Onity records higher earnings despite jolt from price change

Onity improved results during the third quarter, dodging the kind of markdowns in mortgage servicing rights seen at some peers, but a shift in pricing hurt margins in one loan channel.

The $21 million in net income or $2.72 in earnings per share reported under generally accepted accounting principals was up from $11 million the previous quarter and $8 million a year earlier. The S&P Capital IQ consensus estimate had been that Onity would generate $1.60 per share.

Onity's $35 million in adjusted pretax income was the highest it's been in three years, according to CEO Glen Messina. Adjusted EPS, at $3.41, beat an earlier $1.74 estimate, according to Standard & Poor's Capital IQ.

"Our MSR hedge performed very well, effectively offsetting the impact of declining interest rates," Messina said during the company's earnings call.

Onity has a particularly high conservative hedge ratio that has fluctuated between 90% and 110%. Management has been using it with the aim of lowering MSR volatility, analysts at Keefe Bruyette & Woods noted in a first-take report on the company's earnings.

Revenue came in at $265.70 million. The consensus estimate for it had been $258.40 million.

One factor fueling the company's quarterly gains was $53 million in adjusted pretax income from servicing, which compared to $50 million in the second quarter and $10 million a year ago.

The unpaid principal balance of its servicing portfolio inched down to $299 billion from $304 billion the previous quarter, but was up slightly from $296 a year earlier.

Another contributor to earnings was $10.2 million in adjusted pretax income from originations, which compared to $9.7 million the second quarter and $2 million loss a year ago.

Origination volume overall was up during the quarter at $8.5 billion but margins in the business-to-business channel suffered due to a sudden pricing change by influential government-related secondary market buyers Fannie Mae and Freddie Mac.

Onity's reduction in B2B pretax income occurred despite the fact that production volumes in this channel rose to $8.1 billion from $6.6 billion in the second quarter.

Adjusted pretax income fell to $5.8 million from $9.5 million in the B2B channel from the previous quarter due in part to the pricing volatility.

However, the regulator of Fannie and Freddie has since directed them to mitigate this kind of concern with notifications for future, large guarantee fee changes.

"They'll be more thoughtful about price changes going forward, and will do better to pre announce changes so people can adjust their pipeline position and not get caught with loans that haven't been sold forward," Messina said.

As previously announced, Onity moved ahead with capital restructuring in line with plans to sell a stake in its servicing joint venture during the third quarter. It later confirmed it had followed through on with a related senior note offering.

The JV's restructuring is on track to close in the fourth quarter, pending regulatory approvals, according to Chief Financial Officer Sean O'Neil. 

The company also had announced an agreement to buy $55 million in reverse-mortgage servicing assets during the quarter. That transaction closed last week, O'Neil said during the earnings call.

Onity's shares had opened at $32.17, up from from the previous day's close at $30.13, but they later vacillated and at deadline they were trading at levels around $31.50.