Onity Group Inc. (ONIT) Q2 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Ocwen Financial Second Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As reminder, this conference call is recorded. I would now like to introduce your host for today's conference, Mr. Stephen Swett. You may begin, sir.

Good morning, and thank you for joining us today for Ocwen's second quarter 2017 earnings conference call. Before we begin, please note that a slide presentation is available to accompany today's call. To access the presentation, please go to the Shareholder Relations section on our website at www.ocwen.com and click on the Events & Presentations link. As a reminder, the presentation and our comments today may contain forward-looking statements made pursuant to the safe harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology. Forward-looking statements, by their nature, address matters that are, to different degrees, uncertain. Our business has been undergoing substantial change, which has magnified such uncertainties. You should bear these factors in mind when considering such statements and should not place undue reliance on such statements. Forward-looking statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. In the past, actual results have differed from those suggested by forward-looking statements and this may happen again. Our forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, the presentations posted online and our comments contain references to non-GAAP financial measures, such as adjusted operating expense, adjusted pretax income, adjusted pretax income before corporate debt expense, normalized adjusted cash flow from operations, illustrative servicing cash flow or servicing cash generation and adjusted liquidity. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition. We also believe these non-GAAP financial measures provide an alternative way to view certain aspects of our business that is instructive. Non-GAAP financial measures should be viewed in addition to, not as an alternative for, company's reported results under accounting principles generally accepted in United States. The financial results and other financial data discussed today and presented in slide presentation are preliminary based upon our estimates and subject to completion of our financial and closing procedures, and issuance of our financial statements as of before the quarter ended June 30, 2017. Moreover, the financial results and other financial data have been prepared on the basis of currently available information. Our final financial results and other financial data could differ materially from our preliminary financial results and other financial data. Our final financial results will be set forth in the company's Form 10-Q for the second quarter of 2017. For an elaboration of the factors I just discussed, please refer to today's earnings release as well as the company's filings with the SEC, including Ocwen's 2016 Form 10-K as amended, and once filed, Ocwen's second quarter 2017 Form 10-Q. Joining me on the call today is Ron Faris, President and Chief Executive Officer; and Michael Bourque, Chief Financial Officer. Now I will turn the call over to Ron.

Good morning, and thank you all for joining the call today. Like last quarter, we do not intend to go through the reported financial numbers in detail on today's call. Our investor presentation, which accompanies this call, has a significant amount of detail on our financial results, especially around operating cost where we continue to make progress. In fact, in the first half of this year compared to the first half of 2016, operating expenses were down $157 million or 22%, or revenue was down only 10%. We continue to focus on cost control, and have recently identified an additional $12 million of expected annualized cost savings in our corporate functions, which should be eliminated in the second half of this year. I'm going to spend most of our time today discussing 4 primary topics. First, I will discuss our recent settlement in the securities class action matter; second, I will briefly discuss the status of the New Residential transaction; third, I will update you on the status of the state regulatory matters; and lastly, I will provide some updates on our go-forward plan. Let me start with the securities class action matter where we were successful in reaching a settlement in principle in late July. While I will direct you to our July 20, 8-K filings for the details, I want to put the case into perspective. This case stems primarily from the drop in our share price following the New York DFS consent order back in December of 2014. While we believe that we have sound, legal and factual defenses, there is always uncertainty in going to a jury trial. As is typically the case, the plaintiff's lawyers came up with some very large numbers based on various theories. And in this case, they were seeking up to $21 per share, which had the potential to result in a very large verdict if things didn't go our way. We are at the eve of trial, which was scheduled to begin on July 24. While we were prepared to try the case and strongly considered the merits of going to trial, we had also agreed to participate in a mediation process. Through the mediation process and a recommendation of the mediator, both sides agreed to accept the mediator's recommendation, which was based on a vast amount of information as to the merits on both sides. As discussed in our 8-K, we expect to recover approximately $14 million of the $56 million settlement amount from our insurance carrier. While this settlement was a tough decision to make given the cost, we have significantly reduced future uncertainty and exposure and we view it positively for that reason. I will note that there are some opt-outs from this class, and at least 1 more case scheduled to go to trial later this year. We will continue to address these opt-outs as we seek to resolve the legacy issues impacting our business. Next, let me briefly discuss the New Residential transaction. While it took a long time to draft and reach final agreement, the basics for the deal are the same as when originally disclosed by the parties. This transaction involves a vast number of non-agency securities, and was very complicated to properly draft and document. Now that we've reached agreement, our efforts are focused on obtaining consents and transferring the ownership of the respective MSRs, which may begin as soon as September and continue into 2018. Page 5 of our Investor deck summarizes some of the key terms of the deal. In addition, we will no longer own any interest in the deferred servicing fees on these transactions following the consents and transfer. I would also note that we are very pleased to now have New Residential as a significant shareholder, and we look forward to participating with them in other opportunities. My third main topic this morning is to update you on the status of our discussions with the various state regulators with whom we have been discussing both individual-state and global-resolution possibilities. Our objective is to arrive at acceptable resolution terms as quickly as possible, and we believe we are making progress. At this point, as it relates to many states with the possibility for common terms, main global topics for agreement and resolution revolve around the size and scope of an escrow review, complaint handling and financial condition and reporting. Licensing and other issues are also being discussed with select states, which have identified specific concerns. I would expect that we will remain under restricted esquire of mortgage servicing rights for the foreseeable future. We're also working on various paths to migrate to a new servicing system platform. I am not going to comment in detail on the CFPB at this time, as there is no real update beyond the various legal filings that have taken place and will continue to take place. We are preparing a robust defense and expect to see increased spend on professional fees as a result, some of which began in Q2 as is noted on Page 19 of our presentation. I will note, however, that earlier this week, consistent with the applicable federal rules, the judge overseeing the CFPB litigation invited the U.S. Attorney General to share his views on the constitutional issues raised in our motion to dismiss. Finally, I want to provide some updates on our go-forward plan. While the state regulatory constraints regarding MSR acquisitions create some uncertainty, we are focused on the following primary objectives, resolve our state regulatory issues, expeditiously complete the transfer of MSRs sold to New Residential, resolve our legacy high-exposure litigation to reduce future uncertainty, reduce corporate overhead as a percentage of revenue, improve overall liquidity and reduce leverage over time, and most importantly, continue to reduce RMBS losses, and keep struggling families in their homes through effective servicing and loan modifications. In short, we're closely examining each of our businesses and product lines, especially those that are not generating acceptable returns, and those where we may not be able to effectively support longer-term growth. We will not hesitate to scale back, close or sell underperforming businesses or product lines. We have already closed our Correspondent lending channel for forward originations due to unacceptable margins. We have also shifted to selling the MSRs and the majority of our forward originations generated through our wholesale channel, so let's reduce capital consumption, and the ongoing risk of maintaining the MSRs, such as interest rate risks. We are also exploring opportunities to improve scale, reduce corporate overhead, reduce interest rate risk and reduce funding risks. Opportunities could include strategic transactions, and/or selling certain assets or businesses. Before I open up the call to questions, I'd like to call out a few more positives. If you exclude legal settlement-related expenses and the other significant items we noted in our press release, we earned an adjusted pretax profit in Q2. Our reverse mortgage business has performed very well and remains an industry leader. Our Servicing segment had its fourth consecutive profitable quarter on a pretax basis. Our management team and staff have stayed together, and continue to perform at a high level under challenging circumstances. And we continue to go above and beyond to help consumers struggling with their mortgage payments as demonstrated by our industry-leading loan modification and principal forgiveness results, and our community outreach events, including our Summer of Help and Hope events. Thank you. We'll now open the call up for questions. Operator?

Thank you. [Operator Instructions] And our first question comes from Bose George with KBW. You may proceed, sir.

Hey, good morning. Actually, I had a couple of questions. First, just wanted to make sure I understood the NRZ transaction and just the impact on the revenues to you guys. On the MSRs sides, I think you mentioned last time that it was 12 basis points that they would be receiving for that investment. So can you just sort of reconfirm that? And then, just wanted to make sure I understood on the sub-servicing side, do you know how that's going change the revenues for you guys?

Sure. So I'm not sure about the 12 basis points. I think it was reported that it will be moving to a more traditional-looking sub servicing arrangement. In our slide deck, we talk about the fact that if the whole transaction were to kind of have closed at the end of the quarter, we would receive kind of the payment of approximately $400 million. But you can think of that in terms of receiving cash up-front converting to a sub servicing arrangement where we'll receive a lower revenue on a go-forward basis. Michael, do you have anything to add to that?

No, only that's - Bose, is as - now that is finalized, we'll work through getting the documents out to folks and kind of communicate the go-forward impact. It's obviously a complex transaction, and we want to make sure we've got all the details ironed out before releasing our expectations on expected future changes to revenue. So more to come there, but as Ron described it, that's correct.

Okay. And then actually just a question on the balance sheet impact. Does this essentially kind of monetize in equivalent of line of your MSR, whatever that $400 million or whatever the line ultimately is? Does that sort of come off your balance sheet?

Yes, I mean, that's so - again, it falls under the kind of the go-forward accounting decisions. And there's, I think, in kind of economic principle that's likely -- that's the appropriate way to think about it. But as we have seen with some of the rights transactions in the past, the GAAP accounting tends to be a bit different or a bit more complicated. So more to come on that. But from kind of economic-substance standpoint, that's the way to think about it, Bose.

Okay, great. Thanks.

And our next question comes from Fred Small with Compass Point. You may proceed.

Hey, good morning. Thanks for taking my question. Just sort of following up on the accounting impact I guess, what would second quarter revenue have been under - assuming that the transaction had already taken place?

Yes, I don't - I mean, Bose-- we're - I mean, Fred, I don't - we don't have, we are not prepared to speak to that. And as Michael said, we're still working through how the accounting will work. We will start to see some of the impacts we hope in the third quarter as deal starts to transfer over, but we don't have that information for you.

Okay. I guess maybe I'm just hopefully not beating a dead horse here, but if I think about the way that you're - right now everything flows through Ocwen's P&L. And there are obviously sort of net offsets. Is just net economically net revenues be lower following the transaction?

Fred, I'm not sure what you mean by net revenues. But I mean, the way to think about is we're receiving up-front cash in kind of pulling forward some expected future cash flows from the original deal. And in that, how the revenue matches that cash is something kind of subject to accounting review, and we're just not ready to go out with exactly how that's going to work.

Okay. So it sounds like you still might available what I think maybe you had talked about on last quarter's call, you record some sort of balance sheet for the - as a deferred revenue or something, and that kind bleeds into the developed P&L over time, that's still part of the way you're looking at it?

I would just say potentially, but I - we can't really comment further, Fred. There's a lot that goes into it. I think if you just look at the landscape of these types of transactions in the industry, different firms have had different accounting treatment depending on the nature of the relationship, the tenure of the relationship. And so there is a lot to evaluate there, and it's just premature at this point to go out with anything too definitive.

Okay. Got it. And then if you think about sort of, the underlying economics of transaction with NRZ as a financing, what sort of - what you think the implied cost is for Ocwen?

Again, I don't...

I mean, that's not anything we ever...

Yes, go ahead, Michael.

Well, yes. I don't think that's anything that we have or will be discussing. You have to keep in mind it resolved certain uncertainties, it extended the tenure of our relationship, it involved them making an equity investment in the company. A lot of pieces there, but we're not going to get into sort of the pricing mechanisms that we're used to arrive at the agreed-upon transaction.

Okay. Great. And then there was some language, I think, in your 10-Q or in Altisource's 10-Q, maybe both last quarter, that you're evaluating different software systems or potentially changing servicing platforms. Is that still a potential for the technology side? Is that still something you are looking at?

Yes, in fact, in my prepared remarks I commented that we are working on various paths to migrate to a new servicing system platform.

Okay, cool. I got dropped off, part of the call earlier. Okay, thanks. And how does that fit into, I guess, how you're thinking about forward expenses when Walter moved, I think, from its own system on to - I recognize a couple of years ago that there was - they had a big increase in cost from sort of an on-going perspective and also from a one-time sort of migration-cost perspective?

Yes. So we are not giving out the details. But I think it is fair to say that any time you make a system transition for a primary large system platform, there's going to be cost associated with that transition process. And so there will be, at some point, some elevated cost going in through a transition from one platform to another. Our hope would be that following transition, it would not be a significant increase in cost or any increase at all. But that is to be determined as we have not finalized everything up at this point. But you can definitely, I think, expect that there would be transition-related cost to get from one system to the other.

All right. Got it. Thanks a lot.

Thanks, Fred.

[Operator Instructions] Thank you, ladies and gentlemen. That concludes the Ocwen Financial Corporation second quarter earnings call. Thank you for attending. Have a great day.