Ocwen Financial Corporation (NYSE:OCN), the parent company of PHH Mortgage Corp. and reverse mortgage lender Liberty Reverse Mortgage, posted a net loss of $80 million in the fourth quarter of 2022 under generally accepted accounting principles (GAAP) — but noted that its growing servicing and sub-servicing segment was a bright spot.
The company acquired Reverse Mortgage Solutions (RMS) in October 2021, and the integrated reverse mortgage servicing business has more than tripled since that time, with UPB climbing from $10 billion in Q4 2021 to $31 billion in Q4 2022, according to an earnings report and earnings call on Tuesday.
Servicing in particular helped drive the firm’s biggest improvement quarter over quarter, with reverse servicing leading the way in the segment’s profitability, according to Ocwen CFO Sean O’Neill.
Ocwen’s performance in Q4
Ocwen Chairman and CEO Glen Messina said that many of the company’s challenges align with the origination environment across the mortgage industry, which is affecting both traditional and reverse segments.
“I’m proud of the results we delivered in 2022,” Messina said. “Our balanced and diversified business model is working well. As you all know, with rising interest rates, the servicing environment improved substantially while the originations environment remains quite challenging.”
Messina attributed the $80 million net loss to mortgage servicing rights (MSR) valuation changes, stating that it was “due to lower interest rates and assumption updates to reflect lower observed trading values in the bulk market and increased future losses for Ginnie Mae borrowers.”
Lower MSR values drove margin and buying pressure in Q4, he said, and in spite of origination challenges, Ocwen’s servicing portfolio managed to post a gain of 8%.
“We focused on growing capitalized sub-servicing, which was up 18% over prior year-end,” Messina said. “Our sub-servicing opportunity pipeline remained strong, up 4% over prior year-end levels.”
Liberty’s reverse mortgage performance
While the reverse mortgage industry is also facing a challenging origination environment, the company has taken action to further integrate the reverse business.
“The originations team continuously adjusted to market conditions, addressing our cost structure, integrating the forward and reverse originations platform for a possible growing of our total client base by 21%, and growing high margin product clients by 41%,” Messina said.
As a result, Ocwen is aiming to increase its sub-servicing portfolio by $85 billion — sourced from a mixture of GSE, reverse, commercial and “special sub-servicing additions,” Messina said.
With the acquisition of RMS, Ocwen sees untapped opportunities in the reverse business, according to Messina.
“We are the industry’s only integrated reverse issuer/servicer, and one of two sub-servicing providers for reverse mortgages,” Messina said. “We’ve earned the trust of clients and partners, as evidenced by over $100 billion in sub-servicing additions in the last 24 months, and a potential opportunity pipeline of over $300 billion.”
Executives believe that both Ocwen and its capital partners could benefit from growing investment opportunities in the space, including new opportunities from “stress in the reverse mortgage market,” Messina said.
Reverse servicing helped drive gains
Reverse servicing drove improvements in company-wide servicing activities, O’Neill said.
“In the reverse servicing area, we grew profits from $1 million to $6 million for the quarter,” he said. “This was a function of the continued integration in the reverse space, which allows us a lower cost to serve, as well as an improvement in performance-based fee income and incremental improvements as we leverage various banking relationships to optimize our return on deposits.”
When looking at performance year-over-year, the trends help illustrate how reverse is a reflection of Ocwen’s broader balanced business model, O’Neill said.
“The origination profits, while still strong in 2022, came down from prior years as we saw lower volumes and margins than we have seen previously,” he said. “The improvements on the servicing side were driven primarily due to the reverse servicing acquisition [of RMS].”
MSR acquisition potential
The leadership team also addressed the 2022 bankruptcy of Reverse Mortgage Funding (RMF) and whether there might be an opportunity to acquire the lender’s MSR portfolio.
“I think as you and others may know, Ginnie Mae owns those MSRs now,” Messina said. “I don’t think Ginnie Mae’s long-term goal — [based on] my own assessment, not theirs — is to be an MSR owner. I don’t think that’s where their focus is. Ultimately, I think those MSRs may go to market. Depending upon the return we can get, we would look at those MSRs to purchase them.”
However, Messina also noted that having another company purchase the MSRs may still be beneficial for Ocwen because of its status as an industry sub-servicer.
“If somebody else wants to purchase them, we could sub-service as well, too,” he said. “We’re one of two sub-servicers in the industry. And frankly, [based on] alignment with our business model, sub-servicing MSRs is probably a more attractive opportunity than purchasing them outright.”
In an earnings call last week, Laurence Penn — CEO of Longbridge Financial parent company Ellington Financial — said that the RMF MSR portfolio could serve as an “attractive acquisition opportunity” in the future.