As Ocwen moves toward profitability, its specialty could cut both ways

Preliminary second-quarter results at Ocwen Financial Corp. suggest the company was able to eke out a profit over that period after suffering a net loss in the first quarter.

Ocwen's early numbers peg its net income for the second quarter at $2 million, up from a net loss of $25.5 million in the first quarter and a net loss of nearly $90 million in the second quarter of last year.

The mixed impact the coronavirus has had on Ocwen to date illustrates a key question for investors may be mulling: will the company’s expertise and exposures as a distressed servicer be a net negative or positive for it?

Glen Messina, the company's CEO, is clearly positioning them as strengths, but he acknowledged that it presents some challenges that Ocwen is working to address.

"We do believe the current environment will increase demand for servicing and subservicing for operators with experience in managing through severe delinquencies," Messina said during a call about the company's preliminary earnings results on Friday.

But he admitted that the company has some limitations when it comes to its access to sources of cash.

"Our primary limitation … will be our available capital," Messina said.

Runoff from record-low rates and the need to advance funds to cover suspended payments have strained Ocwen's liquidity.

While there has been a decline in forbearance rates and roughly 35% of borrowers that requested suspensions have continued paying, Messina noted that he wants to remain conservative about estimating the extent of the strain the company might experience because the virus spread.

Production operations, which have been going gangbusters in response to lower rates, have been a saving grace for Ocwen and some other mortgage companies that are lenders as well as servicers.

But while Ocwen does have a growing origination business, its roots lie in doing distressed servicing in bulk, an activity that has posed a host of regulatory and business challenges for it since the Great Recession.

That said, the company has a reputation for being like a cat with nine lives when it comes to addressing these concerns.

Most notably, after being sued in 2017 by a large group of state and federal regulators, Ocwen was over time able to whittle 30 compliance actions down to two.

Those two outstanding actions have since been combined, and are due to be resolved through a court process that will likely end in mediation this fall, Messina said.

Although the CFPB is not as active as it once was, it's expected to continue to keep a close eye on servicers. Mortgage-related issues were the largest category of complaints the bureau received between January and May at 19%. Fifty-five percent of those complaints were related to payment concerns.

Messina said he has positioned the company to strike the right balance between compliance and business needs going forward.

"We believe the compliance environment, our compliance culture and our control environment allow for operations to maintain quality while undergoing increases in volume," said Messina.