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Ocwen posts net income of $75.8M in 1Q2014 despite regulator woes

But big miss on analyst expectations

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Ocwen Financial Services (OCN) reported net income of $75.8 million, or $0.54 per share, for the first quarter of 2014 compared to net income of $45.1 million, or $0.31 per share, for the first quarter of 2013.

The nonbank generated revenue of $551.3 million, up 36% from the first quarter of 2013. Income from operations grew by 24% to $202.1 million for the first quarter of 2014 as compared to $163.6 million for the first quarter of 2013.

This was well below analyst expectations and the stock is already taking a hit.

Pre-tax earnings on a GAAP basis for the first quarter of 2014 were $89 million, a 73% increase as compared to the first quarter of 2013. Ocwen's normalized pre-tax earnings for the first quarter of 2014 were $114.0 million, a 12% increase from the first quarter of 2013. Ocwen incurred a total of $25 million in normalized expenses in the first quarter of 2014 that were primarily transition-related expenses. 

Regulator woes didn’t hold Ocwen back but they did have serious impact. Notable in the Ocwen report, there was a $5.1 million loss on the $7.6 billion portion of the mortgage servicing rights portfolio marked at fair value as compared to a fourth quarter 2013 gain of $19.1 million. There was also an MSR impairment reversal of $2.4 million for the fourth quarter. Combined, these changes produced a $26.6 million change quarter-over-quarter.

The lending segment generated earnings of $600,000 compared to $14.8 million in the fourth quarter of 2013. The reverse mortgage business posted a $6.3 million loss versus a $0.3 million loss in the prior quarter. Forward lending profit fell from $15.1 million to $6.9 million.

"Going forward, we believe compliance and counterparty strength will be among the most important factors determining long-term success in the servicing business. We consider our solid balance sheet, National Mortgage Settlement compliance and long history of success in large servicing transfers, where we are able to substantially reduce delinquencies and keep more people in their homes, to be substantial competitive advantages. Ocwen is the only non-bank servicer to be subject to its own National Mortgage Settlement that applies across the entire servicing portfolio, and we maintain the strongest capital ratios among large non-bank servicers. In fact, we hold more capital relative to mortgage servicing rights than most banks," commented Bill Erbey, Ocwen's chairman. "However, increased compliance and operational risk management does not come without a cost, as you can see from our first quarter normalized earnings."

Of note in the Ocwen financial statement:

On February 26, 2014, Ocwen issued $123.6 million of Ocwen Asset Servicing Income Series, Series 2014-1 Notes secured by owned MSRs relating to a reference pool of Freddie Mac mortgages with $11.8 billion of unpaid principal balance. This transaction is recorded as a financing and mitigates prepayment risk.

Ocwen completed 28,456 loan modifications, with HAMP modifications accounting for 39% of the total. Modifications that included some principal reduction accounted for 49% of total modifications. The firm also completed the remaining acquisition of MSRs associated with the February 2013 ResCap transaction. Ocwen had been subservicing these loans for the ResCap estate.

Ocwen’s president and CEO spoke specifically to the nonbank’s recent problems with the New York Department of Financial Services.

"Ocwen continues to work cooperatively with the New York Department of Financial Services to address their concerns that led to an indefinite hold on our Wells Fargo transaction," said Ron Faris, President and CEO. "We believe that increased regulatory scrutiny will, over time, benefit the industry and Ocwen by building greater confidence in the system and rewarding those with efficient and effective servicing processes.  Nevertheless, new requirements and the associated investments have raised costs for the industry, including Ocwen. This places an increased premium on operational scale and proficiency in operations, two areas of competitive strength for Ocwen."

Faris continued, "The 0.7 percentage point decline in delinquencies continues to demonstrate Ocwen's capability to improve performance on newly boarded portfolios. On the OneWest private-label portfolio, delinquencies fell 1.2 percentage points from the end of December 2013 to the end of March 2014. Non-foreclosure resolutions continue to dominate our loss mitigation efforts, with 78.2% of our 66,417 total resolutions being full debt pay-offs, modifications, forbearance plans, short-sales or deeds-in-lieu. Ocwen remains an industry leader in helping homeowners and generating more cash flow for mortgage investors."

HARP remains a profitable segment for Ocwen.

"Income from forward lending dropped 54% from the fourth quarter of 2013 to $6.9 million. The change was driven by lower volume and lower overall margins. HARP refinances remain the largest component of overall profitability. The reverse lending business, which has been going through an industry-wide overhaul, contributed a GAAP loss of $6.3 million, though we expect that the reverse business will contribute future "tail" earnings on new originations that will more than make up for current period losses."

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