Ocwen takes a loss on servicing valuation changes

Ocwen Financial's earnings slipped into the red as an interest rate drop hurt the valuations for mortgage servicing rights the company owns.

The mortgage company recorded a $47 million net loss for the fourth quarter. This compares to a positive $8 million in the third quarter and a negative $2 million for the fiscal period one year earlier.

Ocwen also recorded a loss for the year due to negative MSR changes, the first seen since 2020. The negative $64 million in earnings in 2023 compared to $37 million in net income in 2022 and $18 million positive result in 2021.

The rate drop during the quarter and associated valuation changes have been common concerns for servicers with higher coupons in their MSR portfolio, and Ocwen has taken aggressive steps to address the issue.

The company has increased its hedge coverage ratio target to protect against another potential drop in rates this year, Glen Messina, the company's chairman, CEO and president said in an earnings call.

This ratio refers to the percentage of a position that a hedge is designed to protect.

"Our fourth quarter unfavorable MSR fair value change was driven by an 82 basis point reduction in key interest rates, offset by hedge coverage of 69%, which was aligned with our average target for the quarter," he said. "In December, we increased our hedge coverage ratio target to 100% to protect book value if rates should fall in 2024 as anticipated."

While the company recorded a loss under generally accepted accounting principles due to valuation shifts, when those changes are excluded, the company generated $11 million in adjusted, pretax income for the quarter, and $49 million for the year.

Although the valuation changes on MSRs the company owns weighed down net earnings, servicing as a business line was the main driver of the gains in adjusted results.

On an adjusted, pretax basis during the quarter, the company generated $37 million in income from traditional and reverse mortgage servicing and $1 million from origination. 

"Both our servicing and origination businesses continued their profitable trend," said Sean O'Neil, the company's executive vice president and chief financial officer, during the company's earnings call. Growing business lines include subservicing and investor partnerships.

The origination number was down slightly due to what analysts at Keefe, Bruyette and Woods said was "primarily due to lower volumes in the correspondent and co-issue channels, some of which can likely be attributed to seasonality."

The company may sell off some servicing rights if opportunities appear favorable, executives said. Ocwen also is looking into creating a separate vehicle for its Ginnie Mae servicing rights to address a new nonbank capital requirement the government guarantor will add at year-end.

"We've begun plans to launch a separate legal entity to hold our Ginnie Mae forward assets to meet the new Ginnie Mae risk-based capital ratio requirements, and have had preliminary discussions with Ginnie Mae to vet this approach," O'Neil said.

At the time of this writing on Monday, Ocwen's shares were trading at a level largely in line with where they started the day at a little over $28 per share.