Ocwen Financial (OCN) - 2021 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Unaudited Consolidated Financial Statements The company's unaudited consolidated financial statements detail its financial position, operational results, and cash flows for the period ended September 30, 2021 Consolidated Financial Statements Consolidated Balance Sheet Summary (in thousands) | Account | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $12,040,238 | $10,651,127 | | Mortgage servicing rights (MSRs) | $2,176,260 | $1,294,817 | | Loans held for investment, at fair value | $7,108,730 | $7,006,897 | | Loans held for sale | $933,700 | $387,836 | | Total Liabilities | $11,570,367 | $10,235,755 | | HMBS related borrowings, at fair value | $6,782,564 | $6,772,711 | | Mortgage loan warehouse facilities | $1,069,170 | $451,713 | | MSR financing facilities, net | $945,744 | $437,672 | | Senior notes, net | $612,658 | $311,898 | | Total Stockholders' Equity | $469,871 | $415,372 | Consolidated Statement of Operations Summary (in thousands) | Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $283,101 | $249,035 | $756,140 | $729,901 | | MSR valuation adjustments, net | $(6,320) | $(33,814) | $(57,562) | $(231,368) | | Total Operating Expenses | $145,436 | $149,522 | $434,873 | $431,545 | | Income (loss) before income taxes | $10,263 | $(11,374) | $(335) | $(104,875) | | Net Income (Loss) | $21,552 | $(9,420) | $19,773 | $(32,955) | | Diluted EPS | $2.29 | $(1.09) | $2.13 | $(3.76) | Consolidated Statement of Cash Flows Summary (YTD, in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(412,836) | $248,039 | | Net cash used in investing activities | $(845,381) | $(328,116) | | Net cash provided by (used in) financing activities | $1,222,301 | $(29,297) | | Net decrease in cash, cash equivalents and restricted cash | $(35,916) | $(109,374) | Note 1 - Organization and Basis of Presentation - Ocwen Financial Corporation operates as a non-bank mortgage servicer and originator through its subsidiary, PHH Mortgage Corporation, focusing on servicing, subservicing, and loan origination[26][28][29] - The company maintains significant international operations, with approximately 3,200 employees in India and 400 in the Philippines supporting servicing and corporate functions[30] - A one-for-15 reverse stock split was implemented in August 2020, and all share and per-share data have been retroactively adjusted[32] Note 2 – Securitizations and Variable Interest Entities - The company accounts for securitizations of GSE or Ginnie Mae guaranteed loans as sales, retaining $136.5 million in MSRs in the first nine months of 2021[43][45] - Transfers of Home Equity Conversion Mortgage (HECM) loans into the HMBS program are treated as financings, with the loans remaining on the balance sheet[49] - Ocwen consolidates various Special Purpose Entities (SPEs) and Variable Interest Entities (VIEs) used for financing purposes, as it is deemed the primary beneficiary[50][52][55] Note 3 – Fair Value - Significant assets and liabilities, including MSRs and reverse mortgages, are classified as Level 3 in the fair value hierarchy, indicating reliance on unobservable inputs[61][67] Key Level 3 Assets and Liabilities at Fair Value (in thousands) | Item | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | MSRs | $2,176,260 | $1,294,817 | | Loans held for investment - Reverse mortgages | $7,100,726 | $6,997,127 | | HMBS-related borrowings | $6,782,564 | $6,772,711 | | Financing liability - Transferred MSR liability | $702,907 | $566,952 | MSR Valuation Sensitivity (as of Sep 30, 2021, in thousands) | Adverse Change Scenario | 10% Increase | 20% Increase | | :--- | :--- | :--- | | Weighted average prepayment speeds | $(65,965) | $(128,151) | | Weighted average discount rate | $(53,571) | $(103,573) | Note 7 – Mortgage Servicing MSR Portfolio Roll-Forward (At Fair Value, in thousands) | Description | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Beginning balance | $1,294,817 | $1,486,395 | | Additions (New & Purchased) | $942,951 | $116,779 | | Changes in fair value | $(54,668) | $(270,626) | | Ending balance | $2,176,260 | $1,069,013 | - The total UPB of the MSR portfolio grew to $206.0 billion from $154.2 billion, driven by a bulk acquisition of GSE loans with a $46.8 billion UPB in June 2021[94][95] Servicing Revenue Breakdown (in thousands) | Revenue Source | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | | Servicing | $246,363 | $161,154 | | Subservicing (incl. MAV & NRZ) | $243,681 | $325,232 | | Ancillary income | $72,720 | $82,059 | | Total | $562,764 | $568,445 | Note 8 — MSR Transfers Not Qualifying for Sale Accounting - Certain MSR transfers to New Residential (NRZ) and MAV are treated as secured financings, with the assets and a corresponding liability remaining on the balance sheet[98][99][100] Assets & Liabilities from Non-Sale MSR Transfers (in thousands) | Account | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Transferred MSRs, at fair value | $718,913 | $566,952 | | Other financing liability - Transferred MSR liability | $702,907 | $566,952 | - The termination of an NRZ subservicing agreement in February 2020 met sale accounting criteria, resulting in the derecognition of $263.7 million in MSRs and the related financing liability[92][122] Note 10 - Investment in Equity Method Investee - Ocwen holds a 15% equity interest in MAV Canopy, a joint venture with Oaktree Capital Management formed to invest in MSRs[125] - The company's subsidiary, PMC, holds exclusive rights to subservice MAV's MSR portfolio and solicit its borrowers for refinancing[126][127] - As of September 30, 2021, Ocwen's investment in MAV Canopy was valued at $19.8 million[137] Note 12 – Borrowings - In March 2021, the company completed a major debt refinancing, redeeming $21.5 million of 6.375% Senior Notes, $291.5 million of 8.375% Senior Secured Notes, and repaying its $185.0 million Senior Secured Term Loan[159][163] - Concurrently, the company issued $400.0 million of new 7.875% Senior Secured Notes due 2026 and $285.0 million in total Senior Secured Notes due 2027 to Oaktree investors[164][170][171] - The company was in compliance with all debt covenants, including a minimum tangible net worth of $275.0 million and minimum consolidated liquidity of $125.0 million[178][179] Note 19 – Business Segment Reporting Segment Income (Loss) Before Income Taxes (YTD 2021 vs YTD 2020, in thousands) | Segment | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Servicing | $14,728 | $(74,283) | | Originations | $75,846 | $71,149 | | Corporate Items and Other | $(90,909) | $(101,741) | | Total | $(335) | $(104,875) | Total Assets by Segment (in thousands) | Segment | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Servicing | $10,790,503 | $9,847,603 | | Originations | $865,011 | $379,233 | | Corporate Items and Other | $384,724 | $424,291 | | Total | $12,040,238 | $10,651,127 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, segment performance, and strategic outlook for the third quarter of 2021 Overview - Ocwen operates a balanced business model of servicing and originations, with a total servicing UPB of $248.3 billion as of September 30, 2021[276] Total Servicing and Subservicing UPB Additions (in billions) | Period | Q3 2021 | Q2 2021 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Additions | $26.48 | $68.67 | $108.68 | $26.74 | - Key operating objectives for 2021 include accelerating growth, strengthening recapture performance, and improving cost leadership[286] - The company managed 53,300 loans under COVID-19 forbearance plans, representing 4.1% of its total portfolio, a declining trend[291] Results of Operations Consolidated Results of Operations Summary (in millions) | Metric | Q3 2021 | Q2 2021 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $283.1 | $265.4 | $756.1 | $729.9 | | MSR valuation adjustments, net | $(6.3) | $(72.5) | $(57.6) | $(231.4) | | Net Income (Loss) | $21.6 | $(10.3) | $19.8 | $(33.0) | - Q3 2021 revenue increased by $17.7 million (7%) from Q2 2021, driven by higher servicing fees and gains on sale of loans[298][300] - MSR valuation adjustments improved significantly, with a net loss of $6.3 million in Q3 2021 compared to a $72.5 million loss in Q2 2021[303][305] - Operating expenses decreased by 3% from Q2 2021, primarily due to a $7.1 million decline in professional services expense[315] Financial Condition - Total assets increased by $1.4 billion to $12.0 billion, driven by an $881.4 million (68%) increase in MSRs and a $545.9 million (141%) increase in loans held for sale[335] - Total liabilities increased by $1.3 billion, reflecting higher warehouse and MSR financing facilities to fund portfolio growth[336] - Total stockholders' equity increased by $54.5 million to $469.9 million, driven by stock issuance to Oaktree and net income[338] Segment Results of Operations Servicing Segment The Servicing segment's pre-tax income improved significantly due to portfolio growth and gains on exercised call rights, despite reverse mortgage revenue declines Servicing Segment Results (in millions) | Metric | Q3 2021 | Q2 2021 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $224.3 | $197.3 | $596.9 | $592.0 | | MSR valuation adjustments, net | $(10.6) | $(69.9) | $(103.2) | $(249.9) | | Total operating expenses | $80.8 | $83.6 | $247.2 | $255.5 | | Income (loss) before income taxes | $16.6 | $(15.4) | $14.7 | $(74.3) | - NRZ remains the largest subservicing client, accounting for 24% of UPB, though the average UPB serviced for NRZ decreased by 5% from Q2 to Q3 2021[349][372] - The fair value of owned MSRs experienced a net loss of $50.1 million in Q3 2021, driven by portfolio runoff and hedging losses[382][386] Originations Segment The Originations segment's pre-tax income declined due to higher compensation expenses, despite increased revenue and correspondent channel volume Originations Segment Results (in millions) | Metric | Q3 2021 | Q2 2021 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $58.8 | $55.4 | $180.4 | $124.8 | | MSR valuation adjustments, net | $2.8 | $8.8 | $20.1 | $26.3 | | Total operating expenses | $43.5 | $39.7 | $120.5 | $78.3 | | Income before income taxes | $16.8 | $22.5 | $75.8 | $71.1 | Originations & MSR Purchases by Channel (UPB in millions) | Channel | Q3 2021 | Q2 2021 | | :--- | :--- | :--- | | Forward Loans (Correspondent & Direct) | $5,928 | $3,098 | | Reverse Loans | $428 | $340 | | MSR Purchases (Flow/Bulk) | $4,902 | $61,302 | | Total | $11,258 | $64,740 | - The company expanded its correspondent seller network from 119 to 419 in the twelve months to September 30, 2021[410][425] Corporate Items and Other Segment The Corporate segment's pre-tax loss narrowed due to lower professional services and legal settlement expenses Corporate Items and Other Segment Results (in millions) | Metric | Q3 2021 | Q2 2021 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $1.5 | $1.5 | $4.3 | $5.2 | | Total operating expenses | $21.1 | $26.5 | $67.1 | $97.7 | | Total other expense, net | $(3.6) | $(4.4) | $(28.1) | $(9.3) | | Loss before income taxes | $(23.2) | $(29.4) | $(90.9) | $(101.7) | - Professional services expense for YTD 2021 declined $22.7 million (43%) compared to YTD 2020, driven by lower legal expenses and cost initiatives[448] - A loss on debt extinguishment of $15.5 million was recognized in Q1 2021 due to the corporate debt refinancing[454] Liquidity and Capital Resources - The company completed a comprehensive refinancing of its corporate debt, extending maturities by over three years and increasing financial flexibility[457][459] - Unrestricted cash was $236.1 million, while total borrowing capacity increased by $1.3 billion (60%) during the first nine months of 2021[462][464] Cash Flow Summary (YTD, in millions) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(413) | $248 | | Net cash used in investing activities | $(845) | $(328) | | Net cash provided by (used in) financing activities | $1,222 | $(29) | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company details its exposure to interest rate, foreign currency, and home price risks, highlighting a new MSR hedging strategy implemented in May 2021 - Effective May 2021, the company ended its macro-hedging strategy and began hedging its MSR portfolio and originations pipeline separately[528][537] Interest Rate Sensitivity of MSR Portfolio and Hedges (as of Sep 30, 2021, in millions) | Scenario | Agency MSRs (excl. NRZ) | Total Hedge Position | Hypothetical Residual Exposure | | :--- | :--- | :--- | :--- | | 25 bps rate decrease | $(74.5) | $42.5 | $(32.0) | | 25 bps rate increase | $75.3 | $(43.9) | $31.4 | - The company is exposed to daily margining requirements on its MSR financing facilities and derivative instruments, which could require posting additional cash collateral[469][534] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal controls - Management concluded that as of September 30, 2021, the company's disclosure controls and procedures were effective in providing reasonable assurance of timely and accurate reporting[551] - There were no material changes in internal control over financial reporting during the quarter ended September 30, 2021[552] PART II - OTHER INFORMATION Item 1. Legal Proceedings The report references Notes 20 and 22 for detailed disclosures on ongoing legal proceedings and regulatory matters - For information regarding legal proceedings, the report refers to Note 20 (Regulatory Requirements) and Note 22 (Contingencies) in the financial statements[554] Item 1A. Risk Factors No material changes were reported to the risk factors previously disclosed in the company's 2020 Annual Report on Form 10-K - The company states there are no material changes from the risk factors disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020[555] Item 6. Exhibits This section lists filed exhibits, including officer certifications under the Sarbanes-Oxley Act and financial data in Inline XBRL format - The exhibits filed with this report include officer certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, and financial data in Inline XBRL format[556]