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OCWEN FINANCIAL CORP – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per share amounts and unless otherwise indicated)
OVERVIEW General We are a leading non-bank mortgage servicer and originator providing solutions through our primary brands,PHH Mortgage and Liberty Reverse Mortgage.PHH Mortgage is one of the largest servicers in the country, focused on delivering a variety of servicing and lending programs. Liberty is one of the nation's largest reverse mortgage lenders dedicated to education and providing loans that help customers meet their personal and financial needs. We serviced 1.4 million loans with a total UPB of$283.3 billion on behalf of more than 3,800 investors and 95 subservicing clients as ofSeptember 30, 2022 . We service all mortgage loan classes, including conventional, government-insured, non-Agency, small-balance commercial and multi-family loans. Our originations business is part of our balanced business model to generate gains on loan sales and profitable returns, and to support the replenishment and the growth of our servicing portfolio. Through our retail, correspondent and wholesale channels, we originate and purchase conventional and government-insured forward and reverse mortgage loans that we sell or securitize on a servicing retained basis. In addition, we grow our mortgage servicing volume through MSR flow purchase agreements, Agency Cash Window programs, bulk MSR purchase transactions, and subservicing agreements. The table below summarizes the volume of Originations by channel, in the third quarter of 2022, compared with the preceding quarter, and the nine months endedSeptember 30, 2022 compared with the corresponding period of the prior year. The volume of Originations is a key driver of the profitability of our Originations segment, together with margins, and a key driver of the replenishment and growth of our Servicing segment. $ in billions UPB Three Months Ended Nine Months Ended September 30, September 30, September 30, 2022 June 30, 2022 2022 2021 Mortgage servicing originations Retail - Consumer Direct MSR (1) $ 0.16 $ 0.32$ 1.14 $ 1.71 Correspondent MSR (1) 5.07 3.94 11.69 10.51 Flow and Agency Cash Window MSR purchases (2) 2.05 3.21 9.35 17.06 Reverse mortgage servicing (3) 0.29 0.43 1.27 1.03 Total servicing 7.57 7.90 23.45 30.30 Bulk purchases (2) 4.33 - 4.33 55.13 Bulk purchases - reverse (2) - - 0.21 - Total servicing additions 11.90 7.90 27.99 85.44 Subservicing additions (4) 5.86 18.93 37.03 23.24 Total servicing and subservicing UPB additions$ 17.76 $ 26.83 $ 65.02 $ 108.68 (1)Represents the UPB of loans that have been originated or purchased (funded UPB) during the respective periods and for which we recognize a new MSR on our consolidated balance sheets upon sale or securitization. (2)Represents the UPB of loans for which the MSR is purchased. Bulk purchases include 12,931 loans with a UPB of$4.1 billion for which PMC was previously performing the subservicing that were purchased from third parties during the third quarter of 2022. (3)Represents the UPB of reverse mortgage loans that have been securitized on a servicing retained basis. The loans are recognized on our consolidated balance sheets under GAAP without any separate recognition of MSRs. (4)Includes interim subservicing, including the volume of UPB associated with short-term interim subservicing for certain clients as a support to their originate-to-sell business, with$2.5 billion and$5.3 billion for the three months endedSeptember 30, 2022 andJune 30, 2022 , respectively, and$10.7 billion and$12.2 billion for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. In addition to interim subservicing, subservicing additions for the three months endedSeptember 30, 2022 andJune 30, 2022 in the table above include reverse mortgage loan subservicing and new subservicing on behalf of MAV. OnOctober 1, 2021 , in connection with the transaction with MAM (RMS), PMC became the subservicer for approximately 57,000 reverse mortgages, or approximately$14.3 billion in UPB pursuant to subservicing agreements with various clients, including MAM (RMS). Under the five-year subservicing agreement with MAM (RMS), we added subservicing of approximately 40,000 59 -------------------------------------------------------------------------------- reverse mortgage loans or approximately$9.1 billion in UPB in the first quarter of 2022, and approximately 19,000 reverse mortgage loans with a UPB of$4.1 billion in the second quarter of 2022. In the second quarter of 2021, we launched our joint venture MSR investment with Oaktree with MAV. MAV purchased approximately$2.5 billion and$8.5 billion GSE MSRs from unrelated third parties that PMC began subservicing in the third quarter of 2022 and second quarter of 2022, respectively. The following table summarizes the average volume of our Servicing segment during the third quarter of 2022, compared with the preceding quarter, and the nine months endedSeptember 30, 2022 compared with the corresponding period of the prior year. The average volume of Servicing is a key driver of the profitability of our Servicing segment. The relative weight of performing and delinquent loans or servicing and subservicing also drive the gross revenue and expenses, and their timing. In the third quarter of 2022, our total average servicing portfolio decreased by$3.2 billion as compared to the second quarter of 2022, mostly due to reductions in our forward interim subservicing portfolio and the portfolio runoff, offset by MSR acquisitions by MAV. $ in billions Average UPB Three Months Ended For the Nine Months Ended September 30, September 30, 2022 June 30, 2022 2022 September 30, 2021 Owned MSR $ 119.5 $ 115.6 $ 120.8 $ 113.6 Rithm (formerly NRZ) 51.0 52.6 52.8 62.9 MAV 46.4 42.3 41.1 7.4 Subservicing (incl. interim subservicing) 57.7 67.5 56.6 21.0 Reverse mortgage loans (owned) 7.4 7.4 7.3 6.7 Commercial and other servicing 0.9 0.8 0.9 1.1 Total serviced and subserviced UPB (average) $ 282.9 $ 286.1 $ 279.4 $ 212.7
As of
Financial Highlights
Results of operations for the third quarter of 2022
•Net income of
•Servicing fee revenue of
•Originations gain on sale of
•$67 million MSR valuation gain on our owned MSRs attributable to rate and
assumption changes, net of hedging
Financial condition at the end of the third quarter of 2022
•Stockholders' equity of
•MSR investment of
the average serviced and subserviced UPB in the quarter
•Cash liquidity position of
•Total assets of
Business Initiatives
We have established the following key operating objectives to return to
sustainable profitability and drive improved value for shareholders in 2022:
•Leveraging the core strengths of our balanced and diversified business model
through a continued focus on servicing as well as sizing originations to the
market environment and maintaining agility to address a potential recession;
•Driving prudent growth adapted for the environment, including emphasis on
subservicing to drive servicing portfolio UPB growth and expansion of higher
margin originations products and clients;
•Reducing cost structure across the organization to achieve industry cost
leadership by maintaining continuous cost improvement discipline and optimizing
technology, global operations, and scale;
•Optimizing liquidity, diversifying capital sources and repositioning for higher
rates; and
•Allocating capital to deliver value for shareholders, including leveraging our
MSR asset vehicle with Oaktree and expanding multi-investor partnership model to
fund new MSR originations.
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In the first nine months of 2022, market interest rates rose faster and higher
than the industry consensus, significantly reducing the production volumes and
margins of our Consumer Direct channel and adversely affecting Originations
profitability. To achieve our profitability goals for 2022, we have responded to
the market shift by rapidly scaling down our Consumer Direct operations in 2022
and we expect to continue to reduce our expenses in the fourth quarter of 2022.
We are also accelerating our goals relating to business process rationalization
and optimization, including further off-shoring of operations, enterprise-wide.
Our growth strategy includes acquiring assets and/or operations of complementary
businesses, by means of acquisition, merger or other transaction forms. Our
strategy may also include pursuing large transactions, including bulk purchases
or sales of MSRs. We have engaged in such transactions in the past, and we
continue to explore opportunities that may be accretive to our business and
stockholders' value.
Results of Operations and Financial Condition
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations appearing in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . 61 --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, June 30 September 30, September 30,
Results of Operations Summary 2022 2022 % Change 2022 2021 % Change
Revenue
Servicing and subservicing
fees $ 215.6 $ 215.1 - % $ 643.3 $ 562.8 14 %
Reverse mortgage revenue, net 6.9 (2.6) (365) 17.4 56.2 (69)
Gain (loss) on loans held for
sale, net 18.9 0.9 n/m 16.7 108.1 (85)
Other revenue, net 8.3 8.7 (5) 26.1 29.1 (10)
Total revenue 249.7 222.2 12 703.4 756.1 (7)
MSR valuation adjustments,
net 95.2 33.2 187 191.0 (57.6) (432)
Operating expenses
Compensation and benefits 71.3 83.9 (15) 223.2 209.4 7
Servicing and origination 19.0 19.1 (1) 52.3 82.0 (36)
Technology and communications 14.4 14.7 (2) 44.0 41.1 7
Professional services 17.2 8.7 98 38.0 61.2 (38)
Occupancy and equipment 12.4 9.7 28 32.1 25.7 25
Other expenses 7.1 8.4 (15) 23.2 15.4 51
Total operating expenses 141.4 144.4 (2) 412.8 434.9 (5)
Other income (expense)
Interest income 13.7 9.7 41 30.6 16.0 91
Interest expense (50.4) (37.9) 33 (126.1) (102.6) 23
Pledged MSR liability expense (131.6) (74.1) 78 (292.6) (168.8) 73
Earnings of equity method
investee 3.3 3.9 (15) 19.3 1.3 n/m
Gain (loss) on extinguishment
of debt - 0.9 (100) 0.9 (15.5) (106)
Other, net (5.5) (4.2) 31 (9.9) 5.6 (277)
Total other income (expense),
net (170.5) (101.6) 68 (377.9) (264.0) 43
Income (loss) before income
taxes 33.0 9.4 251 103.7 (0.3) n/m
Income tax expense (benefit) (4.0) (0.9) 344 (1.6) (20.1) (92)
Net income (loss) $ 36.9 $ 10.4 257 $ 105.4 $ 19.8 432
Segment income (loss) before
income taxes
Servicing $ 55.0 $ 38.6 42 % $ 172.3 $ 32.2 435
Originations 9.5 (1.8) (628) 4.8 73.2 (93)
Corporate Items and Other (31.5) (27.3) 15 (73.4) (105.7) (31)
$ 33.0 $ 9.4 250% $ 103.7 $ (0.3) n/m
n/m: not meaningful
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Total Revenue
The below table presents total revenue by segment and at the consolidated level:
Three Months Ended Nine Months Ended
September 30, June 30 September 30, September 30,
Revenue 2022 2022 % Change 2022 2021 % Change
Servicing $ 211.8 $ 184.4 15 % $ 594.3 $ 596.9 - %
Originations 38.3 36.3 6 119.6 180.4 (34)
Corporate 1.5 1.6 (6) 5.0 4.3 16
Total segment revenue 251.7 222.3 13 718.8 781.7 (8)
Inter-segment elimination (1) (2.0) (0.1) n/m (15.4) (25.5) (39)
Total revenue $ 249.7 $ 222.2 12 $ 703.4 $ 756.1 (7)
(1)The fair value change of inter-segment economic hedge derivatives reported
within Total revenue (Gain on loans held for sale, net) is eliminated at the
consolidated level with an offset in MSR valuation adjustments, net. Refer to
Item 3 - Quantitative and Qualitative Disclosures about Market Risk for further
detail.
Total segment revenue was $251.7 million for the three months ended September
30, 2022 , $29.4 million or 13% higher than the three months ended June 30, 2022 ,
driven by a $27.4 million revenue increase from Servicing and a $2.0 million
revenue increase from Originations. The Servicing revenue increase is mostly due
to a $15.4 million improvement in Reverse mortgage revenue, net driven by lower
unrealized fair value losses on the HECM loan portfolio, and an $8.8 million
loss recognized in the second quarter of 2022 on the repurchase of delinquent
loans in connection with the Ginnie Mae EBO program. The increase in
Originations revenue is mostly due to an $8.2 million increase in Gain on loans
held for sale, net due to due to higher volumes and margins in the forward
Correspondent channel, offset in part by a $5.9 million decrease in reverse
mortgage originations revenue, net driven by lower loan production volume in all
three channels and lower margin in our retail channel resulting from unfavorable
market interest rate and spread conditions.
As compared to the nine months ended September 30, 2021 , total segment revenue
for the nine months ended September 30, 2022 was $62.9 million or 8% lower, due
to a $60.8 million decrease in Originations revenue and a $2.6 million decline
in Servicing revenue. The decrease in Originations revenue is primarily due to a
$54.2 million decrease in Gain on loans held for sale, net in our Consumer
Direct channel driven by a decline in margin and lower recapture volume in the
context of rising interest rates at a historic pace during the nine months ended
September 30, 2022 . The decline in Servicing revenue includes a $53.2 million
decline in Gain on loans held for sale, net due to lower redelivery gains and
losses on repurchased and sold delinquent loans in connection with the Ginnie
Mae EBO program and $22.5 million gain recorded in the nine months ended
September 30, 2021 related to the exercise of our servicer call rights of
certain Non-Agency trusts, a $34.0 million decline in Reverse mortgage revenue,
net due to higher unrealized fair value losses on the HECM loan portfolio, net
attributable to lower margins resulting from continued increase in interest
rates and the widening of yield spreads, largely offset by an $84.8 million
increase in Servicing and subservicing fees due to the portfolio growth, the
launch of MAV and the acquisition of reverse subservicing from MAM (RMS).
See the respective Segment Results of Operations for additional information.
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MSR Valuation Adjustments, Net
The table below presents the key components of MSR valuation adjustments, net:
Three Months Ended Nine Months Ended
September 30, June 30 September 30, September 30,
Segment Results 2022 2022 % Change 2022 2021 % Change
MSR realization of expected cash
flows (1) $ (68.6) $ (67.6) 1 % $ (209.1) $ (175.1) 19 %
MSR fair value changes due to
interest rate and assumption
updates 184.0 115.1 60 % 500.2 102.2 389 %
Derivative fair value gain (loss) (25.8) (17.0) 52 % (122.9) (28.9) 325 %
Total Servicing 89.6 30.5 194 % 168.3 (101.8) (265) %
Originations - MSR fair value
changes 3.6 2.6 38 % 7.3 18.7 (61) %
Inter-segment elimination -
derivative fair value gain (loss) 2.0 0.1 n/m 15.4 25.5 (40) %
MSR valuation adjustments, net $ 95.2 $ 33.2 187 % $ 191.0 $ (57.6) (432) %
(1) The terms realization of expected cash flows and runoff may be used
interchangeably within this discussion.
We reported a$95.2 million gain in MSR valuation adjustments, net in the three months endedSeptember 30, 2022 ,$62.0 million higher than the three months endedJune 30, 2022 . The net gain is driven by favorable MSR fair value changes due to rising interest rates, net of hedging. The increase in the net gain in the third quarter of 2022 as compared to the second quarter of 2022 is mostly driven by a higher increase in rates during the respective periods. The 10-year swap rate increased by 81 basis points in the third quarter of 2022 and 65 basis points in the second quarter of 2022. For the nine months endedSeptember 30, 2022 , we reported a$191.0 million gain in MSR valuation adjustments, net, as compared to a$57.6 million loss for the nine months endedSeptember 30, 2021 . The loss in the nine months endedSeptember 30, 2021 is mostly due to MSR portfolio runoff and a lower MSR fair value gain due to interest rate and assumption updates, net of hedging. The higher net fair value gain in the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 is mostly driven by a higher increase in rates during the respective periods. The 10-year swap rate increased by 228 basis points in the nine months endedSeptember 30, 2022 and 58 basis points in the nine months endedSeptember 30, 2021 .
See the respective Segment Results of Operations sections for additional
information.
Compensation and Benefits
Compensation and benefits expense for the three months endedSeptember 30, 2022 decreased$12.6 million , or 15%, as compared to the three months endedJune 30, 2022 , primarily due to a 6% headcount reduction and incentive compensation reduction. Specifically, the decline is due to a$7.2 million decrease in incentive compensation, a$5.6 million decrease in salaries and benefits and a$2.0 million decline in commissions, partially offset by a$3.2 million increase in severance expense. The decrease in incentive compensation expense is the result of a$3.8 million decrease in estimated annual incentive plan award for 2022 and the reduction in headcount, and a$3.4 million decrease in expense for cash-settled share-based awards due to our common stock price decline during the third quarter of 2022. Salaries and benefits expense declined 10%, due to the 6% overall headcount reduction, predominantly in theU.S. Headcount reduction is driven by a 25% decrease in Originations, mostly Consumer Direct, and an 11% decrease in Corporate functions, as part of our continued efforts to right size our resources to market opportunities and our continuous improvement initiatives. As compared to the nine months endedSeptember 30, 2021 , Compensation and benefits expense for the nine months endedSeptember 30, 2022 increased$13.8 million , or 7% largely due to a$16.4 million increase in salaries and benefits primarily due to an 11% increase in total average headcount, mostly attributed to a 19% increase in Servicing headcount to support the development of our reverse mortgage subservicing platform and the MAM (RMS) subservicing portfolio acquisition. In addition, severance expense increased$9.9 million predominantly due to headcount reductions in forward Originations and Corporate functions in the second and third quarters of 2022, as well as aU.S. headcount reduction in Servicing in the third quarter of 2022. These increases in expense were partially offset by a$10.5 million decline in expense for cash-settled share-based awards as a result of a decrease in our common stock price and a reduction in expense due to forfeitures recognized in the first quarter of 2022, a$1.9 million decline in estimated annual incentive plan award and$1.2 million decrease driven by lower employee retention expenses. 64 --------------------------------------------------------------------------------
Servicing and Origination Expense
Servicing and origination expense for the three months endedSeptember 30, 2022 remained flat as compared to the three months endedJune 30, 2022 primarily due to a$2.1 million increase in provision for indemnification related to our Servicing business, offset by a$1.6 million decrease in satisfaction and interest on payoff expense due to lower payoffs, and a$1.3 million decrease in loan origination expense, primarily due to a decrease in production volume in our Consumer Direct and Reverse channels. As compared to the nine months endedSeptember 30, 2021 , Servicing and origination expense for the nine months endedSeptember 30, 2022 decreased$29.7 million , or 36%, mostly attributed to the Servicing segment. The decline is primarily due to a$13.5 million decrease in satisfaction and interest on payoff expense attributable to lower payoff volume, an$8.7 million decrease in reverse subservicing expenses with the transfer of a subservicer to our reverse servicing platform beginning in the fourth quarter of 2021, a$4.5 million reduction in interim subservicing costs incurred on bulk acquisitions in the nine months endedSeptember 30, 2021 , a$1.7 million decline in provision expense on government-insured claims receivables primarily due to decreased claim volumes, and a$1.1 million net decrease in provision for indemnification related to our Servicing business driven by favorable settlements.
See Segment Results of Operations - Servicing for additional information.
Other Operating Expenses
Professional services expense for the three months endedSeptember 30, 2022 increased$8.5 million , or 98%, as compared to the three months endedJune 30, 2022 . Reimbursements received in the third quarter of 2022 from mortgage loan investors related to prior year legal expenses and payments received following resolution of legacy litigation matters were$6.8 million lower than the second quarter of 2022, and expenses related to other legal matters increased$2.8 million as compared to the second quarter. These increases were partially offset by a$1.5 million decrease in other professional fees. As compared to the nine months endedSeptember 30, 2021 , Professional services expense for the nine months endedSeptember 30, 2022 decreased$23.2 million , or 38%, primarily due to a decline in legal expenses as other professional fees remained flat. The decline in legal expenses is largely due to reimbursements received from mortgage loan investors related to prior year legal expenses, and to payments received following resolution of legacy litigation matters. Occupancy and equipment expense for the three months endedSeptember 30, 2022 increased$2.7 million , or 28%, as compared to the three months endedJune 30, 2022 , primarily due to repairs required in connection with our exit of ourNew Jersey leased office facility. As compared to the nine months endedSeptember 30, 2021 , Occupancy and equipment expense for the nine months endedSeptember 30, 2022 increased$6.4 million , or 25%, largely driven by a$3.4 million increase in postage and mailing expenses associated with an increased average number of loans serviced and the acquisition of reverse mortgage subservicing, and the$2.9 million facility repair obligation described above. Technology and communication expense for the three months endedSeptember 30, 2022 remained flat as compared to the three months endedJune 30, 2022 . As compared to the nine months endedSeptember 30, 2021 , Technology and communication expense for the nine months endedSeptember 30, 2022 increased$2.9 million , or 7%, largely driven by higher fees related to our forward loan servicing system due to the increase in the average number of loans serviced. Other expenses for the three months endedSeptember 30, 2022 decreased$1.3 million as compared to the three months endedJune 30, 2022 primarily driven by a reduction in bank changes due to higher earnings credits as a result of the increase in interest rates. As compared to the nine months endedSeptember 30, 2021 , Other expenses for the nine months endedSeptember 30, 2022 increased$7.8 million mainly due to a$2.7 million increase in advertising expense in our Reverse Originations business,$3.3 million of amortization expense on the reverse subservicing contract intangible asset recognized inOctober 2021 andApril 2022 , and a$3.3 million increase in miscellaneous other expenses, including travel and licensing expenses. These increases were offset by a$2.0 million decline in bank charges due to due to higher earnings credits as a result of higher interest rates.
Other Income (Loss)
Interest income increased$4.0 million during the three months endedSeptember 30, 2022 as compared to the three months endedJune 30, 2022 primarily attributable to higher forward loan production volumes in Originations and increasing interest rates. As compared to the nine months endedSeptember 30, 2021 , interest income for the nine months endedSeptember 30, 2022 increased$14.6 million , primarily due to higher forward loan production volumes in Originations and increasing interest rates, as well as higher average balances of loans held for sale in our Servicing segment. Interest expense for the three months endedSeptember 30, 2022 increased$12.5 million , or 33%, as compared to the three months endedJune 30, 2022 , due to a$108.4 million increase in average debt balance on our asset backed financing, primarily driven by the same factors described above, specifically higher origination production volume and an average 137 bps higher cost of funds following an increase in underlying reference interest rates. 65 -------------------------------------------------------------------------------- As compared to the nine months endedSeptember 30, 2021 , Interest expense for the nine months endedSeptember 30, 2022 increased$23.5 million , or 23%, primarily due to higher cost of corporate debt that is mostly related to the OFC senior secured notes issued onMarch 4, 2021 andMay 3, 2021 . The notes were issued to Oaktree together with warrants that resulted in an additional discount, the accretion of which is reported as interest expense, a$364.2 million or 13% higher average debt balance on our asset backed financing, primarily to finance our higher loan production volumes and MSR portfolio growth, and an increase in cost of funds of our asset backed financing, primarily driven by increased underlying reference interest rates.
See Segment Results of Operations - Servicing for information regarding Pledged
MSR liability expense.
Gain on debt extinguishment of$0.9 million for the nine months endedSeptember 30, 2022 resulted from our repurchase of$25.0 million PMC 7.875% Senior Secured Notes dueMarch 2026 at a discount during the second quarter of 2022. Loss on debt extinguishment of$15.5 million for the nine months endedSeptember 30, 2021 was recognized in the first quarter of 2021 and resulted from our early repayment of the SSTL dueMay 2022 , PHH 6.375% senior unsecured notes dueAugust 2021 , and PMC 8.375% senior secured notes dueNovember 2022 . Earnings of equity method investee represent our 15% share of MAV Canopy fromMay 3, 2021 . The$19.3 million earnings for the nine months endedSeptember 30, 2022 are predominantly driven by the fair value gains recorded by MAV Canopy on its MSR portfolio due to rising interest rates. See Note 10 - Investment in Equity Method Investee and Related Party Transactions for further detail. Other, net expense for the three months endedSeptember 30, 2022 increased by$1.3 million as compared to the three months endedJune 30, 2022 , primarily due to$3.3 million expense in connection with our new ESS financing liability. For the nine months endedSeptember 30, 2022 , Other, net expense increased$15.5 million , as compared to the nine months endedSeptember 30, 2021 , primarily due to$4.6 million deal call revenue recorded in 2021,$3.3 million loss on MSR recaptured and delivered to MAV for zero cash proceeds (offset by a corresponding amount recorded within Gain on loans held for sale, net),$3.3 million expense recognized in connection with the ESS financing transaction,$2.3 million early payout protection in connection with our MSR sales, and$1.8 million increase in loss adjustment expense related to our CRL reinsurance business due to higher claims.
Income Tax Benefit (Expense)
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Income tax expense
(benefit) $ (4.0) $ (0.9) 344 % $ (1.6) $ (20.1) (92)
Income (loss) before
income taxes $ 33.0 $ 9.4 251 % $ 103.7 $ (0.3) n/m
Effective tax rate (12.1) % (9.6) % 26 % (1.5) % 6700.0 % (100)
Our effective tax rate for the periods indicated in the table above differs from
the federal statutory income tax rate primarily due to the full valuation
allowance recorded on our net U.S. federal and state deferred tax assets. We
conduct periodic evaluations of positive and negative evidence to determine
whether it is more likely than not that the deferred tax asset can be realized
in future periods. In these evaluations, Ocwen considers its sources of future
taxable income as the deferred tax assets represent future tax deductions.
Taxable income of the appropriate character, within the appropriate time frame,
is necessary for the realization of deferred tax assets. While Ocwen generates
positive income before income taxes, the U.S. filing jurisdiction is in a
cumulative loss position for the three-year period ended September 30, 2022 . We
recognize that cumulative losses in recent years is an objective form of
negative evidence in assessing the need for a valuation allowance and that such
negative evidence is difficult to overcome. We evaluated all positive and
negative evidence and determined that a full valuation allowance at September
30, 2022 remains appropriate. The income tax expense (benefit) is primarily
comprised of income taxes in foreign jurisdictions and changes in uncertain tax
positions. Also refer to Note 21 - Income Taxes to the consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 31,
2021 for further details on deferred tax assets.
The $4.0 million income tax benefit recognized in the three months ended
September 30, 2022 was driven primarily by our recognition of $3.5 million of
income tax benefit related to the favorable resolution of an uncertain tax
position, as well as a decrease in the projected annual effective tax rate
applied to year-to-date pre-tax earnings. The income tax benefit recognized in
the three months ended June 30, 2022 was driven primarily by a decrease in the
projected annual effective tax rate applied to year-to-date to pre-tax earnings.
For the nine months ended September 30, 2022 , income tax benefit of $1.6 million
was driven by projected income tax expense related to pre-tax earnings, offset
by income tax benefit related to the favorable resolution of uncertain tax
positions. As compared with the nine months ended September 30, 2021 , income tax
benefit for the nine months ended September 30 ,
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2022 declined $18.5 million primarily due to higher pre-tax earnings, a $12.8
million reduction in the amount of income tax benefit recognized under the CARES
Act, and a $ 3.6 million reduction in the amount of income tax benefit related
to the favorable resolution of uncertain tax positions. The decline in the
effective tax rate is primarily due to the $104.0 million increase in pre-tax
earnings in the nine months ended September 30, 2022 compared to the same period
in 2021, as well as the reduction in income tax benefit recognized under the
CARES Act and a reduction in income tax benefit related to the favorable
resolution of uncertain tax positions.
Under our transfer pricing agreements, our operations in India and Philippines
are compensated on a cost-plus basis for the services they provide, such that
even when we have a consolidated pre-tax loss from operations these foreign
operations have taxable income, which is subject to statutory tax rates in these
jurisdictions that are higher than the U.S. statutory rate of 21%.
Financial Condition
September 30, December 31,
Financial Condition Summary 2022 2021 $ Change % Change
Cash $ 226.6 $ 192.8 $ 33.8 18 %
Restricted cash 45.3 70.7 (25.4) (36)
MSRs, at fair value 2,714.2 2,250.1 464.1 21
Advances, net 642.5 772.4 (130.0) (17)
Loans held for sale 729.6 928.5 (198.9) (21)
Loans held for investment, at fair value 7,402.3 7,207.6 194.6 3
Receivables 170.8 180.7 (9.9) (5)
Investment in equity method investee 38.7 23.3 15.4 66
Other assets 390.1 520.9 (130.9) (25)
Total assets $ 12,360.1 $ 12,147.1 $ 212.9 2 %
Total Assets by Segment
Servicing $ 11,322.6 $ 10,999.2 $ 323.4 3 %
Originations 731.1 823.5 (92.5) (11)
Corporate Items and Other 306.4 324.4 (18.0) (6)
$ 12,360.1 $ 12,147.1 $ 212.9 2 %
HMBS-related borrowings, at fair value $ 7,208.4 $ 6,885.0 $ 323.4 5 %
Other financing liabilities, at fair value 989.7 805.0 184.8 23
Advance match funded liabilities 457.5 512.3 (54.8) (11)
Mortgage loan warehouse facilities 819.6 1,085.1 (265.5) (24)
MSR financing facilities, net 1,020.6 900.8 119.8 13
Senior notes, net 597.1 614.8 (17.7) (3)
Other liabilities 721.1 867.5 (146.4) (17)
Total liabilities 11,814.0 11,670.4 143.6 1 %
Total stockholders' equity 546.1 476.7 69.4 15
Total liabilities and equity $ 12,360.1 $ 12,147.1 $ 212.9 2 %
Total Liabilities by Segment
Servicing $ 10,785.3 $ 10,474.5 $ 310.8 3 %
Originations 694.6 832.7 (138.0) (17)
Corporate Items and Other 334.1 363.3 (29.2) (8)
$ 11,814.0 $ 11,670.4 $ 143.6 1 %
Book value per share $ 68.83 $ 51.77 $ 17.06 33 %
67
-------------------------------------------------------------------------------- Total assets increased$212.9 million , or 2%, betweenDecember 31, 2021 andSeptember 30, 2022 due to a$464.1 million increase in our MSR portfolio mostly attributed to fair value gains due to rising interest rates and additions through purchases and retained servicing on loan sales, partially offset by a sale of MSRs to an unrelated third party, and a$194.6 million increase in Loans held for investment, mostly driven by our reverse mortgage origination and bulk acquisition. These increases were offset by a$198.9 million decline in our loans held for sale portfolio driven by lower forward loan production volumes than sales, a$130.9 million decrease in other assets mostly attributable to the decrease in contingent repurchase rights related to delinquent loans that have been repurchased under the Ginnie Mae EBO program, and a$130.0 million decline in servicing advances, mainly due to seasonal reduction of escrow balances, increased recoveries on delinquent and default loans, and loan repurchases under the Ginnie Mae EBO program. Total liabilities increased by$143.6 million , or 1%, as compared toDecember 31, 2021 , with similar effects as described above. Our HMBS-related borrowings increased by$323.4 million due to the continued growth of our reverse mortgage business and its securitization. The$184.8 million increase in Other financing liabilities is primarily due to additional transfers of MSRs to MAV in the nine months endedSeptember 30, 2022 which did not qualify for sale accounting and related fair value changes, and the new$36.2 million ESS financing liability. Borrowings under our MSR financing facilities increased$119.8 million to fund the increase in our MSR portfolio. Our borrowings under warehouse lines declined$265.5 million due to lower loan production volumes. Advance match funded liabilities decreased$54.8 million consistent with the decline in Servicing advances. Senior notes, net decreased$17.7 million mostly due to our repurchase of$25.0 million PMC 7.875% Senior Secured Notes dueMarch 2026 in the second quarter of 2022. Other liabilities declined$146.4 million mostly due to a decrease in the Ginnie Mae contingent repurchase rights of delinquent loans. Total equity increased$69.4 million during the nine months endedSeptember 30, 2022 mostly due to$105.4 million net income, partially offset by$38.7 million stock repurchased under the$50.0 million repurchase program approved inMay 2022 . See Note 15 - Stockholders' Equity for additional information.
Key Trends
The following discussion provides information regarding certain key drivers of
our financial performance. Also refer to the Segment results of operations
section for further detail, the description of our business environment,
initiatives and risks.
Servicing and subservicing fee revenue - Our servicing fee revenue is a function
of the volume being serviced - UPB for servicing fees and loan count for
subservicing fees. We expect we will continue to replenish and grow our
servicing portfolio through our multi-channel Originations platform and through
MAV and other capital partners for the remainder of 2022. In addition, we
continuously evaluate the relative mix between servicing and subservicing
volume.
Gain on sale of loans held for sale - Our gain on sale is driven by both volume
and margin and is channel-sensitive. Origination volume is negatively impacted
by rising interest rates, high inflation and home price appreciation due to
limited housing supply, among other recent market conditions. We expect volumes
in our Consumer Direct channel to remain at depressed levels absent any
significant interest rate decrease and expect lower margins due to heightened
competition. We expect to continue to prudently manage our Correspondent volume
at margins that are accretive to the business.
Reverse mortgage revenue, net - The reverse mortgage origination gain is driven
by the same factors as gain on sale of loans held for sale, with smaller volumes
in the reverse mortgage market and generally larger margins. With our experience
and brand in the marketplace, we expect to continue to maintain or prudently
grow our volumes albeit with some channel mix changes. We expect total
origination market volume to decline with rising interest rates and increased
volatility, and a downward trend in our margins due to continued uncertain
market interest rate and spread conditions. The fair value of the net reverse
servicing asset is expected to continue to follow market conditions, and is part
of our forward MSR hedging strategy.
MSR valuation adjustments, net - Our net MSR fair value changes include multiple
components. First, amortization of our investment is a function of the UPB,
capitalized value of the MSR relative to the UPB, and the level of scheduled
payments and prepayments. We expect the MSR realization of cash flows to
increase as we continue to grow our MSR portfolio. Second, MSR fair value
changes are driven by changes in interest rates and assumptions, such as
forecasted prepayments. Third, the MSR fair value changes are partially offset
by derivative fair value changes that economically hedge the MSR portfolio. We
are exposed to increased interest rate volatility due to our interest rate
sensitive GSE MSR portfolio. Our hedging strategy provides only partial hedge
coverage and we would expect net MSR fair value losses if interest rates drop
and conversely, net MSR fair value gains if interest rates rise. Refer to the
sensitivity analysis in Item 3 - Quantitative and Qualitative Disclosures About
Market Risk for further detail.
Operating expenses - Compensation and benefits are a significant component of
our cost-to-service and cost-to-originate and is directly correlated to
headcount levels. Headcount in Servicing is primarily driven by the number of
loans or UPB being serviced and subserviced, and by the relative mix of
performing, delinquent and defaulted loans. As servicing volume is expected to
modestly increase (see above), we expect a modest increase in our workforce with
partial offset from an increased relative share of performing loans. We expect
to continue to right size and prudently manage our Originations headcount and
68
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operating expenses to align with funded volume. Other operating expenses are
expected to correlate with volumes, with some productivity and efficiencies
expected through our technology and continuous improvement initiatives. A
continuing rise in inflation may result in higher operating expenses due to
increases in salaries and benefits and rates charged by our vendors.
Stockholders' equity - With the above considerations and uncertainties, we expect our businesses to generate net income and increase our equity, absent any significant adverse change in interest rates and if we continue to be successful in our business initiatives.
SEGMENT RESULTS OF OPERATIONS
Our activities are organized into two reportable business segments that reflect
our primary lines of business - Servicing and Originations - as well as a
Corporate Items and Other segment.
SERVICING
We earn contractual monthly servicing fees pursuant to servicing agreements pertaining to MSRs we own, which are typically payable as a percentage of UPB, as well as ancillary fees, including late fees, modification incentive fees, REO referral commissions, float earnings and convenience or other loan collection fees, where permitted. We also earn fees under both subservicing and special servicing arrangements with banks and other institutions, including MAV, that own the MSRs. Subservicing and special servicing fees are earned either as a percentage of UPB or on a per-loan basis. Subservicing per-loan fees typically vary based on type of investor and on loan delinquency status. As ofSeptember 30, 2022 , we serviced 1.4 million mortgage loans with an aggregate UPB of$283.3 billion . The average UPB of loans serviced during the third quarter of 2022 decreased by 1% or$3.2 billion compared to the second quarter of 2022, mostly driven by reductions in our forward subservicing portfolio and runoff, offset by owned MSR acquisitions and MAV acquisitions. Compared to the nine months endedSeptember 30, 2021 , the average UPB of loans serviced during the nine months endedSeptember 30, 2022 increased by 31% or$66.7 billion mostly due to MSR acquisitions, forward and reverse subservicing additions and MSR originations, offset in part by portfolio runoff. We manage the size of our servicing portfolio with our Originations business and by selectively purchasing MSRs based on capital allocation and financial return targets. InMay 2021 , PMC entered into a subservicing agreement with MAV for exclusive rights to service the mortgage loans underlying MSRs owned by MAV. MAV provides us with a source of additional subservicing volume, either with the MSRs that MAV purchases outright from third parties or with the MSRs that MAV purchases from PMC but the transactions do not achieve sale accounting. InNovember 2022 , we upsized MAV Canopy capacity with an additional$250 million capital commitment with Oaktree. Refer to Note 23 - Subsequent Events. In addition, inOctober 2021 , PMC acquired reverse mortgage subservicing contracts from MAM (RMS) and became its exclusive subservicer under a five-year subservicing agreement. PMC boarded approximately 40,000 and 19,000 additional reverse mortgage loans onto our servicing platform in the first quarter of 2022 and second quarter of 2022, respectively. Rithm (formerly NRZ) remains our largest subservicing client, accounting for 18% and 28% of the total serviced UPB and loan count, respectively, in our servicing portfolio as ofSeptember 30, 2022 . Rithm servicing fees retained by Ocwen represented approximately 10% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to Rithm, for the third quarter of 2022. and 12% the second quarter of 2022. This compares to 11% and 17% for the nine months endedSeptember 30, 2022 and 2021, respectively. Rithm's portfolio represents approximately 69% of all delinquent loans that Ocwen serviced, for which the cost to service and the associated risks are higher. Consistent with a subservicing relationship, Rithm is responsible for funding the advances we service for Rithm. The financial performance of our servicing segment is impacted by the changes in fair value of the MSR portfolio due to changes in market interest rates, among other factors. Our MSR portfolio is carried at fair value, with changes in fair value recorded in earnings within MSR valuation adjustments, net. The fair value of our MSRs is typically correlated to changes in market interest rates; as interest rates decrease, the value of the servicing portfolio typically decreases as a result of higher anticipated prepayment speeds, and the reverse is true. The sensitivity of MSR fair value to interest rates is typically higher for higher credit quality loans, such as our Agency loans. Our Non-Agency portfolio is significantly seasoned, with an average loan age of approximately 17 years, exhibiting little response to movements in market interest rates. Our hedging strategy is designed to reduce the volatility of the MSR portfolio to interest rates.
For those MSR sale transactions with Rithm and MAV that do not achieve sale
accounting treatment, we present on a gross basis the transferred MSR as an
asset at fair value and the corresponding liability amount as a pledged MSR
liability at fair value on our balance sheet. The changes in fair value of the
MSR are reflected as MSR valuation adjustments, net and the
69 -------------------------------------------------------------------------------- corresponding changes in fair value of the pledged MSR liability are reported within Pledged MSR liability expense. Similarly, we present on a gross basis the total servicing fees collected on behalf of Rithm and MAV within Servicing and subservicing fees, net and the total servicing fee remittance to Rithm and MAV within Pledged MSR liability expense. As ofSeptember 30, 2022 , we managed 18,063 loans under forbearance associated with borrowers impacted by the COVID-19 pandemic (or 1.3% of our total portfolio), 3,872 of which related to our owned MSRs, or 0.6% of our owned MSR servicing portfolio (excluding Rithm and MAV), a reduction of 37% and 43%, respectively, compared toDecember 31, 2021 .
Loan Resolutions
We have a strong track record of success as a leader in the servicing industry in foreclosure prevention and loss mitigation that helps homeowners stay in their homes and improves financial outcomes for mortgage loan investors. Reducing delinquencies also enables us to recover advances and recognize additional ancillary income, such as late fees, which we do not recognize on delinquent loans until they are brought current. Loan resolution activities address the pipeline of delinquent loans and generally lead to (i) modification of the loan terms, (ii) repayment plan alternatives, (iii) a discounted payoff of the loan (e.g., a "short sale"), or (iv) foreclosure or deed-in-lieu-of-foreclosure and sale of the resulting REO. Loan modifications must be made in accordance with the applicable servicing agreement as such agreements may require approvals or impose restrictions upon, or even forbid, loan modifications. To select an appropriate loan modification option for a borrower, we perform a structured analysis, using a proprietary model, of all options using information provided by the borrower as well as external data, including recent broker price opinions to value the mortgaged property. Our proprietary model includes, among other things, an assessment of re-default risk.
Our future financial performance will be less impacted by loan resolutions
because, under our Rithm agreements, Rithm receives all deferred servicing fees.
Deferred servicing fees related to delinquent borrower payments were
million
Rithm agreements.
Advance Obligation
As a servicer, we are generally obligated to advance funds in the event
borrowers are delinquent on their monthly mortgage related payments. We advance
principal and interest (P&I Advances), taxes and insurance (T&I Advances) and
legal fees, property valuation fees, property inspection fees, maintenance costs
and preservation costs on properties that have been foreclosed (Corporate
Advances). For certain loans in non-Agency securitization trusts, we have the
ability to cease making P&I advances and immediately recover advances previously
made from the general collections of the respective trust if we determine that
our P&I advances cannot be recovered from the projected future cash flows. With
T&I and Corporate advances, we continue to advance if net future cash flows
exceed projected future advances without regard to advances already made.
Most of our advances have the highest reimbursement priority (i.e., they are
"top of the waterfall") so that we are entitled to repayment from respective
loan or REO liquidation proceeds before any interest or principal is paid on the
bonds that were issued by the trust. In the majority of cases, advances in
excess of respective loan or REO liquidation proceeds may be recovered from
pool-level proceeds. The costs incurred in meeting these obligations consist
principally of the interest expense incurred in financing the servicing
advances. Most subservicing agreements, including our agreements with Rithm,
provide for prompt reimbursement of any advances from the owner of the servicing
rights.
Third-Party Servicer Ratings
Like other servicers, we are the subject of mortgage servicer ratings or
rankings (collectively, ratings) issued and revised from time to time by rating
agencies including Moody's, S&P and Fitch. Favorable ratings from these agencies
are important to the conduct of our loan servicing and lending businesses.
70
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The following table summarizes our key servicer ratings:
PHH Mortgage Corporation (PMC)
Moody's S&P Fitch
Forward
Residential Prime Servicer SQ3 Average RPS3+
Residential Subprime Servicer SQ3 Average RPS3+
Residential Special Servicer SQ3 Average RSS3
Residential Second/Subordinate Lien Servicer SQ3 Average RPS3
Residential Home Equity Servicer - - RPS3
Residential Alt-A Servicer - - RPS3
Master Servicer SQ3+ Above Average RMS3
Ratings Outlook N/A Stable Positive / Stable
Date of last action September 28, 2021 June 29, 2021 August 2, 2022
Reverse
Residential Reverse Servicer - Above Average - Ratings Outlook - Stable - Date of initial rating - May 27, 2022 - In addition to servicer ratings, each of the agencies will from time to time assign an outlook (or a ratings watch such as Moody's review status) to the rating status of a mortgage servicer. A negative outlook is generally used to indicate that a rating "may be lowered," while a positive outlook is generally used to indicate a rating "may be raised. OnSeptember 28, 2021 , Moody's upgraded the servicer quality (SQ) assessment for PMC as a master servicer of residential mortgage loans from SQ3 to SQ3+, reflecting solid reporting and remitting processes and proactive servicer oversight. OnJune 29, 2021 , S&P affirmed PMC's servicer rating as Average, raising management and organization ranking to Above Average. In addition, S&P raised PMC's master servicer rating from Average to Above Average reflecting the industry experience of PMC's management, multiple levels of internal controls to monitor operations, and resolution of regulatory actions, among other factors mentioned by S&P. OnAugust 2, 2022 , Fitch affirmed and upgraded PMC's servicer ratings and upgraded its outlook from Stable to Positive for prime and subprime products. The ratings for the other products remain the same and the related rating outlook remains Stable. The ratings reflect PMC's strong post-pandemic performance, effective enterprise-wide risk environment and compliance management framework, competitive loan servicing performance metrics, and highly automated technology environment. The ratings also consider the financial condition of PMC's parent,Ocwen Financial Corporation . The upgrades and positive outlook on PMC's prime and subprime servicer ratings are reflective of the company's continued portfolio growth, diversified sourcing strategies and improved performance with respect to these loan types, which represent 85% of the total servicing portfolio. OnMay 27, 2022 , S&P assigned an Above Average ranking to PMC as a residential reverse mortgage loan servicer. The ranking outlook is Stable. This is the initial rating for PMC as a reverse mortgage loan servicer. S&P's ranking reflects i) PMC's highly experienced management teams and staff with sound overall levels of turnover, ii) well-designed information technology infrastructure, cybersecurity controls, and business continuity and disaster recovery processes, iii) sound internal control environment, with multiple lines of defense and automated systems to support each function, iv) lack of material internal or external audit findings noted, based on provided reports, v) good focus on systems and workflow automation throughout loan administration processes, vi) robust default management function and claims processes, vii) scale as one of the largest reverse mortgage servicer's in the country, with highly experienced management and staff and technology largely from prior established legacy reverse servicers; ix) and good overall reverse servicing performance metrics, except for the elevated home retention department management and staff turnover rates and call center metrics in the contact center operations. 71 --------------------------------------------------------------------------------
The following table presents selected results of operations of our Servicing
segment. The amounts presented are before the elimination of balances and
transactions with our other segments:
Three Months Ended Nine Months Ended
September 30, June 30 September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Revenue
Servicing and subservicing
fees $ 215.0 $ 214.5 - % 641.7 $ 556.9 15 %
Gain (loss) on loans held for
sale, net 0.2 (11.5) (102) (14.0) 39.2 (136)
Reverse mortgage revenue, net (3.6) (19.0) (81) (34.5) (0.5) n/m
Other revenue, net 0.3 0.4 (25) 1.1 1.3 (15)
Total revenue 211.8 184.4 15 594.3 596.9 -
MSR valuation adjustments,
net 89.6 30.4 195 168.3 (101.8) (265)
Operating expenses
Compensation and benefits 33.6 34.9 (4) 97.5 74.9 30
Servicing expense 15.9 15.6 2 42.4 72.0 (41)
Occupancy and equipment 7.6 7.7 (1) 23.2 18.7 24
Professional services 9.6 3.4 182 19.9 24.2 (18)
Technology and communications 5.8 6.6 (12) 18.9 17.0 11
Corporate overhead
allocations 12.0 11.7 3 34.8 36.5 (5)
Other expenses 1.7 2.6 (35) 6.3 4.0 58
Total operating expenses 86.1 82.5 4 242.9 247.2 (2)
Other income (expense)
Interest income 2.9 3.0 (3) 9.9 4.9 102
Interest expense (30.9) (22.3) 39 (76.3) (57.9) 32
Pledged MSR liability expense (131.7) (74.1) 78 (292.7) (168.8) 73
Earnings of equity method
investee 3.3 3.9 (15) 19.3 1.3 n/m
Other, net (4.0) (4.3) (7) (7.6) 4.8 (258)
Total other income (expense),
net (160.3) (93.7) 71 (347.4) (215.7) 61
Income (loss) before income
taxes $ 55.0 $ 38.6 42 % $ 172.3 $ 32.2 435 %
n/m: not meaningful
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The following table provides selected operating statistics:
September 30, June 30, September 30,
2022 2022 % Change 2021 % Change
Assets Serviced
Unpaid principal balance (UPB) in billions:
Performing loans (1) $ 268.9 $ 273.4 (2) % $ 239.7 12 %
Non-performing loans 13.9 14.2 (2) 7.7 81
Non-performing real estate 0.6 0.7 (14) 0.8 (25)
Total $ 283.3 $ 288.3 (2) % $ 248.3 14 %
Conventional loans (2) $ 180.9 $ 185.5 (2) % $ 145.9 24 %
Government-insured loans 29.9 29.3 2 33.4 (10)
Non-Agency loans 72.5 73.5 (1) 69.0 5
Total $ 283.3 $ 288.3 (2) % $ 248.3 14 %
Servicing portfolio (3) $ 131.7 $ 124.4 6 % $ 144.6 (9) %
Subservicing portfolio
Subservicing - forward 29.5 42.2 (30) 23.9
23
Subservicing - reverse 24.1 25.0 (4) - n/m Total subservicing 53.6 67.2 (20) 23.9 124 MAV (4) (5) 47.8 45.1 6 21.4 123 Rithm (formerly NRZ) (5) (6) 50.3 51.7 (3) 58.4 (14) Total$ 283.3 $ 288.3 (2) %$ 248.3 14 % Number (in 000's): Performing loans (1) 1,307.2 1,335.2 (2) % 1,255.6 4 % Non-performing loans Non-performing loans - Rithm 28.4 29.0 (2) 27.4
4
Non-performing loans - Other 34.0 35.0 (3) 13.7 148
62.4 63.9 (2) 41.1 52
Non-performing real estate 3.8 4.3 (12) 5.2 (27)
Total 1,373.4 1,403.4 (2) % 1,301.9 5 %
Conventional loans (2) 726.0 745.6 (3) % 608.6 19 %
Government-insured loans 160.9 167.5 (4) 190.6 (16)
Non-Agency loans 486.5 490.3 (1) 502.7 (3)
Total 1,373.4 1,403.4 (2) % 1,301.9 5 %
Servicing portfolio 600.0 581.9 3 % 675.9 (11) %
Subservicing portfolio
Subservicing - forward 104.1 148.5 (30) 93.2 12
Subservicing - reverse 99.1 104.2 (5) - n/m
Total subservicing 203.1 252.7 (20) 93.2 118
MAV (5) 180.5 169.6 6 90.1 100
Rithm (5) 389.8 399.2 (2) 442.8 (12)
Total 1,373.4 1,403.4 (2) % 1,301.9 5 %
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Three Months Ended Nine Months Ended
September 30, June 30 September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Prepayment speed (CPR) (7):
% Voluntary CPR 6.1 % 8.9 % (31) % 8.8 % 18.2 % (52) %
% Involuntary CPR 0.4 0.4 - 0.4 0.7 (43)
% Total CPR 9.8 12.5 (22) 12.4 21.8 (43)
Number of completed
modifications (in 000's) 4.8 4.8 - % 13.6 13.4 1 %
Revenue recognized in
connection with loan
modifications $ 5.8 $ 5.7 2 % $ 17.8 $ 20.5 (13) %
(1)Performing loans include those loans that are less than 90 days past due and
those loans for which borrowers are making scheduled payments under loan
modification, forbearance or bankruptcy plans. We consider all other loans to be
non-performing.
(2)Conventional loans include 67,752 and 68,985 prime loans with a UPB of $13.3
billion and $13.4 billion at September 30, 2022 and June 30, 2022 , respectively,
that we service or subservice. This compares to 77,522 prime loans with a UPB of
$14.2 billion at September 30, 2021 . Prime loans are generally good credit
quality loans that meet GSE underwriting standards.
(3)Includes $7.5 billion UPB of reverse mortgage loans that are recognized in
our consolidated balance sheet at September 30, 2022 .
(4)Includes $21.6 billion UPB subserviced, including $9.2 billion in interim
subservicing pending transfer off of the PMC servicing system in the fourth
quarter of 2022, and $26.2 billion UPB of MSRs sold to MAV that did not achieve
sale accounting treatment at September 30, 2022 . Excludes subserviced loans with
a UPB of $10.1 billion that have not yet transferred onto the PMC servicing
system as of September 30, 2022 .
(5)Loans serviced or subserviced pursuant to our agreements with Rithm or MAV.
(6)Includes $1.9 billion UPB of subserviced loans at September 30, 2022 .
(7)Total 3 and 9-month % CPR includes voluntary and involuntary prepayments, as
shown in the table, plus scheduled principal amortization.
The following table provides the rollforward of activity of our portfolio of
mortgage loans serviced that includes MSRs, whole loans and subserviced loans,
both forward and reverse:
Amount of UPB ($ in billions) Count (000's)
2022 2021 2022 2021
Portfolio at January 1 $ 268.0 $ 188.8 1,353.2 1,107.6
Additions (1) (2) 31.5 13.5 116.9 49.4
MSR sales (2) (11.1) - (38.9) (0.1)
Servicing transfers (2.3) (10.9) (9.0) (42.5)
Runoff (10.8) (12.1) (47.1) (51.2)
Portfolio at March 31 $ 275.3 $ 179.4 1,375.1 1,063.2
Additions 26.8 68.7 89.0 256.8
Sales - - (0.1) -
Servicing transfers (1) (4.0) - (16.1) (0.2)
Runoff (9.8) (10.7) (44.5) (49.9)
Portfolio at June 30 288.3 237.3 1,403.4 1,269.9
Additions (1) (3) (4) 13.7 26.5 42.7 97.9
Sales - - (0.1) -
Servicing transfers (1) (2) (11.2) (1.8) (39.3) (6.7)
Runoff (7.5) (13.7) (33.3) (59.2)
Portfolio at September 30 $ 283.3 $ 248.3 1,373.4 1,301.9
(1)Includes the volume UPB associated with short-term interim subservicing for
some clients as a support to their originate-to-sell business, where loans are
boarded and deboarded within the same quarter.
(2)Includes MSRs sold to an unrelated third party in the first quarter of 2022
consisting of 38,850 loans with a UPB of $11.1 billion , with the remaining
active loans transferred out of the PMC servicing system in the third quarter of
2022, and for which PMC performed interim subservicing.
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(3)Additions include purchased MSRs on portfolios consisting of 962 loans with a
UPB of $258.8 million that have not yet transferred to the PMC servicing system
as of September 30, 2022 . Because we have legal title to the MSRs, the UPB and
count of the loans are included in our reported servicing portfolio. The seller
continues to subservice the loans on an interim basis between the transaction
closing date and the servicing transfer date.
(4)Excludes MSRs acquired from unrelated third parties in the third quarter of
2022 consisting of 12,931 loans with a UPB of $4.1 billion for which PMC was
previously performing the subservicing.
The following table provides a breakdown of our servicer advances:
September 30, 2022 December 31, 2021
Principal and Foreclosures, bankruptcy, Principal and Foreclosures, bankruptcy,
Advances by investor type Interest Taxes and Insurance REO and other Total Interest Taxes and Insurance REO and other Total
Conventional $ 3 $ 34 $ 7 $ 44 $ 2 $ 66 $ 7 $ 75
Government-insured 2 22 20 44 1 55 23 79
Non-Agency 220 223 112 555 225 261 133 618
Total, net $ 224 $ 279 $ 139 $ 642 $ 228 $ 381 $ 164 $ 772
The following table provides selected operating statistics related to our
reverse mortgage loans reported within our Servicing segment:
September 30, June 30, September 30,
2022 2022 % Change 2021 % Change
Reverse Mortgage Loans
Unpaid principal balance (UPB) in
millions:
Loans held for investment (1) $ 7,090.4 $ 6,990.9 1 % $ 6,390.0 11 %
Active Buyouts (2) 49.1 46.7 5 31.6 55
Inactive Buyouts (2) 112.3 108.9 3 91.3 23
Total $ 7,251.8 $ 7,146.4 1 % $ 6,512.9 11 %
Inactive buyouts % to total 1.55 % 1.52 % 2 % 1.40 % 11 %
Future draw commitments (UPB) in
millions: 1,749.8 1,745.0 - % 1,247.4 40 %
Fair value in millions:
Loans held for investment (1) $ 7,268.0 $ 7,220.8 1 % $ 6,874.0 6 %
HMBS related borrowings 7,208.4 7,155.3 1 6,782.6 6
Net asset value $ 59.6 $ 65.5 (9) % $ 91.5 (35) %
Net asset value to UPB 0.84 % 0.94 % 1.43 %
(1)Securitized loans only; excludes unsecuritized loans reported within the
Originations segment.
(2)Buyouts are reported as Loans held for sale, Accounts Receivable or REO
depending on the loan and foreclosure status.
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Servicing and Subservicing Fees
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Loan servicing and
subservicing fees:
Servicing $ 83.3 $ 80.9 3 % $ 252.8 $ 246.4 3 %
Subservicing 18.9 20.4 (7) 53.9 9.0 499
MAV 19.3 18.8 3 54.7 1.6 n/m
Rithm 63.4 64.7 (2) 195.2 233.1 (16)
Servicing and subservicing
fees 184.9 184.8 - 556.6 490.0 14
Ancillary income 30.1 29.7 1 85.0 66.9 27
$ 215.0 $ 214.5 - % $ 641.7 $ 556.9 15 %
The $0.5 million increase in total servicing and subservicing fees for the three
months ended September 30, 2022 as compared to the three months ended June 30,
2022 is primarily driven by the increase in our average owned servicing
portfolio partially offset by the decrease in our average forward subservicing
and Rithm portfolios, as further discussed below.
The $84.8 million , or 15% increase in total servicing and subservicing fees in
the nine months ended September 30, 2022 as compared to the nine months ended
September 30, 2021 is primarily driven by our successful volume growth strategy,
selectively balanced between servicing and subservicing, and the gradual
replacement of the Rithm volumes with new relationships and volumes sourced by
our Originations business.
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The following table presents the respective drivers of residential loan
servicing (owned MSR) and subservicing fees.
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Servicing and subservicing fee
Servicing fee (owned MSR) $ 83.3 $ 80.9 3 % $ 252.8 $ 246.4 3 %
Average servicing fee (% of UPB)
(1) 0.28 0.28 - % 0.28 0.29 (3) %
Subservicing fee (excluding MAV
and Rithm) $ 18.9 $ 20.4 (7) $ 53.9 $ 9.0 499 %
Average monthly fee per loan (in
dollars) (2) $ 29 $ 27 7 $ 28 $ 12 133 %
Residential assets serviced
Average UPB ($ in billions):
Servicing portfolio - Owned $ 127.8 $ 123.7 3 % $ 129.0 $ 121.5 6 %
Subservicing portfolio
Subservicing - forward 33.1 42.9 (23) 35.1 21.0 67 %
Subservicing - reverse 24.6 24.6 - 21.5 - n/m
Total subservicing 57.7 67.5 (15) 56.6 21.0 170 %
MAV 46.4 42.3 10 41.1 7.4 455 %
Rithm 51.0 52.6 (3) 52.8 62.9 (16) %
Total $ 282.9 $ 286.1 (1) % $ 279.4 $ 212.7 31 %
Average number (in 000's):
Servicing portfolio 590.4 583.9 1 % 602.0 596.6 1 %
Subservicing portfolio
Subservicing - forward 116.6 152.2 (23) 124.8 83.6 49 %
Subservicing - reverse 101.6 102.7 (1) 88.2 - n/m
Total subservicing 218.2 254.9 (14) 213.0 83.6 155 %
MAV 174.9 160.9 9 157.5 31.8 395 %
Rithm 394.4 405.1 (3) 407.7 472.6 (14) %
1,377.9 1,404.8 (2) % 1,380.2 1,184.6 17 %
(1)Excludes owned reverse mortgages effective with the three months ended June
30, 2022 , Prior periods have been recast to conform to the current presentation.
(2)Excludes MAV portfolio and includes reverse subservicing in the three and
nine months ended September 30, 2022 and three months ended June 30, 2022 .
For the three months ended September 30, 2022 as compared to the three months
ended June 30, 2022 , servicing and subservicing fees were flat. The $2.4
million , or 3% increase in servicing fee income on our owned MSRs is due to a 3%
increase in our average UPB serviced, primarily driven by MSR originations and
acquisitions partially offset by runoff, and the $0.5 million increase in MAV
servicing fees due to our ongoing use of MAV to grow our servicing volume. These
increases were offset by a $1.5 million , or 7% decrease in subservicing fees
primarily due to a decline in average balance due to $11.1 billion interim
subserviced loans that transferred out of the PMC servicing system in the third
quarter of 2022 and a $1.3 million decline in fees collected on behalf of Rithm
due to portfolio runoff.
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The table above and fee structure reflects our strategy to grow our subservicing
business and the increased use of MAV to grow our servicing volume. Year over
year, when comparing the nine months ended September 30, 2022 with the nine
months ended September 30, 2021 , our subservicing fee income grew by $44.9
million and we generated a new source of fee income with the $54.7 million
servicing fee from MAV. On our owned MSR portfolio, servicing fee income
increased by $6.4 million or 3%. We achieved a total $66.6 million fee increase,
or 14%, despite a $37.9 million reduction in fees collected on behalf of Rithm
due to portfolio runoff. The $44.9 million increase in subservicing fees is
mostly due to the boarding of approximately 59,000 reverse mortgage loans under
the subservicing agreement with MAM (RMS) in the first half of 2022. The average
subservicing fee per loan increased from $12 to $28 dollars , driven by the
inclusion of reverse mortgage loans that yield relatively higher compensation
for both active and inactive loans.
The following table presents both servicing fees collected and subservicing fees
retained by Ocwen under the Rithm (formerly NRZ) agreements. See Note 8 - MSR
Transfers Not Qualifying for Sale Accounting for additional information.
Rithm servicing and subservicing fees Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30,
2022 2022 2022 2021
Servicing fees collected on behalf of
Rithm $ 63.4 $ 64.7 $ 195.2 $ 233.1
Servicing fees remitted to Rithm (1) (45.5) (46.0) (139.3) (165.1)
Retained subservicing fees on Rithm
agreements (2) $ 17.8 $ 18.8
Average Rithm UPB ($ in billions)$ 51.0 $ 52.6 $ 52.8 $ 62.9 Average annualized retained subservicing fees as a % of Rithm UPB 0.14 % 0.14 % 0.14 % 0.14 % (1)Reported within Pledged MSR liability expense. The Rithm servicing fee includes the total servicing fees collected on behalf of Rithm relating to the MSR sold but not derecognized from our balance sheet. Under GAAP, we separately present servicing fees collected and remitted on a gross basis, with the servicing fees remitted to Rithm reported as Pledged MSR liability expense. (2)Excludes ancillary income. For the three months endedSeptember 30, 2022 , the net retained fee on our Rithm portfolio declined$1.0 million as compared to the three months endedJune 30, 2022 . The net retained fee on our Rithm portfolio decreased$12.0 million in the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The decline in the Rithm fee collection and remittance is primarily driven by the decline in the average UPB of 3% and 16% in the three and nine months endedSeptember 30, 2022 , respectively, due to portfolio runoff and prepayments.
The following table presents the detail of our ancillary income:
Ancillary Income Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Late charges $ 10.6 $ 11.7 (9) % $ 32.3 $ 31.3 3 %
Reverse subservicing
ancillary fees 4.9 6.3 (22) 14.3 - n/m
Loan collection fees 2.6 2.9 (10) 8.5 8.6 (1)
Recording fees 1.8 2.6 (31) 7.7 10.6 (27)
Custodial accounts (float
earnings) 7.5 1.8 317 10.3 3.5
194
Boarding and deboarding fees 0.3 1.3 (77) 3.0 1.6 88 GSE forbearance fees 0.2 0.2 - 0.6 1.3 (54) Other 2.2 2.9 (24) 8.4 9.9 (15) Ancillary income$ 30.1 $ 29.7 1 %$ 85.0 $ 66.9 27 % Ancillary income for the three months endedSeptember 30, 2022 increased by$0.4 million as compared to the three months endedJune 30, 2022 primarily because of a$5.7 million increase in float earnings driven by the increase in interest rates, offset by a$1.4 million decline in reverse subservicing ancillary fees, a$1.0 million decrease in boarding and deboarding fees related to reverse mortgage loans, a$1.1 million decrease in late charges due to borrower payment behavior and a$1.8 million decline in all other fee categories. 78 -------------------------------------------------------------------------------- As compared to the nine months endedSeptember 30, 2021 , ancillary income increased by$18.1 million largely due to$14.3 million of reverse subservicing fees recognized during the nine months endedSeptember 30, 2022 on reverse mortgage loans boarded under the subservicing agreement with MAM (RMS) during the first and second quarters of 2022 and the fourth quarter of 2021. In addition, float earnings increased$6.8 million due to higher interest rates and recording fees were$2.9 million lower due to the reduction in payoff volume.
Gain (loss) on Loans Held for Sale, Net
Gain on loans held for sale, net for the three months endedSeptember 30, 2022 improved$11.7 million as compared to the three months endedJune 30, 2022 largely due to the$8.8 million loss recognized in the second quarter of 2022 on certain delinquent and aged loans repurchased in connection with the Ginnie Mae EBO program, net of the associated Ginnie Mae MSR fair value adjustment and advances. Loss on loans held for sale, net for the nine months endedSeptember 30, 2022 was$14.0 million , a$53.2 million unfavorable change as compared to a$39.2 million gain recognized in the nine months endedSeptember 30, 2021 . In addition to the EBO program repurchase of certain delinquent and aged loans discussed above, losses in the nine months endedSeptember 30, 2022 are driven by decreased volume and margins on redelivery gains of repurchased loans in connection withGinnie Mae loan modifications and EBO activities, that became minimal in 2022, as a result of higher market interest rates. The unfavorable change is also explained by a$22.5 million gain recorded in the nine months endedSeptember 30, 2021 related to the exercise of our servicer call rights of certain Non-Agency trusts.
Reverse Mortgage Revenue, Net
Reverse mortgage revenue, net reported in the Servicing segment is the net
change in fair value of securitized loans held for investment and HMBS-related
borrowings. Reverse mortgage revenue, net excludes reverse subservicing that is
reflected in Servicing and subservicing fees. The following table presents the
components of the net fair value change and is comprised of net interest income
and other fair value gains or losses. Net interest income is primarily driven by
the volume of securitized UPB as it is the interest income earned on the
securitized loans offset against interest expense incurred on the HMBS-related
borrowings, and represents a component of our compensation for servicing the
portfolio, that is a percentage of the outstanding UPB. Other fair value changes
are primarily driven by changes in market-based inputs or assumptions. Lower
interest rates generally result in favorable net fair value impacts on our HECM
reverse mortgage loans and the related HMBS financing liability and higher
interest rates generally result in unfavorable net fair value impacts. Note that
the fair value changes of the net asset value between securitized HECM loans and
HMBS (referred to as our reverse MSR) attributable to interest rate changes are
effectively used as a hedge of our forward MSR portfolio. See further
description of our hedging strategy in Item 3. Quantitative and Qualitative
Disclosures about Market Risk.
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Net interest income
(servicing fee) $ 5.5 $ 5.4 2 % $ 16.3 $ 14.9 9 %
Other fair value changes (1) (9.2) (24.5) (62) (50.8) (15.4) 230
Reverse mortgage revenue,
net (Servicing) $ (3.6) $ (19.0) (81) % $ (34.5) $ (0.5) n/m
(1)Includes
securitization for the three months ended
respectively, and
Reverse mortgage revenue, net increased$15.4 million for the three months endedSeptember 30, 2022 as compared to the three months endedJune 30, 2022 due to lower unrealized fair value losses on the HECM loan portfolio, net of HMBS, driven by higher fair value losses in the second quarter of 2022 due to wider yield spreads and other unfavorable model assumptions. For the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 , Reverse mortgage revenue, net declined$34.0 million primarily due to higher unrealized fair value losses, driven by increasing interest rates and widening yield spread directly impacting projected asset life and the tail value of the HECM reverse mortgage loans. Tail value declined by$0.2 million and$7.6 million in the three and nine months endedSeptember 30, 2022 , respectively. Tails represent the future draws of borrowers, scheduled and unscheduled, as well as capitalized interest and are included in the fair value of the underlying loans. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach the 98% maximum claim amount liquidation event more quickly. Tails are securitized on a monthly basis and a widening yield spread results in lower cash gain on securitization. 79 --------------------------------------------------------------------------------
MSR Valuation Adjustments, Net
The following tables summarize the MSR valuation adjustments, net reported in
our Servicing segment, with the breakdown of the total MSRs recorded on our
balance sheet between our owned MSRs and the MSRs transferred to Rithm (formerly
NRZ) and MAV that did not achieve sale accounting treatment:
Three Months Ended September 30, 2022 Three Months Ended June 30, 2022
Pledged MSR Pledged MSR
(Rithm and MAV) (Rithm and MAV)
Total (1) Owned MSR (1) (2) Total (1) Owned MSR (1) (2)
Runoff (3) $ (68.6) $ (45.0) $ (23.6) $ (67.6) $ (38.8) $ (28.8)
Rate and assumption change
(1) 184.0 93.2 90.8 115.1 75.2 39.9
Hedging gain (loss) (25.8) (25.8) - (17.0) (17.0) -
Total $ 89.6 $ 22.4 $ 67.2 $ 30.4 $ 19.3 $ 11.1
Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021
Pledged MSR Pledged MSR
(Rithm and MAV) (Rithm and MAV)
Total (1) Owned MSR (2) Total (1) Owned MSR (1) (2)
Runoff (3) $ (209.1) $ (128.4) $ (80.6) $ (175.1) $ (114.8) $ (60.3)
Rate and assumption change
(1) 500.2 314.1 186.2 102.2 30.9 71.3
Hedging gain (loss) (122.9) (122.9) - (28.9) (28.9) -
Total $ 168.3 $ 62.8 $ 105.5 $ (101.8) $ (112.8) $ 11.0
(1)Excludes gains of $3.6 million and $2.6 million in the three months ended
September 30, 2022 and June 30, 2022 , respectively, and $7.3 million and $18.7
million in the nine months ended September 30, 2022 and 2021, respectively, on
the revaluation of MSRs purchased at a discount, that is reported in the
Originations segment as MSR valuation adjustments, net. Effective in the first
quarter of 2022, we recognize revaluation gains or losses on Fannie Mae MSRs
purchased through the Agency Cash Window Program within the Servicing segment
that were historically reported in the Originations segment. Segment results for
prior periods have been recast to conform to the current segment presentation.
Such revaluation gains were $1.5 million for the nine months ended September 30,
2021 .
(2)MSR sale transactions with Rithm and MAV that do not achieve sale accounting
treatment. See Note 8 - MSR Transfers Not Qualifying for Sale Accounting for
further information.
(3)The terms runoff and realization of expected future cash flows may be used
interchangeably within this discussion.
We reported an $89.6 million gain in MSR valuation adjustments, net for the
three months ended September 30, 2022 , comprised of a $22.4 million gain on our
owned MSRs and a $67.2 million gain on the MSRs transferred to Rithm and MAV.
The $22.4 million gain on our owned MSRs for the three months ended September
30, 2022 is comprised of a $93.2 million gain on the MSR portfolio attributable
to rate and assumption changes, a $25.8 million hedging loss and $45.0 million
MSR portfolio runoff. MSR portfolio runoff represents the realization of
expected cash flows and yield based on projected borrower behavior, including
scheduled amortization of the loan UPB together with projected voluntary
prepayments. The fair value gain due to rate and assumption changes is primarily
due to an increase in market interest rates (e.g., the 10-year swap rate
increased by 81 basis points in the three months ended September 30, 2022 ),
partially offset by an increase in the Agency discount rate and certain other
model assumption updates.
The $59.2 million increase in gain on MSR valuation adjustments, net for the
three months ended September 30, 2022 as compared to the three months ended June
30, 2022 is primarily due to a $68.9 million increase in the gain attributed to
rate and assumption change, partially offset by an $8.8 million increase in the
hedging loss. The higher fair value gains attributed to rate and assumption
change are mostly driven by higher increases in rates in the respective periods.
The 10-year swap rate increased by 81 basis points in the third quarter of 2022
and 65 basis points in the second quarter of 2022. Our MSR hedging policy is
designed to reduce the volatility of the MSR portfolio fair value due to market
interest rates. Refer to Item 3 - Quantitative and Qualitative Disclosures about
Market Risk for further detail on our hedging strategy and its effectiveness.
For the nine months ended September 30, 2022 , we reported a $168.3 million gain
in MSR valuations, net as compared to a loss of $101.8 million for the nine
months ended September 30, 2021 . This favorable variance of $270.1 million is
due to a $398.0 million increase in the gain attributed to rate and assumption
change offset by an $94.0 million increase in the hedging loss and a $34.0
million increase in runoff. The increase in gain on rate and assumption change
is primarily due to an increase in market interest rates (e.g., the 10-year swap
rate increased by 228 basis points in the nine months ended September 30, 2022
and increased by 58 basis points in the nine months ended September 30, 2021 ).
The increase in runoff is due to an increase in MSR portfolio size mostly due to
significant bulk MSR acquisitions.
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The following table provides information regarding the changes in the fair value
and the UPB of our portfolio of owned MSRs (excluding Rithm and MAV related
MSRs) during the third quarter of 2022, with the breakdown by investor type.
Owned MSR Fair Value (1) Owned MSR UPB ($ in billions) (1)
GSEs Ginnie Mae Non- Total GSEs Ginnie Mae Non- Total
Agency Agency
Beginning balance $ 1,281.4 $ 158.5 $ 112.7 $ 1,552.6 $ 88.9 $ 11.6 $ 15.8 $ 116.3
Additions
New cap. 54.5 15.5 - 70.0 4.5 0.6 - 5.1
Purchases 68.2 7.3 - 75.5 5.9 0.5 - 6.4
Sales/servicing
transfers - - - - - - - -
Sales/calls (3) (14.2) - - (14.2) (1.2) - - (1.2)
Change in fair value:
Inputs and assumptions
(2) 67.5 13.5 19.3 100.3 - - - -
Realization of cash
flows (33.3) (3.5) (4.4) (41.2) (2.2) (0.4) (0.5) (3.1)
Ending balance $ 1,424.1 $ 191.3 $ 127.6 $ 1,743.0 $ 95.9 $ 12.3 $ 15.3 $ 123.4
Fair value
(% of UPB) 1.49 % 1.56 % 0.84 % 1.41 %
Fair value
multiple (4) 5.82 x 4.19 x 2.54 x 5.12 x
New cap. fair value
multiple (4) 4.83 x 4.51 x
(1)See Note 7 - Mortgage Servicing and Note 8 - MSR Transfers Not Qualifying for
Sale Accounting for further information on the Rithm and MAV portfolios.
(2)Mostly changes in interest rates, except for gains of $3.6 million on the
revaluation of purchased MSRs, that are reported in the Originations segment.
(3)Includes $14.4 million fair value and $1.2 billion UPB of MSR sales to MAV
that did not achieve sale accounting treatment.
(4)Multiple of average servicing fee and UPB.
The $67.2 million gain on the transferred MSRs not qualifying for sale
accounting (transferred to Rithm and MAV) for the three months ended September
30, 2022 includes $90.8 million fair value gain attributable to rates and
assumptions and $23.6 million runoff. The $90.8 million fair value gain
attributable to rates and assumptions during the three months ended September
30, 2022 is mostly driven by non-Agency prepayment assumption update, with
additional gain attributed to the increase in market rates during the quarter.
This MSR fair value gain is partially offset by a fair value loss recorded on
the associated Rithm and MAV MSR pledged liability. The runoff is explained by
the same factors underlying our owned MSR, discussed above, the transfers of
MSRs to MAV beginning in the third quarter of 2021 and the decline in the Rithm
MSR portfolio.
Compensation and Benefits
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Compensation and benefits $ 33.6 $ 34.9 (4) % $ 97.5 $ 74.9 30 %
Average Employment
India and other 2,761 2,637 5 % 2,634 2,429 8
U.S. 991 1,082 (8) 1,029 657 57
Total 3,752 3,719 1 % 3,663 3,086 19 %
Compensation and benefits expense for the three months ended September 30, 2022
declined $1.3 million , or 4%, as compared to the three months ended June 30,
2022 primarily due to a $1.8 million decrease in salaries and benefit expense,
mostly attributed to an 8% decrease in our average U.S. based headcount as part
of our cost reduction efforts, a $1.2 million decrease in estimated annual
incentive plan award, and a $0.9 million decrease in the fair value of
cash-settled share-based awards associated with the decline in our common stock
price during the quarter. These declines in expense were partially offset by a
$3.1 million increase in severance expense in connection with U.S. headcount
reductions.
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As compared to the nine months ended September 30, 2021 , Compensation and
benefits expense for the nine months ended September 30, 2022 increased $22.6
million , or 30%, primarily due to a $20.0 million increase in salaries and
benefit expense driven by a 19% increase in our average Servicing headcount,
mostly onshore. The increase in average servicing headcount primarily reflects
the hiring of employees to support the growth of the reverse servicing platform,
specifically the acquisition of reverse mortgage subservicing from MAM (RMS). In
addition, severance expense increased $2.6 million due to U.S. headcount
reductions in the third quarter of 2022 and commissions were $1.2 million higher
primarily driven by the MAM (RMS) acquisition. Partially offsetting these
increases in expense, incentive compensation decreased $2.2 million primarily
due to a $2.0 million decrease in cash-settled share-based awards expense
associated with the decrease in our common stock price and forfeitures of
unvested awards.
Servicing Expense
Servicing expense primarily includes claim losses and interest curtailments on
government-insured loans, provision expense for advances and servicing
representation and warranties, and certain loan-volume related expenses.
Servicing expense increased in the three months endedSeptember 30, 2022 by$0.3 million as compared to the three months endedJune 30, 2022 , primarily due to a$2.1 million increase in provision for indemnification related to private investor and government-insured loans largely offset by a$1.6 million decrease in satisfaction and interest on payoff expense due to lower payoffs. As compared to the nine months endedSeptember 30, 2021 , Servicing expense for the nine months endedSeptember 30, 2022 declined$29.6 million . The decline is primarily due to a$13.5 million decrease in satisfaction and interest on payoff expense attributable to lower payoff volume, an$8.7 million decrease in reverse subservicing expenses driven by the transfer of our owned reverse portfolio from a subservicer onto our platform beginning in the fourth quarter of 2021, a$4.5 million reduction in interim subservicing costs incurred on bulk acquisitions in the nine months endedSeptember 30, 2021 , a$1.7 million decline in provision expense on government-insured claims receivables primarily due to decreased claim volumes, and a$1.1 million net decrease in provision for indemnification driven by favorable settlements.
Other Operating Expenses
Other operating expenses (total operating expenses less Compensation and benefit expense and Servicing expense) for the three months endedSeptember 30, 2022 increased$4.6 million as compared to the three months endedJune 30, 2022 primarily due to a$6.2 million increase in Professional services expense offset in part by a$0.9 million decrease in bank charges. The increase in Professional services expense was driven by$4.8 million lower reimbursements received from mortgage loan investors related to prior year legal expenses and payments received following resolution of legacy litigation matters, and a$2.4 million increase in other litigation and legal expenses, partially offset by a$1.1 million decrease in other professional fees that was primarily due to costs incurred during three months endedJune 30, 2022 related to MSR sales and our reverse subservicing business. The decrease in bank charges is mostly due to higher earning credits, driven by an increase in interest rates. Other operating expenses increased by$2.7 million for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . Occupancy and equipment expense increased$4.5 million primarily due to an increase in printing and mailing expenses mostly as a result of the increase in the average number of loans serviced and additional mailing driven by our acquisition of reverse mortgage subservicing. Technology and communications increased$1.9 million primarily due to higher fees related to our forward loan servicing system driven by the increase in the average number of loans serviced. Other expense increased by$2.3 million driven primarily by the$3.3 million amortization expense recognized during the nine months endedSeptember 30, 2022 on the reverse subservicing contract intangible asset recorded inOctober 2021 andApril 2022 as part of the transactions with MAM (RMS), partially offset by a$1.6 million decrease in bank charges driven by increased earning credits due to interest rate increases. Offsetting these increases, Professional services declined$4.3 million due to a$14.9 million decrease in legal expenses, mostly driven by reimbursements received from mortgage loan investors related to prior year legal expenses and to payments received following resolution of legacy litigation matters, partially offset by an increase in other litigation and legal expenses and a$9.8 million increase in other professional fees primarily related to our reverse subservicing business and MSR sales. 82 --------------------------------------------------------------------------------
Other Income (Expense)
Other income (expense) primarily includes net interest expense and pledged MSR
liability expense.
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Interest expense
Advance match funded
liabilities $ 5.0 $ 2.8 79 % $ 10.5 $ 11.6 (9) %
Mortgage loan warehouse
facilities 2.0 1.8 11 6.9 6.0 15
MSR financing facilities 13.8 8.6 60 30.2 17.9 69
Corporate debt interest
expense allocation (1) 7.6 8.0 (5) 23.3 17.8 31
Escrow 2.4 1.2 100 5.4 4.5 20
Total interest expense $ 30.9 $ 22.3 39 % $ 76.3 $ 57.9 32 %
Average balances
Advances $ 640.0 $ 692.2 (8) % $ 693.7 $ 755.6 (8) %
Advance match funded
liabilities 436.1 467.9 (7) 463.9 511.9 (9)
Mortgage loan warehouse
facilities 153.8 205.1 (25) 242.1 245.4 (1)
MSR financing facilities 960.7 901.6 7 929.5 629.2 48
Effective average interest
rate
Advance match funded
liabilities 4.60 % 2.39 % 92 % 3.02 % 3.01 % - %
Mortgage loan warehouse
facilities 5.25 3.50 50 3.79 3.27 16
MSR financing facilities 5.76 3.80 52 4.33 3.80 14
Average 1ML 2.46 % 1.01 % 144 % 1.24 % 0.10 % n/m
Average 1M Term SOFR 2.44 % 0.92 % 165 % 1.19 % 0.04 % n/m
(1)Effective in the first quarter of 2022, interest expense on the OFC Senior
Secured Notes is no longer allocated to the Servicing segment. Corporate debt
interest expense allocation for prior periods has been recast to conform to the
current period presentation. The interest expense allocation adjustment for the
nine months ended September 30, 2021 is $14.7 million .
Interest expense for the three months ended September 30, 2022 increased by $8.6
million or 39% as compared to the three months ended June 30, 2022 , mostly due
to a $5.2 million increase in interest expense on MSR financing facilities and a
$2.2 million increase in interest expense on advance match funded facilities.
The increase in interest expense on MSR financing facilities is the result of a
larger MSR portfolio and higher funding costs driven by increases in reference
rates. The increase in interest expense on advance match funded facilities is
due to higher funding cost, driven by increasing market interest rates and our
repayment of low cost OMART term notes during three months ended September 30,
2022 , offset in part by lower average balances.
As compared to the nine months ended September 30, 2021 , interest expense for
the nine months ended September 30, 2022 increased $18.4 million , or 32%, due to
an overall increase in the average debt balances to finance the growth of the
MSR portfolio and a higher funding cost driven by increasing market interest
rates.
Interest income for the three months ended September 30, 2022 was mostly
unchanged as compared to the three months ended June 30, 2022 . As compared to
the nine months ended September 30, 2021 , interest income for the nine months
ended September 30, 2022 increased $5.0 million primarily due to higher Ginnie
Mae EBO loan repurchases and increasing interest rates.
Pledged MSR liability expense relates to the MSR transfers that do not qualify
for sale accounting and are presented on a gross basis in our financial
statements. See Note 8 - MSR Transfers Not Qualifying for Sale Accounting to the
Unaudited Consolidated Financial Statements. Pledged MSR liability expense
includes the servicing fee remittance for these transfers and the fair value
changes of the pledged MSR liability.
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The following table provides information regarding Pledged MSR liability
expense:
Three Months Ended Nine Months Ended
September 30, June 30 September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Net servicing fee remittance
(1) $ 61.1 $ 61.2 - % $ 183.6 $ 166.0 11 %
Pledged MSR liability fair
value (gain) loss (1) 67.2 11.1 505 105.5 11.0 859
Other 3.4 1.8 89 3.5 (8.1) (143)
Pledged MSR liability
expense $ 131.7 $ 74.1 78 % $ 292.7 $ 168.8 73 %
(1)See Note 8 - MSR Transfers Not Qualifying for Sale Accounting.
Pledged MSR liability expense for the three months endedSeptember 30, 2022 increased$57.6 million , as compared to the three months endedJune 30, 2022 , largely due to a$56.1 million increase in fair value losses. Fair value adjustments of our MSR pledged liability (losses in the first, second and third quarter of 2022 driven by rising interest rates) are partially offset by fair value adjustments (gains) to the related MSR asset, which are recorded in MSR valuation adjustments, net. Refer to the above discussions of MSR valuation adjustments, net (Pledged MSR) and Servicing and subservicing fees (Rithm and MAV). Pledged MSR liability expense for the nine months endedSeptember 30, 2022 increased$123.9 million , as compared to the nine months endedSeptember 30, 2021 , primarily due to a$94.5 million increase in fair value losses on the pledged MSR liability and a$17.6 million increase in net servicing fee remittance. These changes are largely driven by rising interest rates in the nine months endedSeptember 30, 2022 , as well as the launch of MAV in the second half of 2021 and the associated recognition of the MAV pledged MSR liability that is more interest rate sensitive than the Rithm pledged MSR liability. Fair value losses recognized in the nine months endedSeptember 30, 2022 include$14.1 million recognized in the first quarter of 2022 as a result of the amendment inMarch 2022 of the MAV Subservicing agreement to adjust down the ancillary income retained by PMC. Other, net expense for the nine months endedSeptember 30, 2022 increased$12.4 million , as compared to the nine months endedSeptember 30, 2021 , primarily due to$4.6 million deal call revenue recorded in 2021,$3.3 million loss on MSR recaptured and delivered to MAV for zero cash proceeds (offset by a corresponding amount recorded within Gain on loans held for sale, net),$3.3 million expense recognized in connection with the ESS financing transaction, and$2.3 million early payout protection in connection with our MSR sales.
ORIGINATIONS
We originate and purchase loans and MSRs through multiple channels, including retail, wholesale, correspondent, flow MSR purchase agreements, the Agency Cash Window and Co-issue programs and bulk MSR purchases. We originate and purchase conventional loans (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans) and government-insured (FHA,VA orUSDA ) forward mortgage loans. The GSEs andGinnie Mae guarantee these mortgage securitizations. We originate HECM loans, or reverse mortgages, that are mostly insured by the FHA and we are an approved issuer of HMBS that are guaranteed byGinnie Mae . Within retail, our Consumer Direct channel for forward mortgage loans focuses on targeting existing servicing customers by offering them competitive mortgage refinance opportunities, where permitted by the governing servicing and pooling agreement. In doing so, we generate revenues for our forward lending business and protect the servicing portfolio by retaining these customers. A portion of our servicing portfolio is susceptible to refinance activity during periods of declining interest rates. Origination recapture volume and related gains are a natural economic hedge, to a certain degree, to the impact of declining MSR values as interest rates decline. To the extent we refinance a loan underlying the MSRs subject to the MAV Subservicing Agreement, we are obligated to transfer such recaptured MSR to MAV under the terms of the Joint-Marketing Agreement. In addition to refinance activities, our Consumer Direct channel targets purchase mortgage loans, cash-out, debt consolidation, mortgage insurance premium reduction, and new customer acquisition. Our forward lending correspondent channel drives higher servicing portfolio replenishment. We purchase closed loans that have been underwritten to investor guidelines from our network of correspondent sellers and sell and securitize them, on a servicing retained basis. We offer correspondent sellers the choice to take out mandatory or best efforts contracts, under which the seller's obligation to deliver the mortgage loan becomes mandatory only when and if the mortgage is closed and funded. Additionally, we offer correspondent sellers the opportunity to leverage a non-delegated underwriting option for best-efforts deliveries. As ofSeptember 30, 2022 , we have relationships with 558 approved correspondent sellers, or 120 new sellers sinceDecember 31, 2021 . 84 -------------------------------------------------------------------------------- We originate and purchase reverse mortgage loans through retail, wholesale, correspondent lending channels under the guidelines of the HECM reverse mortgage insurance program of the FHA. Loans originated under this program are generally insured by the FHA, which provides protection against risk of borrower default. After origination, we package and sell the loans in the secondary mortgage market, through GSE andGinnie Mae securitizations on a servicing retained basis. Origination revenue mostly includes interest income earned for the period the loans are held by us, gain on sale revenue, which represents the difference between the origination or purchase value and the sale value of the loan including its MSR value, and fee income earned at origination. As the securitizations of reverse mortgage loans do not achieve sale accounting treatment and the loans are classified as loans held for investment, at fair value, reverse mortgage revenues include the fair value changes of the loan from lock date to securitization date. We provide customary origination representations and warranties to investors in connection with our GSE loan sales and securitization activities. We receive customary origination representations and warranties from our network of approved correspondent lenders. We recognize the fair value of the liability for our representations and warranties at the time of sale. In the event we cannot remedy a breach of a representation or warranty, we may be required to repurchase the loan or provide an indemnification payment to the mortgage loan investor. To the extent that we have recourse against a third-party originator, we may recover part or all of any loss we incur. We actively monitor our counterparty risk associated with our network of correspondent lenders-sellers. We purchase MSRs through flow purchase agreements, the Agency Cash Window programs and bulk MSR purchases. The Agency Cash Window programs we participate in, and purchase MSR from, allow mortgage companies and financial institutions to sell whole loans to the respective agency and sell the MSR to the winning bidder servicing released. In addition, we partner with other originators to replenish our MSRs through flow purchase agreements. We do not provide any origination representations and warranties in connection with our MSR purchases through MSR flow purchase agreements or Agency Cash Window programs. As ofSeptember 30, 2022 , we have relationships with 217 approved sellers through the Agency Cash Window co-issue programs, or 63 new sellers sinceDecember 31, 2021 . We initially recognize our MSR origination with the associated economics in our Originations segment, and transfer the MSR to our Servicing segment once the MSR is initially recognized on our balance sheet with all subsequent performance associated with the MSR, including funding cost, run-off and other fair value changes reflected in our Servicing segment. However, effective first quarter of 2022, we report MSRs purchased through the Fannie Mae Cash Window program and the associated economics in our Servicing segment upon acquisition, as such MSRs are transferred to MAV monthly under an MSR flow sale agreement and subserviced by PMC. Segment results for prior periods have been recast as applicable to conform to the current segment presentation. See the "MSR Valuations Adjustments, net" section below for additional information. We source additional servicing volume through our subservicing and interim servicing agreements, through our existing relationships and our enterprise sales initiatives. We do not report any revenue or gain associated with subservicing within the Originations segment as the impact is captured in the Servicing segment. However, sales efforts and certain costs - marginal compensation and benefits - are managed and reported within the Originations segment. For the third quarter of 2022, our Originations business originated or purchased forward and reverse mortgage loans with a UPB of$5.2 billion and$292.3 million , respectively. In addition, we purchased$2.0 billion UPB MSR through the Agency Cash Window and flow purchase programs during the third quarter of 2022. 85 --------------------------------------------------------------------------------
The following table presents the results of operations of our Originations
segment. The amounts presented are before the elimination of balances and
transactions with our other segments:
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Revenue
Gain on loans held for sale, net $ 20.7 $ 12.5 66 % $ 46.1 $ 94.5 (51) %
Reverse mortgage revenue, net 10.5 16.4 (36) 51.9 56.7 (8)
Other revenue, net (1) 7.0 7.3 (4) 21.6 29.3 (26)
Total revenue 38.3 36.3 6 119.6 180.4 (34)
MSR valuation adjustments, net (2) 3.6 2.6 38 7.3 18.7 (61)
Operating expenses
Compensation and benefits 17.6 24.6 (28) 70.6 71.9 (2)
Origination expense 2.2 3.5 (37) 9.3 9.6 (3)
Occupancy and equipment 0.9 1.3 (31) 3.8 4.8 (21)
Technology and communications 2.3 2.6 (12) 7.4 6.6 12
Professional services 1.0 1.5 (33) 4.2 7.5 (44)
Corporate overhead allocations 6.0 5.5 9 16.7 14.8 13
Other expenses 3.2 3.6 (11) 9.9 6.6 50
Total operating expenses 33.3 42.5 (22) 122.0 121.9 -
Other income (expense)
Interest income 10.4 6.6 58 19.9 10.8 84
Interest expense (8.9) (5.1) 75 (18.3) (14.8) 24
Other, net (0.6) 0.3 (300) (1.7) - n/m
Total other income (expense), net 0.8 1.8 (56) (0.1) (4.0) (98)
Income (loss) before income taxes $ 9.5 $ (1.8) (628) % $ 4.8 $ 73.2 (93) %
(1)Includes ancillary fee income related to MSR acquisitions reported as
Servicing and subservicing fees at the consolidated level of $0.6 million and
$0.6 million for the three months ended September 30, 2022 and June 30, 2022 ,
respectively, and $1.6 million and $5.8 million for the nine months ended
September 30, 2022 and September 30, 2021 , respectively.
(2)Effective in the first quarter of 2022, we report MSRs purchased through the
Fannie Mae Cash Window program and the associated economics in our Servicing
segment upon acquisition, as such MSRs are transferred to MAV monthly under an
MSR flow sale agreement and subserviced by PMC. Segment results for prior
periods have been recast as applicable to conform to the current segment
presentation. The MSR valuation adjustments, net reclassified to the Servicing
segment for the nine months ended September 30, 2021 was $1.5 million .
86
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The following table provides selected operating statistics for our Originations
segment:
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Loan Production by Channel
Forward loans
Correspondent $ 5,074.7 $ 3,937.4 29 % $ 11,686.1 $ 10,509.5 11 %
Consumer Direct 157.2 323.7 (51) 1,143.6 1,706.4 (33)
$ 5,231.9 $ 4,261.1 23 % $ 12,829.8 $ 12,215.9 5 %
% Purchase production 85 % 69 % 23 67 % 28 % 139
% Refinance production 15 31 (52) 34 72 (53)
Reverse loans (1)
Correspondent $ 116.0 $ 206.0 (44) % $ 603.5 $ 564.3 7 %
Wholesale 87.8 90.2 (3) 296.1 180.5 64
Retail 88.6 135.3 (35) 371.2 286.0 30
$ 292.3 $ 431.5 (32) % $ 1,270.9 $ 1,030.8 23 %
MSR Purchases by Channel
Agency Cash Window / Flow MSR
9,345.5$ 17,055.3 (45)% Bulk MSR purchases 4,333.8 - n/m 4,333.8 55,133.5 (92) Bulk reverse purchases - - n/m 209.1 - n/m$ 6,379.9 $ 3,207.9 99$ 13,888.3 $ 72,188.8 (81) Total$ 11,904.1 $ 7,900.6 51%$ 27,989.0 $ 85,435.5 (67)% Short term loan commitment (at period end) Forward loans$ 1,289.4 $ 526.2 145 %$ 1,289.4 $ 1,221.5 6 % Reverse loans 19.2 31.2 (38) 19.2 80.5 (76) Average Employment Forward U.S. 217 365 (41) 399 471 (15) India and other 338 413 (18) 422 333 27 555 778 (29) 821 804 2 Reverse U.S. 182 220 (17) 201 161 25 India and other 72 81 (11) 81 26 212 254 301 (16) 282 187 51 Total Originations 809 1,079 (25) % 1,103 991 11 %
(1)Loan production excludes reverse mortgage loan draws by borrowers disbursed
subsequent to origination that are reported within the Servicing segment.
87 --------------------------------------------------------------------------------
Gain on Loans Held for Sale, Net
The following table provides information regarding Gain on loans held for sale
by channel and the related forward loan origination volume and margins
(excluding fees that are presented in Other revenue, net):
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Gain on Loans Held for Sale (1)
Correspondent $ 13.8 $ 5.6 146 % $ 19.5 $ 13.7 42 %
Consumer Direct 7.0 7.0 - 26.6 80.8 (67)
$ 20.7 $ 12.5 66 % $ 46.1 $ 94.5 (51) %
% Gain on Sale Margin (2)
Correspondent 0.27 % 0.14 % 93 % 0.17 % 0.13 % 31 %
Consumer Direct 4.43 2.15 106 2.32 % 4.73 (51)
0.40 % 0.29 % 38 % 0.36 % 0.77 % (53) %
Origination UPB (3)
Correspondent $ 5,074.7 $ 3,937.4 29 % $ 11,686.1 $ 10,509.5 11 %
Consumer Direct 157.2 323.7 (51) 1,143.6 1,706.4 (33)
$ 5,231.9 $ 4,261.1 23 % $ 12,829.8 $ 12,215.9 5 %
(1)Includes realized gains on loan sales and related new MSR capitalization,
changes in fair value of IRLCs, changes in fair value of loans held for sale and
economic hedging gains and losses.
(2)Ratio of gain on Loans held for sale to Origination UPB. Note that the ratio
differs from the day-one gain on sale margin upon lock.
(3)Defined as the UPB of loans funded in the period.
Gain on loans held for sale, net for the three months ended September 30, 2022
increased by $8.2 million , or 66% as compared to the three months ended June 30,
2022 due to higher gains in the Correspondent channel, with a $1.1 billion , or
29% increase in loan production volume and increase in margin, as detailed in
the above table. In the third quarter of 2022, with our efforts to prudently
manage volatile market conditions and improve execution, we were able to
continue to grow volume at margin levels that met our targets. For the Consumer
Direct channel, Gain on sale was unchanged in the third quarter as compared to
the second quarter as the higher margin was offset by the reduction in loan
production volume. The Consumer Direct new production volume reduction is driven
by the rising interest rates during 2022, significantly reducing opportunities
for existing borrowers to refinance.
As compared to the nine months ended September 30, 2021 , Gain on loans held for
sale, net for the nine months ended September 30, 2022 declined $48.4 million ,
or 51% primarily due to a $54.2 million decrease in our Consumer Direct channel,
driven by a decline in margin and 33% decrease in loan production attributed to
this channel, as detailed in the above table. Our Consumer Direct channel
benefited from historical low rate conditions during the nine months ended
September 30, 2021 and was exposed to rapidly changing and unfavorable market
conditions for borrower refinancing due to rising interest rates during the nine
months ended September 30, 2022 . Our loan production volume for our
Correspondent channel increased $1.2 billion , or 11% as a result of our channel
growth strategy. On June 1, 2021 , we expanded our network of correspondent
lenders through the assignment by Texas Capital Bank (TCB) to us, of all its
correspondent loan purchase agreements with its correspondent sellers
(approximately 220 sellers). Margins of our Correspondent channel increased when
comparing the nine months ended September 30, 2022 with the nine months ended
September 30, 2021 due to our prudent pricing and growth of higher margin
execution, including best efforts during 2022, as discussed above.
88
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Reverse Mortgage Revenue, Net
The following table provides information regarding Reverse mortgage revenue, net
of the Originations segment that comprises fair value changes of the pipeline
and unsecuritized reverse mortgage loans held for investment, at fair value,
together with volume and margin:
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Origination UPB (1) $ 292.3 $ 431.5 (32) % $ 1,270.9 $ 1,030.8 23 %
Origination margin (2) 3.60 % 3.80 % (5) 4.08 % 5.50 % (26)
Reverse mortgage revenue, net
(Originations) (3) $ 10.5 $ 16.4 (36) % $ 51.9 $ 56.7 (8) %
(1)Defined as the UPB of loans funded in the period.
(2)Ratio of origination gain and fees - see (3) below - to origination UPB. Note
that the ratio includes gains or losses on interest rate lock commitments.
(3)Includes gain on new origination, and loan fees and other. Includes non-cash
gain on securitization of newly originated loans of $6.3 million and $27.6
million during the three and nine months ended September 30, 2022 , respectively,
$10.2 million for the three months ended June 30, 2022 , and $23.4 million during
the nine months ended September 30, 2021 .
We reported $10.5 million Originations Reverse mortgage revenue, net for the
three months ended September 30, 2022 , a $5.9 million , or 36% decrease as
compared to the three months ended June 30, 2022 . The decrease is driven by a
lower average margin in our retail channel and lower volume across the three
channels. Our higher-margin reverse retail channel generated a net $5.3 million
revenue decrease quarter over quarter due to the decline in volume as well as
margin. The decrease in margin is primarily due to the continued increase in
market interest rates and the widening of spreads.
As compared to the nine months ended September 30, 2021 , Reverse mortgage
revenue, net for the nine months ended September 30, 2022 decreased $4.8
million , or 8%. The decrease is primarily driven by lower margins in all three
channels, partially offset by a favorable increase in volume in each of our
channels. The lower margins were mostly due to the increase in market interest
rates and higher level of yield spread widening observed in the market. Our
higher-margin reverse Retail channel generated a net $1.8 million revenue
decrease in the nine months ended September 30, 2022 as compared to the same
period of 2021.
Other Revenue, net
Other revenue for the three months ended September 30, 2022 was mostly unchanged
as compared to the three months ended June 30, 2022 . As compared to the nine
months ended September 30, 2021 , Other revenue for the nine months ended
September 30, 2022 declined $7.7 million , primarily due to a $4.2 million
decline in ancillary fee income related to MSR acquisitions due to a decline in
bulk acquisitions and Agency cash window/flow purchases, and a $2.7 million
decline in setup fees earned for loans boarded on our servicing platform, mostly
related to flow purchases.
MSR Valuation Adjustments, Net
MSR valuation adjustments, net for the three months endedSeptember 30, 2022 increased$1.0 million as compared to the three months endedJune 30, 2022 due to additional revaluation gains on certain MSRs opportunistically purchased through the Agency Cash Window programs, and flow purchases. As an aggregator of MSRs, we may purchase MSRs from smaller originators with a purchase price at a discount to fair value and we recognize valuation adjustments for differences in exit markets in accordance with the accounting fair value guidance. We record such valuation adjustments as MSR valuation adjustments, net within the Originations segment since the segment's business objective is the sourcing of new MSRs at targeted returns. As compared to the nine months endedSeptember 30, 2021 , MSR valuation adjustments, net for the nine months endedSeptember 30, 2022 decreased 11.4 million. Opportunities for fair value discount or margins were greater in the early period of the pandemic and have reduced as markets normalized.
Operating Expenses
Operating expenses for the three months endedSeptember 30, 2022 decreased$9.2 million , or 22%, as compared to the three months endedJune 30, 2022 , primarily due to a$7.0 million , or 28% decrease in Compensation and benefits. The decrease in salaries and benefits expense of$3.9 million was mostly attributed to a 25% lower average total headcount. Forward Originations headcount, mostly Consumer Direct, declined in the three months endedSeptember 30, 2022 by 29% as part of our efforts to right size our resources to market opportunities. The$2.0 million decline in commissions was driven by lower Reverse origination volumes, and the$1.3 million decline in incentive compensation is mainly due to a decrease in the 89 -------------------------------------------------------------------------------- fair value of cash-settled share-based awards associated with the decrease in our common stock price during the quarter and a decrease in the estimated annual incentive plan award. Origination expense for the three months endedSeptember 30, 2022 decreased$1.3 million compared to the three months endedJune 30, 2022 , primarily due to a decrease in production volume in our Consumer Direct and Reverse channels. As compared to the nine months endedSeptember 30, 2021 , Operating expenses for the nine months endedSeptember 30, 2022 increased$0.1 million . Compensation and benefits decreased$1.3 million , or 2% with a$3.2 million decline in incentive compensation and retention bonuses and a$1.6 million decrease in salaries and benefit expense, offset by a$3.8 million increase in severance expense due to headcount reductions in the second and third quarters of 2022. The decline in incentive compensation and retention bonuses is primarily due to a decrease in the fair value of cash-settled share-based awards associated with the decrease in our common stock price atSeptember 30, 2022 as compared toSeptember 30, 2021 , and a reduction in employee retentions. Originations average total headcount increased 11% as compared to the nine months endedSeptember 30, 2021 , mostly in Reverse Originations reflecting an increase in loan production. The increase in headcount due to the acquisition of the TCB Correspondent network was largely offset by the decline in headcount in Consumer Direct. The offshore-to-total average headcount ratio for Originations increased from 36% for the nine months endedSeptember 30, 2021 to 46% for the nine months endedSeptember 30, 2022 . Other operating expenses increased$1.4 million primarily due to higher volumes compared to nine months endedSeptember 30, 2021 , including a$2.5 million increase in advertising expense mostly attributed to Reverse Originations and a$1.9 million increase in corporate overhead allocations offset by a$3.3 million decrease in Professional services, explained by outsourced surge resources utilized during the nine months endedSeptember 30, 2021 to support production volumes. Certain other operating expenses are variable, and as a result, as origination volume increased or decreased so did the related expenses. Examples include credit reports, appraisals, settlement fees, and tax service fees recorded in Origination expenses or certain outsourced services including surge resources recorded in Professional services.
Other Income (Expense)
Interest income consists primarily of interest earned on newly-originated and purchased loans prior to sale to investors. Interest expense is incurred to finance the mortgage loans prior to sale or securitization, which is generally within 15 days. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, commonly referred to as warehouse lines. Interest income for the three months endedSeptember 30, 2022 increased$3.8 million as compared to the three months endedJune 30, 2022 . As compared to the nine months endedSeptember 30, 2021 , interest income for the nine months endedSeptember 30, 2022 increased$9.1 million . These increases are primarily due to the increase in average held for sale loan balances due to higher forward loan production volumes and rising interest rates. Interest expense for the three months endedSeptember 30, 2022 increased$3.8 million as compared to the three months endedJune 30, 2022 due to an increase in effective interest rates driven by base rate increases and the increase in average warehouse facility debt balances due to higher forward loan production volumes. Interest expense for the nine months endedSeptember 30, 2022 increased$3.5 million compared to nine months endedSeptember 30, 2021 , primarily due to increase in average warehouse facility debt balances due to higher forward loan production volumes. CORPORATE ITEMS AND OTHER Corporate Items and Other includes revenues and expenses of corporate support services, our reinsurance business CRL, inactive entities, and our other business activities that are currently individually insignificant, revenues and expenses that are not directly related to other reportable segments, interest income on short-term investments of cash, gain or loss on repurchases of debt, interest expense on unallocated corporate debt and foreign currency exchange gains or losses. Interest expense on corporate debt is allocated to the Servicing segment and the Originations segment based on relative financing requirements. Effective in the first quarter of 2022, we no longer allocate the OFC Senior Secured Notes and related interest expense to the Servicing and Originations segments. Accordingly, the financing cost of the Servicing and Originations segments reflects and is consistent with the financing structure of the licensed entity PMC that carries out these businesses and does not depend on the financing structure strategy of its parent, as a holding company. Interest expense allocated to the Servicing and Originations segments for prior periods has been recast to conform to the current period presentation. The interest expense allocation adjustment for the nine months endedSeptember 30, 2021 is$14.9 million . Corporate support services include finance, facilities, human resources, internal audit, legal, risk and compliance, capital markets and technology functions. Certain expenses incurred by corporate support services are allocated to the Servicing and Originations segments using various methodologies intended to approximate the utilization of such services. Various measurements of utilization of corporate support services are maintained, primarily time studies, personnel volumes and service consumption levels. Support service costs not allocated to the Servicing and Originations segments are retained in the Corporate 90 --------------------------------------------------------------------------------
Items and Other segment along with certain other costs including certain
litigation and settlement related expenses or recoveries, and other costs
related to operating as a public company.
CRL, our wholly-owned captive reinsurance subsidiary, provides re-insurance related to coverage on REO properties owned or serviced by us. CRL assumes a quota share of REO insurance coverage written by a third-party insurer under a blanket policy issued to PMC. The underlying REO policy provides coverage for direct physical loss on commercial and residential properties, subject to certain limitations. Under the terms of the reinsurance agreement, CRL assumes a 60% quota share of premiums and all related losses and loss adjustment expenses incurred by the third-party insurer, effectiveMarch 2021 , with a 50% quota throughFebruary 2021 . The reinsurance agreement expiresDecember 31, 2023 , but may be terminated by either party at any time with six months advance written notice. The agreement will automatically renew for additional one-year terms unless either party provides 60 days advance written notice prior to renewal.
The following table presents selected results of operations of Corporate Items
and Other. The amounts presented are before the elimination of balances and
transactions with our other segments:
Three Months Ended Nine Months Ended
September 30, June 30 September 30, September 30,
2022 2022 % Change 2022 2021 % Change
Revenue
Reinsurance premiums (CRL) $ 1.5 $ 1.5 - % $ 4.6 $ 3.5 31 %
Other revenue 0.1 0.1 - 0.4 0.8 (50)
Total revenue 1.5 1.6 (6) 5.0 4.3 16
Operating expenses
Compensation and benefits 20.1 24.4 (18) 55.1 62.6 (12)
Professional services 6.6 3.8 74 14.0 29.6 (53)
Technology and communications 6.3 5.5 15 17.7 17.5 1
Occupancy and equipment 3.8 0.6 533 5.1
2.2 132 Servicing and origination 0.8 - n/m 0.6 0.4 50 Other expenses 2.3 2.2 5 7.0 4.8 46 Total operating expenses before corporate overhead allocations 40.0 36.5 10 99.4 117.0 (15) Corporate overhead allocations Servicing segment (12.0) (11.7) 3 (34.8) (36.5) (5) Originations segment (6.0) (5.5) 9 (16.7) (14.8) 13 Total operating expenses 22.1 19.4 14 47.9 65.8 (27) Other income (expense), net Interest income 0.5 0.1 400 0.7 0.3 133 Interest expense (10.6) (10.4) 2 (31.5) (29.9) 5 Gain (loss) on extinguishment of debt - 0.9 (100) 0.9 (15.5) (106) Other, net (0.9) (0.2) 350 (0.6) 0.8 (175) Total other income (expense), net (11.0) (9.6) 15 (30.5) (44.3) (31) Income (loss) before income taxes $ (31.5) $ (27.3) 15 %$ (73.4) $ (105.7) (31) % n/m: not meaningful Compensation and Benefits Compensation and benefits expense for the three months endedSeptember 30, 2022 declined$4.3 million , or 18%, as compared to the three months endedJune 30, 2022 primarily as a result of a$3.7 million decrease in incentive compensation and a$0.5 million decrease in severance. The decrease in incentive compensation is due to a$1.9 million decrease in the fair value of cash-settled share-based awards associated with the decline in our common stock price during the quarter, a$1.9 million decrease in estimated annual incentive plan award for 2022 and the reduction in headcount. The average Corporate 91 --------------------------------------------------------------------------------
headcount declined 11% and the offshore-to-total average headcount ratio
increased from 71% for the three months ended
months ended
As compared to the nine months endedSeptember 30, 2021 , Compensation and benefits expense for the nine months endedSeptember 30, 2022 decreased$7.5 million , or 12%, primarily as a result of a$9.6 million decrease in incentive compensation and a$2.0 million decline in salaries and benefit expense, partially offset by a$3.4 million increase in severance. The decline in incentive compensation is primarily due to a$7.4 million decrease of cash-settled share-based awards expense associated with the decrease in our common stock price and forfeitures of unvested awards, a$1.1 million decrease in estimated annual incentive plan award compensation for 2022 and the reduction in headcount. The decline in salaries and benefit expense and the increase in severance expense are due to headcount reductions as part of our cost reduction efforts. The average Corporate headcount declined by 13% and the mix between onshore and offshore was unchanged.
Professional Services
Professional services expense for the three months endedSeptember 30, 2022 increased$2.8 million , or 74%, as compared to the three months endedJune 30, 2022 primarily due to$2.1 million reimbursements received from mortgage loan investors in the second quarter of 2022 related to prior year legal expenses. As compared to the nine months endedSeptember 30, 2021 , Professional services expense for the nine months endedSeptember 30, 2022 declined$15.6 million , or 53%, primarily due to a$10.2 million decrease in legal expenses due to$6.8 million reimbursements received from mortgage loan investors related to prior year legal expenses in the nine months endedSeptember 30, 2022 and a decrease in expenses related to other legal matters. Other professional fees declined$5.6 million primarily due to$3.2 million of advisory fees related to our MSR investment joint venture with Oaktree, MAV Canopy, which closed onMay 3, 2021 and higher utilization of professional services in the nine months endedSeptember 30, 2021 , including consulting services related to corporate strategy and business initiatives. Occupancy and equipment expense for the three months endedSeptember 30, 2022 increased$3.2 million , or 533%, as compared to the three months endedJune 30, 2022 primarily due to$2.9 million facility repairs required in connection with our exit of ourNew Jersey leased office facility. As compared to the nine months endedSeptember 30, 2021 , Occupancy and equipment expense for the nine months endedSeptember 30, 2022 increased$2.9 million , or 132%, due to the same factors as described in the three-month discussion. Other operating expenses for the three months endedSeptember 30, 2022 remained mostly flat as compared to the three months endedJune 30, 2022 . Other operating expenses for the nine months endedSeptember 30, 2022 increased$2.2 million as compared to the nine months endedSeptember 30, 2021 primarily driven by license fees, increased travel expenses, and certain franchise tax credits in the nine months endedSeptember 30, 2021 .
Other Income (Expense)
Interest expense remained flat for the three months endedSeptember 30, 2022 as compared to three months endedJune 30, 2022 . The debt balance of the Corporate segment is comprised mostly of the OFC Senior Secured Notes issued by Ocwen (parent company) as the PMC Senior Secured Notes are largely allocated to the Servicing and Originations segments. As compared to the nine months endedSeptember 30, 2021 , interest expense for the nine months endedSeptember 30, 2022 increased$1.6 million , or 5%. The increase is primarily driven by a higher cost of corporate debt that is mostly due to the OFC senior secured notes issued onMarch 4, 2021 andMay 3, 2021 . The notes were issued to Oaktree together with warrants that resulted in an additional discount, the accretion of which is reported as interest expense. During the second quarter of 2022, we recognized a gain on debt extinguishment of$0.9 million resulting from our repurchase of$25.0 million PMC 7.875% Senior Secured Notes dueMarch 2026 at a discount, net of the proportionate write-off of unamortized discount and debt issuance costs. InMarch 2021 , we recognized a loss on debt extinguishment of$15.5 million resulting from our early repayment of the SSTL dueMay 2022 and our early redemption of our 6.375% PHH senior unsecured notes dueAugust 2021 and our 8.375% PMC senior secured notes dueNovember 2022 . The loss on debt extinguishment includes the write-off of unamortized debt issuance costs and discount, as well as contractual prepayment premiums.
LIQUIDITY AND CAPITAL RESOURCES
Overview
In the normal course of business, we are actively engaged with our lenders and as a result, renew, replace or extend our debt agreements to the extent necessary to finance our operations. See Note 13 - Borrowings to the Unaudited Consolidated Financial Statements for additional information. We actively monitor and, during the nine months endedSeptember 30, 2022 , 92 --------------------------------------------------------------------------------
we have adjusted our borrowing capacity on our various collateralized debt
agreements to align with our financing needs and to optimize our financing
costs.
A summary of borrowing capacity under our advance facilities, mortgage warehouse
facilities and MSR financing facilities is as follows:
September 30, 2022 December 31, 2021
Available Borrowing Available Borrowing Available Borrowing
Total Borrowing Capacity - Committed Available Borrowing Total Borrowing
Capacity - Committed Capacity - Uncommitted
Capacity (1) (1) Capacity - Uncommitted (1) Capacity (1) (1) (1)
Advance facilities $ 520.0 $ 43.8 $ 18.8 $ 595.0 $ 82.7 $ -
Mortgage loan warehouse
facilities 2,133.0 102.0 1,211.5 2,119.3 240.3 794.0
MSR financing facilities 910.0 45.6 33.3 785.0 40.4 18.3
Total $ 3,563.0 $ 191.4 $ 1,263.5 $ 3,499.3 $ 363.4 $ 812.3
Total Capacity increase
(decrease) $ 63.7 $ (172.0) $ 451.2 2% (47)% 56%
Advance facilities (75.0) (38.9) 18.8 (13) (47) -
Mortgage loan warehouse
facilities 13.7 (138.3) 417.5 1 (58) 53
MSR financing facilities 125.0 5.2 15.0 16 13 82
(1)Total Borrowing Capacity represents the maximum amount which can be borrowed,
subject to eligible collateral. Available Borrowing Capacity represents Total
Borrowing Capacity less outstanding borrowings.
Our total borrowing capacity increased by $63.7 million , or 2% in the nine
months ended September 30, 2022 , mostly driven by a $125.0 million , or 16%
increase in the capacity of our MSR financing facilities to fund our MSR
portfolio growth. Partially offsetting this increase is a $75.0 million decrease
in capacity on our advance facilities, consistent with the decrease in our
advances. At September 30, 2022 , none of the available borrowing capacity under
our advance financing facilities could be funded based on the amount of eligible
collateral that had been pledged to such facilities. Also, none of our
uncommitted borrowing capacity was available to fund advances at September 30,
2022 under our Ginnie Mae MSR financing facility based on the amount of eligible
collateral. We may utilize committed borrowing capacity under our mortgage loan
warehouse facilities and MSR financing facilities to the extent we have
sufficient eligible collateral to borrow against and otherwise satisfy the
applicable conditions to funding. At September 30, 2022 , we had no committed
borrowing capacity under our mortgage loan warehouse facilities and $28.1
million committed borrowing capacity under our MSR financing facilities, based
on the amount of eligible collateral. Uncommitted amounts can be advanced at the
discretion of the lender, and there can be no assurance that any uncommitted
amounts will be available to us at any particular time.
At September 30, 2022 , our unrestricted cash position was $226.6 million
compared to $192.8 million at December 31, 2021 . We typically invest cash in
excess of our immediate operating needs in deposit accounts and other liquid
assets.
We strive to optimize our daily cash position to reduce financing costs while
closely monitoring our liquidity needs and ongoing funding requirements. We
regularly monitor and project cash flows over various time horizons as a way to
anticipate and mitigate liquidity risk.
In assessing our liquidity outlook, our primary focus is on available cash on
hand, unused available funding and the following forecast measures:
•Financial projections for ongoing net income, excluding the impact of non-cash
items, and working capital needs including loan origination and repurchases;
•Requirements for amortizing and maturing liabilities;
•The projected change in advances compared to the projected borrowing capacity
to fund such advances under our facilities, including capacity for monthly peak
needs;
•Projected funding requirements for acquisitions of MSRs and other investment
opportunities, including our equity contributions to MAV Canopy;
•Funding capacity for whole loans and tail draws under our reverse mortgage
commitments subject to warehouse eligibility requirements;
•Potential payments or recoveries related to legal and regulatory matters,
insurance, taxes and others; and
•Margining requirements associated with our borrowing facilities and hedging
program.
93
--------------------------------------------------------------------------------
Use of Funds
Our primary near-term uses of funds in the normal course include:
•Payment of operating costs and corporate expenses; •Payments for advances in excess of collections; •Investing in our servicing and originations businesses, including MSRs, other asset acquisitions and MAV Canopy equity contributions; •Originated and repurchased loans, including scheduled and unscheduled equity draws on reverse mortgage loans; •Payment of margin calls under our MSR financing facilities and derivative instruments; •Repayments of borrowings, including under our MSR financing, advance financing and warehouse facilities, and payment of interest expense; and •Net negative working capital and other general corporate cash outflows. We have originated floating-rate reverse mortgage loans under which the borrowers have additional borrowing capacity of$1.7 billion atSeptember 30, 2022 . This additional borrowing capacity is available on a scheduled or unscheduled payment basis. During the nine months endedSeptember 30, 2022 , we funded$181.2 million out of the$1.5 billion borrowing capacity available as ofDecember 31, 2021 . We also had short-term commitments to lend$1.3 billion and$19.2 million in connection with our forward and reverse mortgage loan IRLCs, respectively, outstanding atSeptember 30, 2022 . As an HMBS issuer, we assume certain obligations related to each security issued. The most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount (MCA repurchases), or when they become inactive (the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments). Our subservicing clients bear the financial obligation and risks associated with purchasing loans out of securitization pools within the portfolio we subservice. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, referred to as warehouse lines. Regarding the current maturities of our borrowings, as ofSeptember 30, 2022 , we have approximately$1.9 billion of debt outstanding that would either come due, begin amortizing or require partial repayment in the next 12 months. This amount is comprised of$819.6 million of borrowings under forward and reverse mortgage warehouse facilities,$456.2 million of notes under advance financing facilities that will enter their respective amortization periods,$648.2 million outstanding under Agency and Ginnie Mae MSR financing facilities maturing in the next 12 months and$18.6 million of scheduled principal amortization on thePLS Notes secured by PLS MSRs. We are generally subject to daily margining requirements under the terms of our MSR financing facilities and daily cash calls for our TBAs, interest rate swap futures or other derivatives. Declines in fair value of our MSRs due to declines in market interest rates, assumption updates or other factors require that we provide additional collateral to our lenders under MSR financing facilities. Similarly, declines in fair value of our derivative instruments require that we provide additional collateral to the clearing counterparties. Refer to the sensitivity analysis in Item 3, Quantitative and qualitative disclosures about market risk. OnMay 20, 2022 , Ocwen's Board of Directors authorized a share repurchase program for an aggregate amount of up to$50.0 million of Ocwen's issued and outstanding shares of common stock. ThroughOctober 2022 , we completed the repurchase of 1,682,744 shares of our common stock under this program for a total purchase price of$47.7 million . Unless Ocwen amends the share repurchase program or repurchases the full$50.0 million amount by an earlier date, the share repurchase program will continue throughNovember 20, 2022 . We intend to finance the remaining share repurchases with available cash.
Our medium- and long-term requirements for cash include:
•Payment of interest and principal repayment of our corporate debt that matures in 2026 and 2027; •Any payments associated with the confirmation of loss contingencies; and •Any other payments required under contractual obligations discussed above that extend beyond one year. We are focused on ensuring that we have sufficient liquidity sources to continue to operate and support our business initiatives. We continuously evaluate alternative financings to diversify our sources of funds, optimize maturities and reduce our funding cost. See "Sources of Funds" below.
Sources of Funds
Our primary sources of funds for near-term liquidity in normal course include:
•Collections of servicing and subservicing fees and ancillary revenues;
•Collections of advances in excess of new advances;
•Proceeds from match funded advance financing facilities;
•Proceeds from other borrowings, including warehouse facilities and MSR
financing facilities;
94 -------------------------------------------------------------------------------- •Proceeds from sales and securitizations of originated loans and repurchased loans; and •Net positive working capital from changes in other assets and liabilities. Servicing advances are an important component of our business and represent amounts that we, as servicer, are required to advance to, or on behalf of, our servicing clients if we do not receive such amounts from borrowers. Our use of advance financing facilities is integral to our cash and liquidity management strategy. Revolving variable funding notes issued under our advance financing facilities to financial institutions typically have a revolving period of 12 months. Additionally, certain of our financing and subservicing agreements permit us to retain advance collections for a period ranging from one to two business days before remittance, thus providing a source of short-term liquidity. We use mortgage loan repurchase and participation facilities (commonly called warehouse lines) to fund newly-originated loans on a short-term basis until they are sold or securitized to secondary market investors, including GSEs or other third-party investors, and to fund repurchases of certainGinnie Mae forward loans, HECM loans, second-lien loans and other types of loans. Warehouse facilities are structured as repurchase or participation agreements under which ownership of the loans is temporarily transferred to the lender. These facilities contain eligibility criteria that include aging and concentration limits by loan type among other provisions. Currently, our master repurchase and participation agreements generally have maximum terms of 364 days. The funds are typically repaid using the proceeds from the sale of the loans to the secondary market investors, usually within 30 days. We also rely on the secondary mortgage market as a source of consistent liquidity to support our lending operations. Substantially all of the mortgage loans that we originate or purchase are sold or securitized in the secondary mortgage market in the form of residential mortgage backed securities guaranteed by Fannie Mae or Freddie Mac and, in the case of mortgage backed securities guaranteed byGinnie Mae , are mortgage loans insured or guaranteed by the FHA,VA orUSDA . We regularly evaluate financing structure options that we believe will most effectively provide the necessary capacity to support our investment plans, address upcoming debt maturities and accommodate our business needs. We continuously evaluate the allocation of our capital to MSR investments, the related returns, funding and liquidity requirements. The relationship with MAV may continue to provide PMC with an additional means to finance MSRs and maintain liquidity while maintaining servicing volume. With the development of MAV and our relationships with other clients, additional opportunities to rebalance our servicing and subservicing portfolio mix are available to us and may result in the sale of MSRs while we would perform subservicing for the sold portfolio. In the third quarter of 2022, we issued an excess servicing spread financing to a third party that allows us to continue to perform servicing while enhancing our liquidity. Covenants Our debt agreements contain various qualitative and quantitative covenants including financial covenants, covenants to operate in material compliance with applicable laws and regulations, monitoring and reporting obligations and restrictions on our ability to engage in various activities, including but not limited to incurring or guarantying additional debt, paying dividends or making distributions on or purchasing equity interests of Ocwen and its subsidiaries, repurchasing or redeeming capital stock or junior capital, repurchasing or redeeming subordinated debt prior to maturity, issuing preferred stock, selling or transferring assets or making loans or investments or other restricted payments, entering into mergers or consolidations or sales of all or substantially all of the assets of Ocwen and its subsidiaries, creating liens on assets to secure debt, and entering into transactions with affiliates. These covenants may limit the manner in which we conduct our business and may limit our ability to engage in favorable business activities or raise additional capital to finance future operations or satisfy future liquidity needs. In addition, breaches or events that may result in a default under our debt agreements include, among other things, nonpayment of principal or interest, noncompliance with our covenants, breach of representations, the occurrence of a material adverse change, insolvency, bankruptcy, certain material judgments and litigation and changes of control. See Note 13 - Borrowings to the Unaudited Consolidated Financial Statements for additional information regarding our covenants. The most restrictive liquidity requirement under our debt agreements is for a minimum of$75.0 million in consolidated liquidity, as defined, under certain of our MSR financing facilities agreements. AtSeptember 30, 2022 , we held unrestricted cash in excess of this minimum amount. In addition, our debt agreements generally include cross default provisions such that a default under one agreement could trigger defaults under other agreements. If we fail to comply with our debt agreements and are unable to avoid, remedy or secure a waiver of any resulting default, we may be subject to adverse action by our lenders, including termination of further funding, acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations, and other legal remedies, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations. We believe that we are in compliance with the covenants in our debt agreements as of the date this Quarterly Report on Form 10-Q is filed with theSEC . 95 --------------------------------------------------------------------------------
Credit Ratings
Credit ratings are intended to be an indicator of the creditworthiness of a
company's debt obligations. Lower ratings generally result in higher borrowing
costs and reduced access to capital markets. The following table summarizes our
current ratings and outlook by the respective nationally recognized rating
agencies. A credit rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time.
Long-term Corporate
Rating Agency Rating Review Status / Outlook Date of last action
Moody's Caa1 Positive August 15, 2022
S&P B- Stable January 24, 2022
On August 15, 2022 , Moody's reaffirmed their ratings of Caa1 and revised their
outlook to Positive from Stable. In its affirmation of PMC's ratings, Moody's
referenced currently weak but improving profitability and modest capital levels.
In its change in PMC's outlook to Positive from Stable, Moody's cited the
progress the company is making in transitioning its strategy to focus on
originations and servicing of non-delinquent forward and reverse mortgages from
the servicing of seriously delinquent loans, which should lead to a more
resilient business model and more stable earnings profile. The Positive outlook
also reflects Moody's expectation that PMC will maintain stable financial
metrics in the next 12-18 months with respect to capitalization and liquidity,
continue to strengthen its servicing and origination franchises and make
progress with respect to its strategic plan to improve profitability.
On February 24, 2021 , concurrent with the launch of the $400.0 million PMC
Senior Secured Notes offering, both Moody's and S&P reaffirmed the long-term
corporate ratings at Caa1 and B-, respectively. In addition, both agencies
revised the outlook of the issuer corporate ratings to Stable from Negative.
This change in outlook was driven by the elimination of the short debt maturity
runway and refinancing risk, which was listed as an area of concern by both
Moody's and S&P. On January 24, 2022 , S&P affirmed the long-term corporate
rating at B-.
On January 24, 2022 , S&P raised the assigned rating to the PMC Senior Secured
Notes from 'B-' to 'B' and maintained a stable outlook citing improved
profitability and increase in assets. It is possible that additional actions by
credit rating agencies could have a material adverse impact on our liquidity and
funding position, including materially changing the terms on which we may be
able to borrow money.
Cash Flows
Our operating cash flow is primarily impacted by operating results, including
Originations gains on loan sales, changes in our servicing advance balances, the
level of mortgage loan production, the timing of sales and securitizations of
mortgage loans, and the margin calls required under our MSR financing facilities
or derivative instruments. We classify purchases of MSRs through flow purchase
agreements, Agency Cash Window and bulk acquisitions as investing activity. MSR
investments represent a key indicator of our ability to generate future income
in our Servicing business, together with originated MSRs. We classify changes in
HECM loans held for investment as investing activity and changes in the related
HMBS borrowings as financing activity.
Our Rithm agreements represent an important component of our liquidity and our
liquidity management, and have a significant impact on consolidated statements
of cash flows. Excluding the impact of changes to the secured financings
attributed to changes in fair value, changes in the balance of these secured
financings are reflected in cash flows from operating activities despite having
no impact on our consolidated cash balance.
Our cash flows are summarized as follows:
$ in millions Nine
Months Ended
2022 2021
Net cash provided by (used in) operating activities $ 260 $ (413)
Net cash provided by (used in) investing activities (206) (845)
Net cash provided by (used in) financing activities (45) 1,222
Net increase (decrease) in cash, cash equivalents and restricted
cash
$ 8 $ (36)
Cash, cash equivalents and restricted cash at end of period $
272 $ 321
96
--------------------------------------------------------------------------------
Cash flows for the nine months ended
Our operating activities provided$259.6 million of cash including net collections of servicing advances of$101.8 million , mostly T&I advances, and net cash received on loans held for sale of$38.2 million for the nine months endedSeptember 30, 2022 due to higher forward loan production volumes. In addition, we received earnings distributions of$5.2 million from our equity method investee MAV Canopy. Our investing activities used$206.5 million of cash. The primary uses of cash in our investing activities include$174.9 million to purchase MSRs,$171.4 million net cash outflows in connection with our HECM reverse mortgages and$6.9 million acquisition of reverse subservicing agreement. Offsetting cash inflows include$149.1 million proceeds from the sale of MSRs to an unrelated third party. Capital distributions of$32.4 million received from our equity method investee MAV Canopy were offset by$33.8 million of capital contributions. Our financing activities used$44.7 million of cash. Cash outflows include$143.5 million net repayments of borrowings under our mortgage warehouse and MSR financing facilities due to the decline in loans held for sale,$54.8 million of net repayments on advance match funded liabilities due to the decline in servicing advances, and$83.8 million of net payments on the financing liabilities related to MSRs transferred due to runoff. We also paid$23.6 million to repurchase$25.0 million of our 7.875% PMC Senior Secured Notes and$38.8 million to repurchase 1,338,498 shares of our common stock. Cash inflows include$1.5 billion received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, partially offset by repayments on the related financing liability of$1.3 billion ,$78.7 million of proceeds from sale of MSRs accounted for as a financing in connection with sales of MSRs to MAV and$36.2 million of proceeds from the excess servicing spread financing.
Cash flows for the nine months ended
Our operating activities used$412.8 million of cash largely due to the growth of our new Originations production with net cash paid on loans held for sale of$576.1 million for the nine months endedSeptember 30, 2021 , partially offset by$69.9 million of net collections of servicing advances, mostly P&I advances. Our investing activities used$845.4 million of cash. The primary uses of cash in our investing activities include$785.2 million to purchase MSRs, mostly through bulk acquisitions, and$18.5 million of contributions to our equity method investee MAV Canopy. These cash outflows were partially offset by net cash inflows in connection with our HECM reverse mortgages of$42.8 million . Our financing activities provided$1.2 billion of cash. Cash inflows include$647.9 million from the issuance of the PMC Senior Secured Notes and the OFC Senior Secured Notes, warrants and common stock to Oaktree and$1.1 billion received in connection with our reverse mortgage securitizations, which are accounted for as secured financings, partially offset by repayments on the related financing liability of$1.2 billion ,$130.0 million of proceeds from the sale of MSRs accounted for as a financing in connection with sales of MSRs to MAV, and an$897.6 million net increase in borrowings under our mortgage warehouse and MSR financing facilities. Cash outflows include$319.2 million to repay our 6.375% senior unsecured notes and 8.375% senior secured notes,$188.7 million repayment of the SSTL,$64.7 million of net repayments on advance match funded liabilities and$60.3 million of net payments on the financing liabilities related to MSRs pledged.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our ability to measure and report our financial position and operating results is influenced by the need to estimate the impact or outcome of future events based on information available at the date of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. We have processes in place to monitor these judgments and assumptions, and management is required to review critical accounting policies and estimates with the Audit Committee of the Board of Directors. Our accounting policies and estimates involving significant judgments primarily relate to fair value measurements, income taxes, allowance for losses on assets, and the provision for losses that may arise from contingencies, including indemnification obligations and litigation proceedings. We use fair value measurements to record fair value adjustments to certain instruments in our statement of operations and to determine fair value disclosures, including but not limited to MSRs, Pledged MSR liabilities and Reverse mortgage loans held for investment. As ofSeptember 30, 2022 , 88% of our assets and 70% of our liabilities were reported at fair value, with fair value changes reported in our statement of operations. Substantially all our assets and liabilities at fair value were classified as Level 3 instruments due to unobservable inputs.
Our significant accounting policies and critical accounting estimates are
disclosed in our Annual Report on Form 10-K for the year ended
in Note 1 to the Consolidated Financial Statements and in Management's
Discussion and
97 -------------------------------------------------------------------------------- Analysis of Financial Condition and Results of Operations under "Critical Accounting Policies and Estimates." There have not been any material changes to our critical accounting policies and the methods we used and judgments we made relating to estimates as disclosed in the Annual Report on Form 10-K.
RECENT ACCOUNTING DEVELOPMENTS
See Note 1 - Organization and Basis of Presentation to the Unaudited
Consolidated Financial Statements for information related to recent accounting
standards updates.
PRUDENTIAL FINANCIAL INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENWORTH FINANCIAL INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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