Ocwen on Thursday reported the extension of a $54 billion subservicing contract with New Residential due for expiration this year, highlighting the importance of maintaining business relationships in an area that contributed to its first-quarter return to profitability.
The new contract calls for the sharing of ancillary revenue and a simplified process for future extensions, President and CEO Glen Messina said during an earnings call, in which he noted subservicing’s importance in offsetting origination declines.
Although originations “faced a challenging environment in the first quarter,” falling 13% year-over-year, the expansion of subservicing drove an increase in the size of its servicing book by $20 billion, Messina noted. The company has added $64 billion in subservicing over the last 12 months and plans to add at least another $28 billion in the next six months.
During the call, Ocwen executives also confirmed preliminary reports that it earned $58 million during the first quarter, the highest profit it’s turned in some time. That improved upon a nearly $2 million net loss the previous quarter and almost $9 million in earnings a year ago.
The company’s results suggest servicing worked well as a traditional countercyclical offset for diminished lending at Ocwen, but executives acknowledged it hasn’t precluded the need for the kind of efficiency initiatives that have become increasingly common in the mortgage industry.
“Under current market conditions, we must adjust our capacity and cost structure to match a smaller originations market,” Messina said. “We executed actions to reduce our forward origination staffing by 21%, including contractors. Further reductions are expected to occur.”
The profitability of servicing business lines will also be reliant on maintaining efficiencies, Messina said. The New Residential contract was a case in point. It was unprofitable at the outset and efficiencies did need to be introduced to make it profitable, he said.
Ocwen has reduced its servicing cost structure as expressed in basis points of the unpaid principal balance of loans by over 30% in the past year and plans to use “continued digitization and process improvement” to drive further reductions, said Messina.
Servicing additions also contributed to efficiencies by building scale. These increases boosted Ocwen’s total unpaid principal balance in this category by 3% from the previous quarter and 46% year-over-year to $275 billion.
Ocwen has also been building scalable gains and profitability in reverse mortgage originations and subservicing, Messina said. He added that the company plans to continue evaluating potential mergers and acquisitions as a means of building scale.
Liquidity, which key players in the secondary market are considering higher standards for, will be key to Ocwen’s ability to maintain profitability. The company ended the quarter with $269 million in cash and $45 million in available borrowing, Chief Financial Officer June Campbell said during the earnings call.
“We are taking a cautious and prudent approach to investing and managing our liquidity position,” Messina said.
When asked if Ocwen would be evaluating the sales of mortgage servicing rights, Messina said it would do so selectively. While MSRs have generally generated fair value gains, the company will be selling some legacy Ginnie Mae loans with negative servicing valuations.
“We believe the sale will improve the quality of earnings going forward through lower unreimbursed claims expense and de-risks our portfolio,” Messina said. “We did experience a loss on MSR value for these loans in the first quarter and we’ll recognize a loss on sale in the second quarter upon completion.”