2019. We also believe we are on track to achieve pretax profitability, excluding income statement notables and amortization of NRZ lump sum payments by the third quarter of 2020.I want to thank the Ocwen Board of Directors and our associates for their hard work and enduring commitment through our transformation.And with that, we are ready to take questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Bose George of KBW.

[Bose George:]

Hey. Good morning. First, just, you gave your target hurdle rate for agency MSR, the 8.5%. And also, just on the Ginnie Mae side, do you guys have a target and similarly where do you see the market trading?

[Glen Messina:]

Good morning, Bose. So, yes, during the third quarter, as a result of lower interest rate environment, we have seen returns drift a bit lower on MSR returns. So, we historically have targeted a 9% to 11% range for agency MSRs, and then 11% to 13% range in Ginnie’s. We're seeing the market pricing on both asset levels -- asset level pricings go up, which means returns kind of down. And we are seeing returns in that 8.5% to 9% range, largely for agencies, and Ginnie’s hovering right around 9%. Now, for us, what that means -- I’m sorry, Bose. Go ahead.

[Bose George:]

Sorry. Go ahead, Glen.

[Glen Messina:]

I was going to say, yes, obviously we lever those returns as well with MSR secured financing. So, it produces after leverage return of about 13% for us at the 8.5% level.

[Bose George:]

Okay. And then, just given what you're seeing in the market, are you reasonably comfortable that you can keep your MSR servicing portfolio pretty stable over the next year?

[Glen Messina:]

Yes. We are focused on growing our leading channel in particular, part of the progress we made during the quarter, we have more work to do for sure. But, we are growing our lending channel rapidly. And our goal is to at least double the recapture rate in our portfolio retention platform, continue to grow our correspondent lending platform and achieve annualized volume through our lending channels plus our agency cash flow and flow relationships of $10 billion and then obviously we will continue to participate on our opportunistic basis in the bulk market to achieve our portfolio replenishment objectives.

[Bose George:]

Okay, great. Thanks. And then, on the cost cuts, obviously great work on that. Just the longer term in terms of attaining normalized profitability, is there a way to gauge what you need to do on the revenue side, so the level of UPB or volumes, et cetera?

[Glen Messina:]

Yes. Bose, I think, the roadmap that we laid out to give all the key assumptions to how we're thinking about the business. So, we want to maintain at least $200 billion of UPB. We want to achieve about 50-50 mix of own servicing and subservicing. And then, from a cost reduction perspective achieving our $400 cost savings objective. We’ll have some industry expense savings as a result of some of the corporate debt actions that we've taken, and then seeing about $30 million revenue growth from our lending activities, which is again laid out on that road map. We think that gets the business to a place where we're profitable in the third quarter of 2020.

[Bose George:]

That makes sense. But, I was thinking more of -- does that get to sort of breakeven or your whatever target normalized profitability, and speaking more what you need to get to whatever that target rate is?

[Glen Messina:]

So, again, as I think about the business from our framework perspective, we’re pricing our MSRs to achieve our levered return of around 13%. So, long-term, that's the earnings rate that in theories embedded into our assets, assuming that the pricing assumptions are materialized on a go forward basis. And then, we would expect our lending channels as we continue to grow them, particularly our portfolio retention channel will contribute positive earnings as well too through the cycle, obviously more earnings in down rate environment, less earnings in an up rate or a purchase market environment. We continue to believe our business has to return its cost of capital, which we expect to be in the low double digit range, high single digit low double digit range for the business.

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Glen Messina for closing remarks.

[Glen Messina:]

Thank you, everyone, for joining the call today. We appreciate your continued interest in Ocwen, and I look forward to talking to you next call. Thank you.

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.