Ocwen takes quarterly loss on drop in MSR values

Declines in asset valuations and tepid originations amid a decline in rates drove a fourth-quarter loss at Ocwen Financial, but full-year profit rose as it slashed costs and generated servicing gains.

The company reported an $80 million loss for the three-month period on mortgage servicing rights declines but $26 million in net income for the year. In comparison, it generated $37 million in net income in the third quarter of 2022 and $18 million for full-year 2021.

The quarterly numbers highlight the reason management has been working to diversify in order to manage the company's exposure to MSRs, which can experience volatile swings in value between quarters.

The company grew its subservicing portfolio to $155 billion, which represented an 18% gain on a year-over-year basis, Glen Messina, chair and CEO, said in an earnings call. Subservicing refers to handling the operational responsibilities for servicing without owning MSRs. Ocwen's mortgage-servicing rights portfolio was up 8% during the same time period at $290 billion, based on the unpaid principal balance of loans involved.

"Our focus on diversification is evidence when looking at our portfolio composition. Our operating performance has supported material growth in forward and reverse subservicing," he said.

The company will selectively continue to purchase Fannie Mae and Freddie Mac MSRs, Messina said. In contrast to Ginnie Mae, which is adding some new nonbank capital requirements for servicing rights, the two government-sponsored enterprises are not. Also, the responsibility of advancing payments borrowers don't make to securitization investors is greater in the Ginnie Mae market, where only a small share of Ocwen's loans are concentrated.

In addition to showing the value of diversifying away from MSRs, Ocwen's latest results demonstrate why it has had to dramatically cut costs, particularly in originations where companies industry-wide have faced steep reductions in volume amid higher rates.

Origination expenses during the quarter were 50% lower than a year earlier, with those for servicing down 30%, according to the company's earnings presentation.

Ocwen plans to further reduce servicing costs in 2023 by roughly another 10% in basis points of UPB, largely through process improvements, according to Messina.

When quarterly swings in market valuations were netted over the full year, Ocwen's pretax net income for servicing and origination were positive, with the former at $126 million and the latter generating $3 million, compared with $49 million and $90 million a year earlier, respectively.

"With rising interest rates, the servicing environment improved substantially, while the originations environment remains quite challenging," Messina said.

Balance-sheet revenue for the full year fell slightly to $954 million from $1.05 million primarily due to reductions in the net gain on loans held for sale and other declines that outweighed an increase in servicing-related fees to $863 million from $782 million.

If the market does move into a recessionary environment, as some have forecast, Ocwen's expertise in distressed mortgage servicing will help it weather the shift, Messina said.