Ocwen Financial Corporation, parent company of PHH Mortgage Corporation and leading industry lender Liberty Reverse Mortgage, posted a net profit of $15 million in the second quarter of 2023, an improvement of $56 million over the first quarter. Its adjusted pre-tax income stood at $23 million, an increase of $17 million over Q1.
The adjusted pre-tax income increase was at least partially credited to Ocwen’s continuingly solid performance in the realm of reverse mortgage servicing, according to company CEO Glen Messina, who attributed the figure “largely [to] reverse servicing” in the opening moments of the earnings presentation.
However, Ocwen presented a more pragmatic front when talking about its originations segment, alluding to the challenges facing the reverse mortgage industry that relate to rates and spreads making the loan a potentially weaker value proposition for borrowers. Company leadership also expressed optimism at a recent federal court ruling in its favor that closes a dispute with the Consumer Financial Protection Bureau (CFPB) that began in 2017.
Originations, securitization
“We expect market conditions to continue to be reflective of interest rates being higher and for longer than expected at the beginning of 2023,” Messina said. “This is impacting both forward and reverse origination volume opportunities. As a result, competition remains intense, but conditions are improving versus the first quarter.”
Messina explained that Ocwen/PHH/Liberty’s origination volume has been hampered by spread volatility in Q2, though the originations segment at-large is continuing to “serve well its purpose” in replenishing the company’s mortgage servicing rights (MSR) portfolio.
Messina also mentioned a deal reported in June regarding a sale of reverse mortgage MSRs, sourced from packages of loans it acquired through a prior purchase of a $133 million portfolio of reverse whole loans.
“We combined these assets with roughly 167 million of our own existing buyouts and successfully financed the pool in the new non-recourse, non-mark-to-market securitization,” Messina said. “This securitization allowed us to diversify our sources of funding and reduce our potential exposure to mark-to-market volatility. The combined transactions generated approximately $15 million and adjusted pre-tax income was favorable for liquidity, and provide a stable financing source for future transactions.”
Although Ocwen said reverse origination in Q1 was profitable, CFO Sean O’Neill said that reverse originations were stronger in Q2 but less profitable.
“Reverse had stronger origination volume but experienced spread-widening in the quarter similar to the third quarter of last year,” he said. “This was mostly driven by the regional bank crisis and inflationary pressures. We continue to ensure that the originations segment is sized appropriately for the prevailing market volumes and 2023.”
Ocwen was also encouraged by recent news related to an ongoing lawsuit against it by the CFPB. In 2017, the CFPB accused the company of illegally foreclosing on 1,000 borrowers, mishandling escrow accounts, enrolling consumers in add-on programs without their consent and knowingly populating its mortgage-tracking software with incorrect or incomplete information.
Over the past few years, Ocwen has notched two major wins in that suit, with a federal judge ruling in 2021 and 2023 that the 2017 complaint by the Bureau was precluded by a 2014 settlement Ocwen paid out for more than $2 billion to federal and state governments.
“[I’m] pleased to report the CFPB did not appeal the district court’s May 2023 ruling in our favor,” Messina said on the call. “As a result, that ruling is now final, and the case will remain closed. We look forward to normalizing our relationship with the CFPB.”
Assessing the reverse space
In a Q&A session near the conclusion of the earnings call, a shareholder asked Messina about the reverse space in context with greater rate volatility.
“In the reverse space, it’s no surprise: the reverse originations market opportunity has declined substantially, probably more than 50% with the rise in interest rates,” Messina said. “HECM mortgages are variable rate and the short end of the curve is very high. So even though there’s been home price appreciation, because interest rates have gone up quite a bit, the amount of equity that people could tap in their house with a reverse mortgage is limited by the level of interest rates. So we have seen origination volume come down.”
Still, despite the challenges on the origination side, HECM-backed Securities (HMBS) issuance remains a growing segment for the company, Messina said.
“I think it’s fair to say that if you look at the league tables on HECM issuance, we’re still either number three or number four in the league tables ans year over year, our share is going up,” he said. “What we’ve seen during the course of 2023 has been a fair amount of volatility in what’s called the discount margin or spread, essentially, that reverse mortgage-backed securities and HECM securities get priced off of.”
That spread volatility has impacted the originations business, as well as the value of the company’s MSR portfolio, Messina said. Still more stability on this front is expected over time.
“As market conditions continue to normalize, we would expect to see those spreads stabilized and approach to longer-term averages,” he said. “And, I would say right now, HECM spreads are probably good 20-30 basis points, at a minimum, above the long-term average, maybe even more.”
Still, Ocwen is bullish on reverse mortgages for the long term in spite of current challenges, Messina said.
“We’ve driven a lot of cost productivity, and as we discussed, the special servicing side of that business performs extremely well, and has given us the opportunity to take advantage of opportunistic assets purchases to generate decent returns for the company,” he said. “So, I think the reverse space is still one we like, I still think the demographics of the U.S. population support long-term, stable, consistent growth in reverse mortgage originations, but it has been a choppy market. And that’s affected the industry [broadly], us and others. But again, we think there’s long-term opportunity in both the origination and servicing side.”
