Ocwen Financial, parent company of leading reverse mortgage lender Liberty Reverse Mortgage and PHH Mortgage Corporation, managed to maintain profitability in the third quarter of 2023 largely due to servicing income.
Unlike recent earnings presentations, however, company leadership was not as openly bullish about the company’s reverse mortgage performance, acknowledging industry-wide challenges in the space.
Ocwen’s servicing segment primarily drove adjusted pre-tax income in Q3 2023 of $10 million, according to a presentation made by company CEO Glen Messina. Both originations and servicing broadly were profitable for the quarter, with material improvement to overall pre-tax profitability compared to both Q2 2023 and Q3 2022.
Reverse mortgage performance
With dedicated reverse mortgage origination and servicing divisions owing to the presence of Liberty and the 2021 purchase of servicer Reverse Mortgage Solutions, Messina described reverse securitization as a benefit.
“In the second quarter, our purchase and securitization of reverse whole loans was enabled by our special servicing skills in reverse mortgages,” he said. “This same expertise is also driving cash flow performance in these assets well above projected levels.”
Ocwen Financial CFO Sean O’Neil added that with regards to reverse servicing, the segment showed “an improvement […] from $3 to $4 million quarter-over-quarter due to lower operating expenses from process improvements.”
In terms of origination, the division as a whole — agnostic of a distinction between forward and reverse — improved by $3 million on an adjusted pre-tax income basis, but lagged compared to Q3 2022 due to much higher margins, O’Neil said.
Like much of the reverse mortgage industry, origination volume stayed flat in Q3, O’Neil said.
“Reverse had flat origination volumes and the [Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS)] spreads continue to be wider than recent historical averages, which suppresses gain on sale,” he explained. “We continue to ensure that the origination segment is sized appropriately for the prevailing market volumes which can be seen by our better cost to originate both year over year and quarter over quarter.”
The profitability data is “more impressive when you consider that year-over-year volume is essentially flat,” O’Neil adds.
Reverse mortgage MSRs, servicing and origination relationship
In a portion of the call’s question-and-answer session, a caller inquired about the company’s overarching strategy for HECM mortgage servicing rights (MSRs). Messina explained how HECM MSRs factor into the overarching MSR positioning.
“Our HECM servicing just generally acts as a hedge against our forward servicing,” he said. “HECM MSRs, so to speak, react [inversely] to interest rates [when compared to] forward MSRs. So if rates go up, HECM MSRs actually lose value. And then obviously, that value can change as well by spreads widening or contracting.”
If spreads widen, Messina explained, then all other things being equal the HECM MSR value would be lower. If they tighten, then the HECM MSR value would be “wider,” which allows Ocwen to view HECM MSRs as a “yielding hedge” against its forward MSRs, Messina said.
“[That is a] part of our overall hedging strategy,” Messina explained.
Messina also spoke more about the relationship between performance in reverse mortgage servicing and origination later in the session.
“Our reverse servicing and subservicing platform continues to be profitable and generates good returns,” he said. “But, reverse originations are struggling just like forward is. The benefits of our balanced business model, having both forward and reverse servicing and originations, allows us to balance out the impact of the industry environment, and we expect that will continue to serve us well on a go-forward basis.”