Like many companies operating in the forward mortgage business, traditional originations were down in the first quarter of 2022 for Ocwen Financial Corporation, parent company of PHH Mortgage and top reverse mortgage lender Liberty Reverse Mortgage. However because of the company’s presence in the reverse space, the company spoke at length about how its reverse mortgage division is increasingly important to the larger company’s prosperity, going even further than it did in the last earnings presentation.
While forward mortgage origination pre-tax income declined significantly year-over-year from Q1 2021 to Q1 2022, the company’s reverse mortgage business has shown visible growth in subservicing and in origination volume. This has led Ocwen to describe its reverse mortgage business as one of three “drivers of profitability” in the months ahead, alongside the company’s servicing and sub-servicing businesses, respectively.
Reverse mortgage performance, and driver of profitability
While originations have dropped on the forward side, Liberty’s reverse originations have grown 108% year-over-year, according to the company presentation. Between Q1 2021 and Q1 2022, Ocwen/Liberty’s reverse mortgage market share has grown from 6.1% to 7.6%, while reverse sub-servicing unpaid principal balance has grown in that same period from $7 billion to $29 billion.
This led Messina to describe Ocwen’s reverse mortgage business as a key driver of profitability, he explained.
“We are the only large-scale, full-service, end-to-end reverse mortgage provider in the industry,” he said. “Industry opportunity is growing, our origination volume and market share continues to improve and origination profitability is stable. Our reverse subservicing business is gaining scale, profitability is improving, and we have an opportunity pipeline of roughly $55 billion.”
In spite of its overall reverse mortgage confidence, the last year has seen Ocwen’s share price decline by over 45%. Still, the reverse mortgage business is not emphasized enough to investors in the profitability equation, Messina indicates.
“Overall, we’re really excited about the potential for reverse business and our overall business and do not believe our recent share price is reflective of our financial position, earnings power, or the strength of our business,” he explains. “With industry volume shrinking, we continue to look at potential M&A opportunities that can expand scale and capabilities or otherwise create value for shareholders.”
Servicing on both the forward and reverse sides of the business are clearly a priority for Ocwen, based on both these earnings results and recent history. On the reverse side, Ocwen in 2021 acquired Reverse Mortgage Solutions (RMS) to bolster its reverse mortgage servicing position, while also becoming an end-to-end lender in the industry.
The business and trends fueling reverse mortgage confidence
Messina is effusive in his praise of the reverse mortgage industry in the Q1 2022 earnings call.
“We’re very excited about the opportunity in the reverse mortgage market,” he says. Increases in home price appreciation and the increase in the maximum claim amount to roughly $970,000 in combination continued to fuel new loan production and is helping to offset the impact of higher interest rates. Demographics here are favorable with 12,000 people turning age 65 each day, and home equity held by this group now tops $10 trillion.”
Messina also directly mentioned some of the evolution of the reverse mortgage product in wider conversation, including accelerating reverse mortgage media coverage describing the products as a potential retirement tool. One such story was recently published in the New York Times.
Origination performance was also lauded by Messina, though he did not distinguish between new Home Equity Conversion Mortgage (HECM) business, HECM-to-HECM refinances or proprietary reverse mortgage products.
“We’re seeing growth in all channels; direct-to-consumer retail, wholesale, and correspondent lending. Direct-to-consumer retail is our fastest-growing channel,” he says. “Revenue margins have drifted down over the past year, however margins by channel have been stable for the past several quarters. We are positioned as the only large reverse mortgage market participant that can offer end-to-end capabilities across originations and servicing. The integration of the RMS platform is going well, loan boardings are ahead of schedule, and we’re slightly ahead of our financial expectations as a result.”
Messina ended the portion of the call by saying that reverse mortgage strength ultimately equals the company having less overall reliance on the forward mortgage market.
“We believe we’re uniquely positioned in the reverse mortgage market, and the diversification this business provides helps mitigate our reliance on the forward mortgage origination market,” he said.
‘We just love the reverse business’
Reverse sub-servicing generated “small, positive” pre-tax income for Ocwen in Q1, according to CFO June Campbell, which she attributed to improved operating efficiency.
At the end of the call during a Q&A section, one caller asked Messina specifically about the optimism he relates about the reverse mortgage business, and the opportunity he believes it could represent for Ocwen in the future.
“We just love the reverse business,” he said. “If you look at the mortgage landscape today, it’s one of the few areas where our opportunity continues to grow. Demographics are favorable and it’s a product that this day and age with home price appreciation and the higher [maximum claim amount]. Look, this product makes a lot of sense for, consumers. And as you know, there’s a fair amount that goes upfront in terms of consulting with consumers to make sure the product is right for them. It’s business where we continue to demonstrate really strong momentum.”
Profitability on the origination side and greater sub-servicing potential have been positive indicators, but Messina indicates that the company sees visible opportunities on the retail side due to its status as the fastest-growing channel in its reverse business.
“[Reverse also] has the highest revenue margin, obviously, higher cost structure as well too, but it’s been a good business,” he says. “We are investing approximately $2-2.5 million in additional marketing spending [and] sales resources throughout the course of the year to drive additional reverse production, which we’ve seen some of in the first quarter, but [we expect more momentum] really more towards the back half of the year. […] We think it’s a great payback on investments and it’s something want to continue to allocate capital towards.”
According to HECM endorsement data compiled by Reverse Market Insight (RMI), Liberty Reverse Mortgage is the fifth-largest reverse mortgage lender in the country, posting 4,561 originations in the 12-month period ending in April, 2022.