The first quarter of 2016 has not been kind to the profits of banks and investment banking firms, as evidenced by the substantial year-over-year declines most of them experienced.
After the release of Ocwen Financial Corp.’s Q1 earnings statement on Wednesday, the industry found out that the first quarter was not so great for non-bank servicers, either. Ocwen reported a year-over-year net loss of $111.2 million for Q1 (minus $0.90 per share), following a net loss of $224.3 million for Q4 2015. For Q1 2015, Ocwen reported a net income of $34.4 million ($0.27 per share).
Ocwen's revenue in Q1 ($330.8 million) also experienced a substantial decline year-over-year (35.2 percent), largely impacted by the impact of the sales of agency mortgage servicing rights (MSRs) and portfolio runoff during 2015. Expenses were down by 13 percent over-the-year in Q1, driven by the reduction in the size of the servicing portfolio. The reduction in expenses was offset, however, by an increase in monitor costs (by $21 million) and an increase of $8.8 million in unfavorable interest rate-driven fair value changes related to Ginnie Mae, Fannie Mae, and Freddie Mac MSRs (excluding runoff), according to Ocwen.
Also contributing to the $111.2 million loss for Q1 was a decline in flows provided by operating activities, which fell year-over-year from $325 million in Q1 2015 down to $140.9 million for the first quarter of 2016.
The servicer's operating expenses, when adjusted for the fair value changes and the monitoring costs, declined by $55 million (a 17 percent dropoff) in Q1.
"Unfortunately, $(30) million of monitor costs and $(33) million in MSR value decline from the drop in interest rates during the quarter negatively impacted the first quarter results."
Ron Faris, Ocwen President and CEO
"We are pleased to see the progress of our ongoing cost improvement efforts," Ocwen President and CEO Ron Faris said. "Companywide we saw adjusted operating expenses decline by $55 million or 17 percent from the prior quarter. Excluding MSR fair value changes and monitoring expenses, which we have no or limited ability to control, and our new initiative spending, our Servicing and Corporate segments reduced expenses by $80 million. We are focused on making further progress on our cost goals while continuing to enhance the borrower experience. We also remain committed to investing in our lending businesses, which we believe will drive earnings growth in the future. Unfortunately, $(30) million of monitor costs and $(33) million in MSR value decline from the drop in interest rates during the quarter negatively impacted the first quarter results."
The tough first quarter for Ocwen suggests an ongoing trend for non-bank mortgage servicers—even though they have a much larger share of the mortgage market than they did just four years ago, they are having difficulty profiting. A report released last week found that out of the three largest non-bank servicers rated by Moody’s (Ocwen, Nationstar Mortgage, Walter Investment), only Nationstar turned a profit for the full year of 2015 ($43 million). Both Ocwen and Walter experienced losses of more than $200 million last year.
Click here to view Ocwen's Q1 earnings report.