Ocwen Financial Corp (OCN) Reports 3Q:16 Results; Shares Rise 13%


Ocwen Financial Corp (NYSE:OCN) reported GAAP net income of $9.5 million, or $0.08 per share, for the three months ended September 30, 2016.

Third Quarter 2016 Results

Pre-tax income for the third quarter of 2016 was $2.4 million, a $98.8 million improvement from the second quarter of 2016. Pre-tax results for the quarter include a number of significant items, including but not limited to: $12.0 million of gains from the execution of servicer “clean up” call rights, $5.7 million from the sale of agency mortgage servicing rights (“MSRs”) on approximately $3.3 billion of unpaid principal balance (“UPB”), $(15.1) million of third-party monitor costs, $(10.0) million of additional reserves for the potential California regulatory settlement and $(7.0) million of incremental reserves for the previously disclosed letter dating remediation based on final submitted claims. For the quarter, the Company generated cash from operating activities of $178 million, an increase of $147 million versus the prior quarter. The Company ended the quarter with $264 million in cash, up $44.6 million from June 30, 2016.  As of September 30, 2016, the Company had not yet paid various settlement amounts, including but not limited to the $30 million Fisher settlements announced in June and the $22 million letter dating remediation.

The Servicing segment recorded $33.2 million of pre-tax income on strong performance under the Making Home Affordable streamline modification program, significant operating cost improvements, gains from the execution of servicer “clean up” call rights and MSR sales and continued reductions in advances and match funded advances. This quarterly profit for the Servicing segment represents a $47.9 million improvement versus the second quarter of 2016.

The Lending segment recorded $3.6 million of pre-tax income for the third quarter of 2016, a $3.9 million decline versus the prior quarter on lower gain on sale margins. Quarterly mortgage lending volume grew 8% over the prior quarter.

The Automotive Capital Services business continued to grow, increasing inventory finance receivables outstanding by $11 million or 66%.  As of October 24, our auto inventory finance business is now operating in 32 markets with 57 active auto dealerships and has approved credit facilities of $67 million.

“We are very pleased with the financial result this quarter, recording our first quarterly profit since the second quarter of 2015. We saw terrific execution from our Servicing team, which completed more than 21,000 modifications in the quarter, successfully delivered $12.0 million of gains on servicer “clean up” call rights transactions and continued to reduce operating costs.  Additionally, our Automotive Capital Services business continues to grow and move closer to profitability. Our mortgage lending business saw growth in origination volume, but we must improve margins,” commented Ron Faris, President and CEO.

Phyllis Caldwell, who assumed the role of independent Chairwoman of the Board of Directors of Ocwen on March 15, 2016, added, “We remain focused on putting legacy matters behind us. We received the much awaited Standard & Poor’s upgrade to our servicer ranking in August. We continue to progress towards a potential resolution with the California Department of Business Oversight to end the current consent order and associated third party auditor before year-end.  We are also continuing to achieve benchmarks and meet necessary conditions that we believe will result in the other remaining third-party monitorships concluding at their scheduled end dates.”

Ms. Caldwell continued, “I am also proud to say that despite some of the challenges of the past, we have continued to invest in our corporate culture, risk management, compliance, service excellence, and technology. We have maintained our leadership in helping families struggling with their mortgage payments as evidenced by our number one status in the HAMP program. We are also making progress in building our new asset generation businesses. Most importantly, the entire Ocwen team is devoted to working in the best interest of homeowners and investors to deliver positive outcomes.”

Additional Q3 2016 Business Highlights

  • Completed 21,070 modifications in the quarter, 63% of which were HAMP modifications. 38% of modifications included some form of principal reduction.
  • Delinquencies decreased from 11.9% at June 30, 2016 to 11.4% at September 30, 2016, primarily driven by higher collections and loss mitigation efforts.
  • In the third quarter of 2016, Ocwen originated forward and reverse mortgage loans with unpaid principal balance of $1.2 billion and $213.0 million, respectively.
  • Our reverse mortgage portfolio ended the quarter with an estimated $97.5 million in undiscounted future gains from future draws on existing loans. Neither the anticipated future gains nor the future funding liability are included in the Company’s financial statements.
  • Reduced CFPB consumer complaints by 28%, the largest reduction of any major mortgage company, for the three month period from May to July of 2015 to the same three month period of 2016.
  • Conducted successful community outreach programs with NID Housing Counseling and NAACP in Sacramento and San Bernardino, California and Des Moines, Washington.
  • The constant pre-payment rate (CPR) increased from 14.2% in the second quarter of 2016 to 15.0% in the third quarter of 2016.  In the third quarter of 2016, prime CPR was 19.7%, and non-prime CPR was 12.0%. (Original Source)

Shares of Ocwen Financial reacted well to the earnings release, rising nearly 13% to $3.99 in after-hours trading Wednesday. OCN has a 1-year high of $7.63 and a 1-year low of $1.29. The stock’s 50-day moving average is $3.58 and its 200-day moving average is $2.52.

On the ratings front, OCN has been the subject of a number of recent research reports. In a report released yesterday, Piper Jaffray analyst Kevin Barker downgraded OCN to Sell. Separately, on September 14, Compass Point’s Fred Small upgraded the stock to Buy .

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Kevin Barker and Fred Small have a total average return of 6.8% and 5.9% respectively. Barker has a success rate of 68% and is ranked #331 out of 4197 analysts, while Small has a success rate of 58% and is ranked #1137.

The street is mostly Neutral on OCN stock. Out of 4 analysts who cover the stock, 2 suggest a Hold rating , one suggests a Sell and one recommends to Buy the stock. The 12-month average price target assigned to the stock is $3.00, which reflects a potential downside of 15% from last closing price.

Ocwen Financial Corp. is a financial services holding company, which through its subsidiaries engages in the servicing and origination of mortgage loans. It operates through the following segments: Servicing, Lending, and Corporate Items and Other. The Servicing segment engages in residential servicing business, which offers residential and commercial mortgage loan servicing, special servicing and asset management services. The Lending segment involves in the originating and purchasing conventional and government-insured residential forward and reverse mortgage loans mainly through correspondent lending arrangements, broker relationships and directly with mortgage customers. The Corporate Items and Other segment include revenues and expenses that are not directly related to other reportable segment.

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