Ocwen Financial eked out a second quarter profit due to cost cuts, appreciation in owned mortgage servicing rights, and a shift to higher-margin correspondent products, all of which offset challenging market conditions that were particularly hard on reverse mortgage lending.
The company earned $10 million during the period, down from $58 million in the first quarter but improving on a $10 million net loss a year ago. Its $1.12 in earnings per share was in the lower end of the range of analyst estimates, and below a Wall Street Journal consensus of $2.29.
“We saw higher rates positively impact MSR appreciation in our own servicing book as well as strong performance in our correspondent origination business which offset…negative drivers,” Sean O’Neil, Ocwen’s new chief financial officer, told analysts in an earnings call Thursday.
Ocwen’s greatest challenges during the second quarter included mark-to-market accounting adjustments, a reduction in production volumes due to higher rates and the sale of delinquent loans bought out of Ginnie Mae securities to reduce risk.
In a rising rate environment like that seen in the second quarter, production will take more of a back-seat to servicing as a priority, executives said during the call.
“In this part of the market cycle, originations will be a less important driver of earnings, but…a critical element of our business to replenish and grow our servicing portfolio,” said Glen Messina, Ocwen’s president and CEO.
However, a downturn in the economy could change the credit risk and interest rate environment and Ocwen is remaining mindful of that by ensuring some of its growth is in subservicing, he added.
Even if an economic downturn creates more demand for its distressed servicing expertise, it also could pose cost and balance sheet management issues for the company. Subservicing helps Ocwen address that because it allows companies to fulfill operational responsibilities for managing loan payments while removing the risk of MSR value fluctuations and the need to advance funds when borrowers are delinquent, said Messina.
“With over 50% of our servicing portfolio comprised of subservicing, our exposure to higher costs and advances in a recession is reduced versus a 100% owned servicing portfolio,” Messina said.
Ocwen added subserviced loans with an unpaid principal balance totaling $79 billion over the last 12 months and has $14 billion more scheduled additions planned over the course of the next six, he said.
Reverse mortgages contributed to that subservicing growth but also had a tough the second quarter.
“While the long-term reverse mortgage opportunity remains attractive due to borrower demographics and the reverse MSR counter-cyclical behavior during a home price downturn, there are near term headwinds in this business,” O’Neil said.
Not only did reverse mortgages experience a 125 basis point runup in rates during the period, secondary-market spreads were four times wider than they were in 2021, said Messina.
Also, some large correspondents also switched to issuing securities backed by Home Equity Conversion Mortgages themselves rather than selling their loans to others, said O’Neil.
“All of these headwinds are reflected in the drop in second quarter income relative to the first quarter and the accompanying margin decline,” O’Neil said. “It is still a profitable business, but a smaller income contribution this quarter.”