Ocwen stays in the red thanks to legal, regulatory expenses

Posts loss of $44.4 million in the second quarter

It was another quarter in the red for Ocwen Financial, albeit a slightly better one than the same time period last year.

Ocwen reported its second quarter earnings on Wednesday morning, disclosing that it posted a loss of $44.4 million in the second quarter, compared to a loss of $32.6 million in the first quarter, and a loss of $87.2 million in the second quarter of last year.

Posting a loss in the second quarter shouldn’t come as a surprise to Ocwen’s investors, as the company said at the end of last year that it expected to post a loss in 2017 due to, in part, to “regulatory challenges.”

Those “regulatory challenges” came home to roost during the second quarter, when the Consumer Financial Protection Bureau announced that it is suing Ocwen Financial for “failing borrowers at every stage of the mortgage servicing process.”

According to the CFPB, its lawsuit alleges that Ocwen cost borrowers money, and in some cases, their homes, with its years of “widespread errors, shortcuts, and runarounds.”

Additionally, a group of state banking regulators issued a series of cease-and-desist orders to Ocwen that prohibit the acquisition of new mortgage servicing rights and the origination of mortgage loans by Ocwen Loan Servicing, a subsidiary of Ocwen, until the company is “able to prove it can appropriately manage its consumer mortgage escrow accounts.”

Ocwen previously said that it intends to fight both the CFPB’s allegations and the various state actions, but the costs of those fights helped drag down Ocwen’s business in the second quarter.

In an investor presentation published Wednesday by the company, Ocwen said that it is “actively engaged with state regulators in an attempt to reach a resolution to the various cease and desist orders,” while also “vigorously defending the claims made in the CFPB suit.”

But “active engagements” and “vigorous defense” carry a cost.

Ocwen said Wednesday that its pre-tax loss in the second quarter was $41.6 million, driven by $33.6 million of legal settlement-related expenses (after allowing for expected insurance and other recoveries), and $5.6 million of CFPB and state regulatory matter-related defense costs.

Included in that $33.6 million in legal expenses was a payout of $30 million to settle a pair of lawsuits that accused the nonbank of falsely certifying that it was in compliance with Federal Housing Administration and Home Affordable Modification Program rules.

Broken down by segment, Ocwen’s servicing segment recorded $9.2 million of pre-tax income, a $21.4 million improvement compared to the second quarter of 2016, despite $23 million lower HAMP fees.

But the big shift was in Ocwen’s lending segment, which recorded $0.6 million pre-tax loss for the second quarter of 2017, a $5.6 million decline compared to the second quarter of 2016.

The revenue itself wasn’t the big surprise. Rather, Ocwen’s total mortgage lending was the shocker.

Ocwen’s total lending volume declined by 26.1% over the second quarter of 2016, because the company apparently decided to exit correspondent lending during the second quarter.

As a result, Ocwen saw a 70% reduction in the forward lending correspondent channel, but the company noted that the correspondent volume decline was offset by a 96% increase in the higher margin forward lending retail channel and 33% overall growth in reverse lending volumes.

Overall, Ocwen originated forward and reverse mortgage loans with unpaid principal balance of $699.5 million and $275.4 million, respectively, in the second quarter.

“Despite the recent regulatory setbacks, we made progress during the second quarter on a number of fronts,” Ocwen President and CEO Ron Faris said.

“We signed our agreements relating to mortgage servicing rights transfer and subservicing with New Residential Investment Corp. We settled additional legacy litigation matters further reducing future uncertainty; and we specifically identified approximately $12 million in annual corporate overhead cost savings that we expect to realize in the second half of this year,” Faris added.

“We also saw our servicing business achieve its fourth consecutive quarterly pre-tax profit, and for this quarter, after adjusting for various items such as legal settlements, Ocwen recorded an overall adjusted pre-tax profit of $2.8 million,” Faris continued. “Just as important, we continued our successful community outreach efforts, assisting over 11,000 struggling families.”

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