Ocwen Financial's first-quarter profit fell 43%, and the Atlanta mortgage servicer said that its auditor is questioning its long-term viability.
Chief Executive Ron Faris told analysts Thursday that Ocwen's independent auditor has again delayed its 2014 financial results and has raised questions about the firm's ability to operate as a going concern because of liquidity problems and the strict regulatory environment. Its 2014 results are expected to be finalized by May 29.
Ocwen also said it will sell a significant portion of nonperforming loans backed by Fannie Mae and Freddie Mac at a loss of between $75 million to $90 million. Doing so will improve its operating margins and liquidity and reduce servicing advances that cannot be financed, Faris said. The company also expects to recover more than $150 million in servicing advances.
The auditor has an array of concerns, and no single issue is driving them, Faris told analysts on a conference call.
Ocwen's auditor could sign off on its financials with no qualification, indicating they have questions about the company's ability to remain financial viable as a going concern over the next 12 months.
The primary focus is on Ocwen's residential-servicer rankings. Standard & Poor's Ratings Services ranks Ocwen Loan Servicing as average with a negative outlook. On April 21 S&P placed Ocwen's credit rating on CreditWatch with negative implications.
"Mounting negative pressure including the potential for a 'going concern' opinion, and servicing ranking outlooks currently on negative with the potential for downgrades, could have a significant impact on the company's ability to retain a portion of mortgage servicing contracts, negatively impacting revenue," wrote Richard Zell, S&P's credit analyst.
The auditor is deciding between a going-concern opinion or a milder warning, Faris said Thursday. "We are looking at all available information including the impact of the regulatory environment, the status and impact of our servicer rating and our liquidity," he said.
"A going-concern explanatory paragraph, if that were to be the result, will not cause a default on any of our debt agreements," Faris continued. "While we are aware of the negative public perception, we believe we will be able to refinance all outstanding debt and maintain liquidity going forward."
The big drop in quarterly earnings to $34.4 million, or 27 cents a share, came after revenue fell 7%, to $510.4 million, and special items dealt a blow. Those items included a $17.8 million impairment charge to devalue mortgage-servicing rights after the Federal Housing Administration cut insurance premiums 50 basis points.
Ocwen took a $9 million charge in the first quarter for expenses related to the monitor of the national mortgage settlement and $8.4 million for strategic-advisory expenses.
At the same time the company also reported a $26.9 million gain on the sale of $9 billion in unpaid principal on performing loans backed by Freddie Mac.
Ocwen estimates it will have $50 million of expenses in 2015 to pay for various settlement monitors, but it is "not aware of any fines, penalties or settlements from any state agencies that would have a material impact," Faris said.
On the call, Faris thanked Ocwen's 11,000 employees for their "tireless efforts over recent months" and cited their "tremendous commitment and a passion to persevere."
Ocwen said it is not exiting the servicing or lending of loans backed by Fannie, Freddie or the FHA. It even plans to expand its lending segment, which generated $16 million in first-quarter earnings.
