In 2021, Ocwen Financial Corporation (NYSE:OCN), parent company of leading reverse mortgage lender Liberty Reverse Mortgage, posted its first annual profit since 2013 but a slide in earnings in the fourth quarter. The company also sees its current and future interests in the reverse mortgage business through Liberty and its recently-closed acquisition of Reverse Mortgage Solutions (RMS) as a critical factor in its operations.
This is according to an earnings call on Friday morning discussing Ocwen’s fourth quarter and full-year 2021 financial results. Particularly the acquisition of RMS appears to have bolstered the company’s confidence in its total sub-servicing portfolio, and the company described favorable conditions in its originations business particularly when it comes to Liberty in comparison with its forward mortgage portfolio.
The RMS acquisition, origination environment
After closing the RMS deal in October, Ocwen expected that acquisition to be diluted in the near-term according to Glen Messina, the company’s CEO.
“Fourth quarter adjusted pre-tax income includes a $4 million pre-tax loss in reverse servicing, and this is largely related to staffing actions to support adding 60,000 loans by the end of the third quarter of 2022,” he said. “This will roughly double our reverse sub-servicing portfolio. Assuming the current longboarding schedule and subject to investor approval, we project run-rate adjusted pre-tax income for reverse servicing will improve by roughly $7 million by the third quarter of 2022 versus the fourth quarter of 2021.”
The deal has appeared to only enhance Ocwen’s commitment to the reverse mortgage space, according to statements made by Messina.
“In response to market conditions, we continue to focus on expanding our client base and higher-margin products and services, we’re intensifying our focus in reverse and consumer-direct, and driving continuous cost improvement,” he said.
Liberty’s performance in terms of raw loan volume for Home Equity Conversion Mortgages (HECMs) increased 16% in the fourth quarter of 2021, and nearly 60% compared to 2020 figures according to Messina.
“In Q4, according to Reverse Market Insight, we increased our market share in reverse by three points to 9.4%,” Messina said. “And now with the RMS acquisition, we are the only end-to-end service provider in the reverse industry.”
Becoming such a lender was a stated goal for Liberty in the immediate aftermath of the deal’s announcement, according to interviews conducted by RMD. However, the goal is also to diversify the portfolio according to Messina.
“With the closing of the RMS reverse servicing platform acquisition, we are now positioned to compete in both reverse and forward sub-servicing,” he said. “The investments we’ve made in our platform are being recognized with over $56 billion in sub-servicing additions in 2021. And our sub-servicing pipeline has never been more robust.”
Since the beginning of 2022, Ocwen through Liberty and the RMS acquisition has built over $57 billion in reverse mortgage sub-servicing opportunities, he added.
‘Accelerated growth’ in 2022, reverse resistant to forward headwinds
Ocwen Financial CFO June Campbell described the RMS acquisition in very optimistic terms for the company, but that ambition will not come into clearer view until the second half of teh year, she said.
“We’re excited about our reverse sub-servicing platform,” she said. “It uniquely positions our reverse servicing business for accelerated growth this year. [W]e expect $11 million in higher reverse mortgage revenue from boarded and committed volume this year, $25 billion of the $27 billion in UPB are under a five-year sub-servicing agreement. With scale and optimized cost structure, we expect the acquisition to be accretive to our reverse servicing business in the second half of the year, achieving $5 million in adjusted pre-tax income by the fourth quarter.”
In a following question-and-answer session of the presentation, Messina was asked about the issues facing the forward mortgage business related to rising interest rates and reduced refinances. Messina acknowledged these are headwinds for Ocwen’s forward business, but was unsure how much of an impact they would have on the reverse side.
“We are seeing gain on sale margins in all channels. We do expect them to contract. And in 2022, I think it’s going to be a tough environment and originations with rates up and a shrinking mortgage market,” he explained. “That said, we don’t expect to see the same pressure in reverse. Actually, we expect reverse margins to be flat, and maybe even up a little bit during the course of 2022.”
He took things a step further in describing the broad optimism that Ocwen has found in its reverse mortgage business as a boon to the entire company’s landscape, citing oft-discussed demographic trends and the 2022 HECM lending limit as two key realities in that space, in addition to figures from the National Reverse Mortgage Lenders Association (NRMLA) regarding senior-held levels of home equity.
“We think there’s opportunity in reverse to continue to grow that business, it’s a growing market,” he said. “[10,000] new people turn age 65 every day. And, that group has about $10 trillion in home equity. In addition to continued home price appreciation, as well as the increase in the maximum claim amount to over $970,000 I think will help fuel growth in the reverse mortgage market despite higher interest rates. So, we’re very optimistic about the reverse business, and we see that as being a key part of our margin expansion initiatives in 2022.”