Ocwen Financial (OCN) missed analyst earnings by more than a dollar per share, posting a pretax loss of $75.3 million or $0.58 per share vs. a profit of $60.6M and $0.39 one year ago as the company books a $100 million pretax charge for a potential settlement with the New York Dept. of Financial Services.

Ocwen generated revenue of $513.7 million, down 3% compared to the third quarter of 2013. Income from operations was $58.7 million for the third quarter of 2014. 

On Wednesday, Height Analytics analyst Edwin Groshans threw out the idea to Bloomberg that $40 million might be the settlement amount; Ocwen seems to be buffering that with another $60 million.

Last week the New York Department of Financial Services sent an open letter alleging it was backdating letters to borrowers. After the allegations on Oct. 21, Ocwen responded with an open letter of apology, stating the errors were software related and that it would take steps to rectify the situation. Ocwen has been in the NYDFS’s crosshairs since February, when it put a $2.7 billion mortgage servicing rights deal between Ocwen and Wells Fargo (WFC) on an indefinite hold.

Net income for the nine months ended September 30, 2014 was $52.2 million, or $0.36 per share, as compared to $175.1 million, or $1.17 per share, for the same period in 2013. Revenue for the first nine months of 2014 increased 9% from the first nine months of 2013 to a total of $1.6 billion.

"I want to emphasize that Ocwen takes great efforts to keep borrowers in their homes and to avoid foreclosures," said Bill Erbey, Ocwen's Executive Chairman. "Ocwen recently reached a significant milestone by making its 500,000th loan modification, including 290,000 HAMP modifications. Ocwen is the leader in foreclosure prevention with 44% more HAMP modifications than any other servicer. We work very hard to keep borrowers in their homes and that is why we take the concerns raised by the New York Department of Financial Services so seriously. We have numerous compensating controls in place which we believe should have prevented borrower harm. Nonetheless, Ocwen is proactively creating a process whereby any borrower, who believes they received a misdated letter, and were harmed as a result, will have the opportunity to receive a complete file review to resolve any issues caused by the misdating."

Pre-tax loss on a GAAP basis for the third quarter of 2014 was $(72.3) million, a 194% decrease as compared to the second quarter of 2014. During the third quarter of 2014, Ocwen incurred a total of $137 million in normalized expenses. Ocwen's normalized pre-tax earnings were $64.8 million, a 41% decrease from the second quarter of 2014. Normalized pretax earnings were impacted by $120.0 million of reserves for various regulatory and legal matters, including a $100.0 million accrual for a potential settlement with theNew York Department of Financial Services, $9.0 million for Fair Value changes and $8.1 million of integration, technology-related and severance costs. We have not reached any agreement with the New York Department of Financial Services and cannot predict whether or when we may reach such a resolution. Any future resolution of these regulatory and legal matters may be materially different from what has been accrued.

Third quarter highlights include:

  • Completed 21,543 loan modifications with HAMP modifications accounting for 41% of the total. Modifications that included some principal reduction accounted for 47% of total modifications.
  • The constant pre-payment rate ("CPR") decreased slightly from 12.9% in the second quarter of 2014 to 12.8% in the third quarter of 2014. In the third quarter of 2014, prime CPR was 15.0%, and non-prime CPR was 9.7%.
  • Delinquencies increased slightly from 12.9% at June 30, 2014 to 13.4% at September 30, 2014.
  • Deferred servicing fees ("DSF") related to delinquent borrower payments amounted to $559.0 million at the end of the quarter. Ocwen does not recognize DSF as revenue until collected, and it does not accrue DSF on its balance sheet.
  • Originated forward and reverse mortgage loans with UPB of $1.1 billion and $168.0 million, respectively.
  • Lending operations generated a $6.6 million pre-tax profit, up 17% compared to the third quarter of last year.
  • Generated $349 million of Cash from Operating Activities and $195 million of Normalized Adjusted Cash from Operating Activities, a non-GAAP measure that adjusts for the impact of advance financing and loans held for sale.
  • Ocwen completed the repurchase of 5,307,019 common shares under its $500 million repurchase program, for a total outlay of $158.8 million.