Ocwen Financial Corporation Q1 2023 Earnings Call

As you can see our team delivers massive servicing performance improvements for clients versus our competitors across several critical metrics.

This differentiated performance creates a better consumer experience as well as decreased cost and improved MSR returns for clients.

Our industry, leading performance has again been recognized by investors with pop servicer performance ratings by the agencies and our board servicer ratings have been upgraded by S&P and Fitch to above average with a stable outlook.

We continued to demonstrate proven leadership and special servicing and both forward and reverse.

And forward for all loans that were over 60 days past due and boarded in 2021, we achieved a 67% cumulative cure rate within 12 months from the date afforded.

And reverse for our clients, where we have assumed managing claims collateral support assigned claims we have driven a 23% reduction in Asia, Simon claims and a 56% increase in loan assignments.

Through our investment in technology and global operating capability, we've built an efficient immature platform with capacity for growth that delivers industry, leading performance and improved financial outcomes for clients.

Please turn to slide nine.

We continue to focus on expanding our capital partner relationships to support our growth objectives on a capital light basis.

Since completing the upsides in mid fourth quarter NAV is purchased $17 billion in MSR <unk> at attractive pricing levels, and we have remaining capacity for growth.

We've also closed two trades with two new capital partners and we're targeting an additional two capital partners in the second quarter.

With these new capital partners, we've implemented an MSR best execution structure for flow sales of MSR purchased through our origination channels further enhancing our ability to generate capital light growth.

Looking ahead, we're focused on developing additional investor relationships to support our growth objectives across multiple asset types.

We are evaluating a diverse range of potential structures across several potential capital partners to satisfy the unique needs of each investor and further diversify our structural alternatives.

We believe the development of an investor of Investor relationships will further help us achieve our servicing scale objectives on a capitalized basis.

In addition, our investor driven approach to MSR purchases introduces an added level of price discipline to our independent valuation expert benchmarking process as well as mitigate interest rate risk exposure.

I want to thank our business partners at Oaktree, and our new MSR Investor partners for the trust and confidence they have placed in our team to help them achieve their growth and profitability objectives.

And now I'll turn it over to Sean to discuss our results for the fourth quarter.

Thank you Glenn Please turn to slide 10 for our financial highlights.

In the first quarter of 2023, we recognized GAAP net income of negative $40 million due primarily to a decline of $46 million and the forward MSR value drive.

This was driven exclusively by interest rate movements in the quarter.

The adjusted pretax net income, which is a non-GAAP metric for the same period was a positive $6 million.

The earnings per share was negative $5, 34, which led to a book value per share of $55.

I will cover the MSR valuation in more detail on the next page.

Liquidity was strong in the quarter with an ending balance of $233 million. This is well in excess of any covenants requirements, including the new FHFA in Ginnie Mae requirements that began in September of this year.

The walk on the right side of the page has the main drivers of improvement from end of year adjusted pre tax income of positive $4 million to the current quarter of positive $6 million.

The initial adjustment is a recalibration of how we record our runoff for adjusted pre tax income, which Glenn mentioned on the opening page. This.

This resulted in the restatement of the fourth quarter 2022.

I'm, sorry fourth quarter 2022, adjusted pretax income to a positive $4 million.

Here are the details beginning in the first quarter, we are reporting adjusted pre tax income using actual MSR fair value runoff instead of model MSR fair value write off.

We have updated adjusted pre tax income for the prior periods in this presentation to reflect actual MSR fair value runoff.

This adjustment impacted adjusted DTI by $9 million in the first quarter of 'twenty, three and $7 5 million in the fourth quarter of 2022.

We believe reporting actual MSR fair value runoff provides additional important and relevant information for investors, which was previously not readily observable.

Actual MSR fair value runoff is a metric used by management to assess the performance of our servicing segment and the owned MSR portfolio and we believe it is more consistent with how our non bank peers report MSR fair value run off as well.

Modeled MSR runoff is still presented in note seven to our financial statements in our 10-Q as realization of expected cash flows.

This change will have no impact on our GAAP net income reporting.

Yeah.

Then moving to the right servicing continued its strong performance and grew adjusted pre tax income by $5 million for a total of $30 million in the quarter, which I will cover in later slides.

On the overhead line controlling costs at the levels, we came down to in the fourth quarter of 2022 continues to be critical and the increase in overhead is not due to increased staffing, but rather seasonal impacts such as higher accruals for variable compensation in 2023 versus last year and payroll taxes, excluding the various.

Compensation accrual the overall AUM.

<unk> expense declined in the first quarter versus prior quarter.

Finally origination continued to have volume and margin challenges that brought adjusted pre tax income down by $2 million quarter over quarter more on that in a later segment slide.

I'd like to recap the notable items for the quarter that connect adjusted pre tax income to GAAP net income we provide adjusted pretax income for greater investor transparency and it is a metric we use in managing the business the.

The first quarter notables, which are detailed in the appendix are comprised primarily of the $30 million decline in MSR fair value adjustments net of hedge.

And then $4 million loss in other notables, mostly from $4 million negative impact of severance.

$2 million negative impact from legacy legal settlements and a positive $2 million impact due to reduce expense and our long term incentive plan due to stock price fluctuation.

In terms of adjusting guidance for 2023, the only changes we are making are the servicing segment forecast slow shows a slightly lower <unk> growth for the year, we are forecasting $75 billion of UTP gross adds.

And this has no significant impact to our outlook on the servicing pretax income overall as we can adjust our variable costs in line with volume brought on.

On the origination side, our segment forecast shows a reduction in volume to four five to $5 $5 billion per quarter with no change to the revenue margin forecast.

For more information on their MSR valuation, please turn to page 11.

This page focuses solely on our forward MSR valuation, which had a net decline of $47 million for the quarter. The appendix will show that the reverse MSR gains of $7 million in the quarter as reverse MSR as a natural hedge to the Ford MSR.

Before the decline in value over 100% or $49 million is attributed to changes in interest rates. This is primarily the five and 10 year treasury rates, which were down a blended 30 basis points over the quarter that was offset by $2 million of positive assumption or modeling changes.

Our third party valuation expert users interest rates versus the primary mortgage rates to value of the MSR is the.

The mortgage rates declined by a smaller amount in the first quarter versus the five and the 10 year Treasury swap rates. This drove a steeper decline versus a similarly sized MSR portfolio that would be valued on the primary mortgage rate, which is with borrowers pay.

Coming back to the box on the left the top graph shows in light blue the increase or decrease each quarter of the MSR value due to interest rates. The dark blue indicates the change in valuation due to model inputs and assumptions such as potential future losses and portfolios during a recession, which drove some of the fourth quarter.

Changes.

For about $5 million from the last quarter of adjusted pretax income.

Reverse servicing also improved by 16% quarter over quarter, primarily due to better ancillary fees as we improve claimed finding processes for the Genie may happen reverse loans and saw better tail securitization game.

This growth continues to provide scale drives down our servicing costs and creates marginally higher income.

We also want a major new client and the reverse space and should see those in the Sars or hope to see those MSR start Dubord later in the year.

As expected improvements in floating Tom continued as our custodial balances grew from a seasonal fourthquarter trough due to taxes, which was one and a half billion dollars up to the first quarter closing balance of 1.9 billion of custodial balances. This generate an additional $4 million a float income quarter over quarter, which was <unk>.

Finally, like any successful service or must do we continuously improve our cost structure, while keeping quality and customer service at the forefront you can see in the lower right graph that improving trend.

There was a slight increase in the first quarter as we temporarily added some staff to generate the higher fees that I mentioned earlier in the reverse servicing area.

As well as some of the seasonal changes, which impact the expense space.

Please turn to page 13 for an overview on origination segment also both forward and reverse.

The origination business continues to experience a challenging environment with continued lower volumes in correspondent consumer direct and all of our reverse channels you can see that in the bullets to the left the.

The correspondent margins can be partly attributed to the disconnect previously mentioned between MSR values at origination.

Specifically correspondent and flow lending delivered a small loss is we're not chasing margins, but rather pricing for inappropriate return besides controlling costs. The correspondent business continue to have a focus on higher margin products, which you can see with the illustrative example of best efforts and the Ginnie Mae product in the lower left brat.

[noise] helped alleviate some mandatory lower volumes the growth in these products is directly attributed to our enterprise salesforce continuing to expand the base of sellers, especially those in multiple channels such as clients that participate in foreign correspondent reverse and or consumer direct.

The reverse channel and origination created a small profit for the quarter and it's showing no momentum and new application volume heading into the second quarter as well as adding new clients.

Book value per share is at $54.50 would the declines in MSR value due to interest rates, primarily driving the change from the third quarter 2022 P.

Similar to a year and at the end of the first quarter twenty-three our stock was trading at 50% of current book. While this is an improvement over most of the 2022 trading range. We think this discount is not representative of the value we are creating nor of our current balance sheet.

Finally, I would point out using the same starting point that we have used in prior quarters.

Which is 2020 year and our stock continues to outperform not just the Russell 2000, but also a basket of our peers. This basket of our peers has the same basket that we have in our proxy and we also show it in the end notes for your convenience.

As well as information on the Oak tree warrants, which are described in our 10-K either of the 2021 version or the 2022 version.

On our MSR valuation assumption page 28, we showed evaluation multiples and the trailing quarter for easier preference.

With respect to our balance sheet, we provide a more granular view on page 19.

Titled Condense balance sheet breakdown. This delineates assets that require matching asset and liability gross ups under GAAP treatment. This is primarily due to an inability to achieve accounting true sale and these balance sheet impacts fall and do roughly three categories first category as the assets held at math.

Rhythm the.

Second credit gory is reverse heck I'm assets and the final category as Ginnie Mae Msr's that are not eligible for an early buyout, commonly referred to as <unk>.

Q Glenn.

Thanks, Sean Please turn to slide 15, a few wrap up comments before we go to Q&A.

I'm proud of how our team is executing and the results we delivered in the first quarter, we've made solid progress towards achieving our financial objectives.

As we can do to execute our business strategy. We believe we are well positioned to navigate the market environment ahead <unk>.

And deliver long term value for our shareholders.

We are executing a focus growth strategy, leveraging our superior operating capabilities to grow subservicing across multiple investor and prototypes.

Our sub servicing opportunity pipeline is robust and we our position to deliver value to clients investors and consumers in an economic downturn.

We remain steadfast in our pursuit of industry servicing cost leadership by driving continuous constant process improvement and will continue to optimize expenses further during 2023.

We remained equally steadfast and maintaining industry, leading operational performance.

We have delivered measurable performance improvements for our clients borrowers and investors and provide an unmatched breadth of capabilities.

Finally, we continue to expand our capital partner relationships, we are prudently managing capital and liquidity for economic and industry volatility as well as market risks and opportunities.

You're using a speaker phone please pick up your handset before pressing any key.

Julia a question. Please press Star then too.

The first question comes from.

Mmm Jeffries. Please go ahead.

Alright. Good morning can you provide color on bulk MSR pricing you softer Q1, how that has progressed subsequent quarter and.

Yeah, Hey, Derek.

Do think with the market is one trillion dollars or more as certain industry experts are speculating yes.

Yeah, it's going to continue to put you know a bit of a damper on our <unk>, our prices and the bulk market.

Our enterprise sales team is really focused on <unk>.

Developing client relationships that can drive what we call our our higher margin product mix, our best efforts Nondelegated and higher margin products.

TDMA products for example.

Signing up reverse clients and brokers as we continue to grow that business. So.

Good old fashion, you know feed industry sales effort focused on growing the clients that can give us the higher margin profit business that we that we want originate in this part of the market cycle.

Got it. Thank you that's helpful color that's all from me.

Great. Thank you.

Once again, if you have a question please press star.

The next question comes from Eric Hagen.

B T I D.

Please go ahead.

Hi, good.

Good morning, maybe just a couple for me can we start by talking about Hey, good morning can we start by talking about the new reverse some servicing agreement with finance of America and how much do you expect to sub service what the fee it looks like on that business.

Just just the overall kind of support for being a subservicer in that business.

And then on the expense side or are there any expenses that you feel like still need to come out of the business or do you feel like you're right size for this interest rate environment.

Origination volume if we get there thanks.

Sure.

Eric look we're excited about the sub.

<unk> servicing agreement, we just executed with massive America reverse.

Still working with far to determine.

Focused every year here since I've been here on continuous cost improvement. So we are always focused on getting cost.

For the total company as well as for servicing.

So we think we are appropriately sized if in fact, the industry originations volume projection does materialize, we're going to monitor that closely also monitor competitive environment closely obviously that could impact how much msr's wanna buy or invest in and look if we either don't <unk>.

I'm kind of glad that you guys brought up the valuation in your remarks, it feels to us like the stock valuation is largely a function of the leverage.

Which is sort of maybe reinforced with quarters like this where msr's driver.

Yeah in the near term one of the things we're doing is.

Owned MSR book between $115 billion to $135 billion.

We own msr's, because we want scale in our portfolio scale and are servicing factory. So if I can convert those msr's to synthetic sub servicing at attractive economics will do that and that helps take.

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