In a dastardly market, Liberty parent remains optimistic about reverse mortgages

A Q3 earnings report from Ocwen Financial indicates ongoing commitment to the reverse mortgage business, though market challenges remain

Ocwen Financial Corporation, parent company of PHH Mortgage Corp. and leading reverse mortgage lender Liberty Reverse Mortgage, expanded its profitability modestly but acknowledged that the mortgage business broadly is in the midst of a challenging operating environment.

That extends to the reverse mortgage business, though the company remains generally bullish about reverse mortgage prospects, owing to demographic potential and the resiliency of U.S. home price appreciation (HPA) levels. The company also said this week that it will consolidate its forward and reverse operating platforms across both origination and servicing.

Reverse mortgage outlook and resiliency, consolidating forward/reverse platforms

Ocwen CEO Glen Messina said the company is aiming to become leaner and more nimble in a challenging market, and that includes the company’s reverse mortgage activities.

“We are expecting low originations volume in the fourth quarter and are committed to adjusting capacity and expenses further as necessary going forward,” Messina said on the third quarter earnings call this week. “In addition, we’re consolidating our forward and reverse operating platforms in both originations and servicing. We’re focused on leveraging a single backbone platform and processes for activities that are common across both forward and reverse.”

Messina explained that such consolidation will result in “scale benefits” for both businesses.

“We’re one of the few competitors in the reverse space who has the capability to execute this strategy,” he said. “The initial results are promising and we expect further benefits going forward into 2023 as we continue to refine and optimize our approach.”

Messina also noted that Liberty’s status as an end-to-end reverse mortgage provider from origination through servicing has the potential to allow for the creation of new reverse-centric partnerships in the future, but did not elaborate further.

Reverse origination, servicing profitability

The company did experience a lower profit in reverse servicing and a slight loss on reverse origination in Q3, according to Ocwen Chief Financial Officer Sean O’Neil.

“While the long-term reverse mortgage opportunity remains attractive primarily due to borrower demographics as well as the behavior of a reverse mortgage servicing right (MSR) being countercyclical when home prices turned down, there continue to be the same near-term headwinds that we introduced last quarter,” he said. “First, mortgage rates continue to increase. This reduces HECM refinance opportunities. And as rates increase the amount of cash that a reverse borrower can take out of a property declines.”

This has reduced the attractiveness of both proprietary reverse mortgages and non-Ginnie Mae HECMs from investors, he said, which is accounted for in the pre-tax loss statement for Q3. Reverse servicing remains profitable, but at a reduced level.

“[This is because] we have incurred some costs as we integrate the business into our forward servicing business,” O’Neil said. “Volumes in the reverse servicing business were relatively flat quarter-over-quarter but there’s strong growth indicated for the first quarter of 2023 based on our pipeline today. Going forward, we will be integrating both the reverse origination and the reverse servicing businesses into our respective forward businesses to ensure we maximize productivity.”

Reverse mortgage distribution challenges, interest from the forward mortgage business

In a Q&A session, Messina addressed specific challenges facing the reverse mortgage business as well as new opportunities.

“In originations, I would say one of the challenges the reverse industry has always faced was product distribution,” Messina said. “By integrating the forward platform and in particular the sales teams that we have supporting the correspondent and wholesale channels, we get, I think, tremendous distribution leverage by distributing that product across all of our forward clients who are interested in selling the product, as well as our existing reverse clients.”

Messina mentioned a high interest level in reverse among attendees at the MBA Annual event in Nashville.

“I could tell you, coming back from the MBA conference we were just at two weeks ago, [we saw] a lot of interest on the part of our forward clients about the reverse product,” Messina said. “We have a group called Liberty Academy, which trains people on how to sell the reverse product. And again, having the capability to buy the asset as well as service it or sub-service it, as the case may be, really allows us to be in a position [to provide] an end-to-end solution to those forward providers who are looking to get into the reverse space.”

Catering to the forward mortgage business and providing more direct paths for forward practitioners to enter the reverse space has long been a priority of the reverse mortgage business to expand the size of the industry, but there is no single consensus among embedded reverse mortgage professionals regarding how that goal could be achieved.

According to HECM endorsement data compiled by Reverse Market Insight (RMI), Liberty Reverse Mortgage is currently the sixth-largest reverse mortgage lender in the country with 4,182 loans in the 12-month period ending in October, 2022.

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