Ocwen's black Monday: Nonbank discloses cavalcade of bad news
Posts big loss in 2015, expects another in 2016, discloses SEC investigation
Ocwen Financial reported its fourth quarter and full-year 2015 financial results on Monday morning, and the news wasn’t good.
In fact, it was a parade of bad news for the nonbank.
According to Ocwen’s financial data filed Monday with the Securities and Exchange Commission, the nonbank posted a big loss in 2015, making it the second year in a row that the nonbank took a loss.
And not only did the nonbank take a loss in 2015, it expects to take another in 2016.
And that’s not all. Ocwen also disclosed that it is currently under an SEC investigation relating to “fees and expenses charged in connection with liquidated loans and REO properties held in non-agency (residential mortgage-backed securities) trusts.”
Ocwen's SEC troubles
Ocwen has previously run afoul of the SEC, as recently as earlier this year, for its business dealings.
In January, Ocwen discloses that it will pay a $2 million fine after a SEC investigation found that the nonbank misstated it financials on several occasions by using a “flawed, undisclosed methodology” to value mortgage-servicing rights that were sold to an Ocwen-associated company, Home Loan Servicing Solutions.
Last year, Home Loan Servicing Solutions agreed to a $1.5 million fine for misstating its net income in 2012, 2013 and the first quarter of 2014, due to using an accounting methodology that misstated the value of the company’s primary asset, the billions of dollars in mortgage-servicing rights it purchased from Ocwen.
The SEC’s investigation also found that Ocwen’s close relationship with Altisource Residential, Altisource Asset Management Corp, Altisource Portfolio Solutions, and Home Loan Servicing Solutions and William Erbey’s role as the chairman of each company contributed to the faulty financial dealings.
Erbey founded Ocwen, and served as chairman of the board of Ocwen, Altisource Residential, Altisource Asset Management, Altisource Portfolio Solutions and Home Loan Servicing Solutions until the relationship between those companies became the subject of intense investigation from the New York Department of Financial Services.
The NYDFS investigation ultimately led to Erbey’s resignation from his positions with each company and a $150 million fine for Ocwen.
And now Ocwen is under another SEC investigation. According to Ocwen’s 10-K SEC filing, the company received a letter on Feb. 11 about the SEC investigation into the “fees and expenses charged in connection with liquidated loans and REO properties held in non-agency RMBS trusts.”
Ocwen said that the SEC’s letter requested that the company voluntarily produce documents and information about these fees and expenses, and Ocwen said that it is cooperating with the SEC on this matter.
But that wasn’t all of Ocwen’s bad news for Monday.
Ocwen's tough 2015
Ocwen also reported its fourth quarter and full-year 2015 financial results, and the results showed a second straight year in the red for the nonbank.
Ocwen posted a loss of $546 million in 2014, stating in April 2015 that the loss was due to “preliminary normalized expenses,” namely a $420.2 million charge-off of goodwill. In March 2015, Ocwen estimated the charge-off to be between $370-$420 million, and actual result came in slightly higher than that estimate.
Additionally, Ocwen recorded a loss of $186.1 million in legal and settlement expenses, primarily related to the 2014 settlement with the NYDFS.
Ocwen’s 2015 was better, but still not good enough for the nonbank to turn a profit.
Ocwen disclosed Monday that it posted a loss of $224.3 million in the fourth quarter of 2015, driven by a number of “significant items” including but not limited to: a l loss of $22.1 million of monitor costs, $14 million of net losses from sales of non-performing agency mortgage servicing rights, $13.9 million in legal and other settlement costs, $9.7 million of benefit from fair value changes related to Ginnie Mae, Fannie Mae and Freddie Mac MSRs and $8.2 million in restructuring costs.
Ocwen’s servicing segment recorded a $62.6 million pre-tax loss inclusive of the loss on sales of MSRs and MSR fair value changes. The company’s lending segment incurred a $5.1 million pre-tax loss for the fourth quarter of 2015 driven by a 35% decline in lock volumes versus the prior quarter due to lower volumes from a network partner as well as lower portfolio refinance activity.
Ocwen had already primed its investors that it was going to be facing a loss in 2015, telling its shareholders in September that it expected to post a loss in 2015, citing lower revenue expectations coupled with higher expected operating, interest and tax expenses.
Ocwen actually posted profits – albeit small ones – in the first and second quarters of 2015. In the first quarter, Ocwen reported net income of $34.4 million, while in the second quarter, Ocwen reported net income of $10 million, but those profits were undone by Ocwen’s rough third quarter, and now undone ever further by a rough fourth quarter.
Ocwen stated Monday that its fourth-quarter revenue was $362.5 million, down 26.5% compared to the fourth quarter of the prior year, primarily driven by the impact of sales of agency MSRs and portfolio run-off during 2015.
For the full year 2015, Ocwen took a net loss of $246.7 million, inclusive of a fourth quarter non-cash charge of $101.9 million to establish a valuation allowance against its deferred tax assets, or a loss of $1.97 per share, as compared to a net loss of $469.6 million, or a loss of $3.60 per share for 2014.
Ocwen stated that its revenue for 2015 fell by 17.5% to $1.7 billion.
"We continue to make progress in resolving legacy issues. We also continue to lower our corporate debt, ending the year with a corporate debt to equity ratio of under 0.9 to 1," said Ron Faris, President and CEO of Ocwen.
"We are also focused on continuous improvement in operational and service excellence, employee engagement, diversity and inclusion,” Faris continued. “We have made good progress on our cost improvement initiative announced last year, and we are committed to making further progress in this area, while continuing to focus on the borrower experience."
Ocwen looking at tough 2016, as well
Despite that progress, Faris stated that Ocwen expects to take another loss 2016, as the company shifts its business model away from buying other company’s assets to one that creates its own.
“Moving forward, Ocwen’s goal is to transform the company into a world-class asset origination and servicing company that delivers service excellence to customers and strong returns to shareholders,” Faris said.
“Ocwen was formerly a transaction company,” he continued. “A company that purchased assets that others created. Going forward, the company will focus on creating the assets. This strategy will provide the company more control and higher operating margins over the long term.”
While that shift is taking place in 2016, the company expects another year in the red.
“We are hopeful that this lower interest rate environment combined with our ongoing roll out of our origination capabilities will be a positive for that business,” Faris will tell investors later today, according to supplementary information provided in advance of Ocwen’s call with investors.
“We expect the level of monitor expenses incurred in Q4 to continue for at least the next few quarters, although we are committed to engaging with our regulators to better manage these significant costs,” Faris continues.
“Eventually, we expect these significant regulatory costs to subside, hopefully later this year and more substantially by mid-2017,” Faris adds.
“While we are investing in our asset generation businesses, we project minimal downside in 2016 from these investments and some potential upside. We expect more meaningful upside in 2017 and beyond,” Faris continues.
“If, over time, these investments do not look like they will generate meaningful future returns, we intend to move quickly to control expenses and adjust our strategy accordingly – including shuttering new initiatives if we no longer believe they will generate adequate returns,” he adds.
Faris said that the company expects to have “elevated legal costs in 2016,” especially during the first half of the year, as we “continue to vigorously defend” various legal matters.
“Overall we are projecting a net loss for 2016. While we are disappointed with this outlook, we hope to show progress each quarter, although there remains a high level of volatility in our business and the market in general,” Faris said.
“To the extent we can continue to reduce delinquencies and improve portfolio performance, we believe we should continue to generate positive cash flow, which gives us options not only to fund investments we believe may drive future earnings growth, but also to continue to reduce leverage or even return cash to shareholders,” Faris continues. “In short, 2016 will still be a year of great transition for the company, but we believe the strategy we are pursuing is the best path forward at this point in time.”
A bloodbath on Wall Street
And Monday's news did a number on Ocwen's stock as well.
As of 3:19 p.m Eastern on Monday, Ocwen's stock was down more than 35% for the day, with the stock that once traded near $60 now trading at less than $4.