Ocwen Financial Plunges as Deleveraging Continues

By Markets Fool.com


Image: Ocwen Financial.

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The housing market has recovered strongly since the financial crisis, and mortgage volumes have rebounded in the years since 2009. Yet Ocwen Financial hasn't been able to make its gains hold up, and the mortgage-servicing business has gone through immense changes in response to regulatory requirements and changing business conditions. Coming into Monday's fourth-quarter financial report, Ocwen investors were prepared for further declines in sales and more net losses from the company, but they nevertheless sent the stock sharply lower after its actual results came out. Let's take a closer look at the latest from Ocwen Financial to see if the mortgage-servicer can bounce back from its latest setback.

Is the roof caving in on Ocwen?
Ocwen Financial's fourth-quarter results continued the downward slide that investors have seen recently. Revenue dropped almost 27% to $362.5 million, which was slightly steeper than the decline that most investors had expected. On the bottom line, Ocwen had another big net loss of $224.2 million, which worked out to $1.79 per share. That was far worse than the $0.29 consensus loss forecast, but it also reflected a tax-related one-time charge of $102 million.

Taking a closer look at Ocwen Financial's financials, the company continued to work on getting itself through one of the toughest periods of its history. Ocwen reduced its total unpaid principal balance of loans serviced by 13% to $251 billion between September and December, and that brought the total reduction over the past year to nearly three-eighths. Expenses from the segment have finally started to fall, and that helped the company narrow its losses from year-ago figures.

However, the once-strong lending side of Ocwen Financial's business showed a big slowdown during the quarter. Revenue from the segment got cut almost in half, although a corresponding drop in expenses helped narrow its pre-tax segment loss as well.

CEO Ron Faris tried to keep a longer-term perspective. "We continue to make progress in resolving legacy issues," Faris said, and "we also continue to lower our corporate debt, ending the year with a corporate debt-to-equity ratio of under 0.9." The CEO made it clear that containing costs has been a key element of Ocwen's strategy while still looking to give borrowers a good customer experience.

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What's ahead for Ocwen?
Ocwen is optimistic about its future. In Faris' words, "Our vision for Ocwen is to be a world-class asset origination and servicing company." It believes that the new launch of its automotive capital services business could give it greater potential for gains in 2016 and beyond, and Ocwen thinks it can tap similar opportunities to return to profitability in the long run.

Early progress from the automotive capital area has been positive. As of late February, the new business line had entered into eight markets in five states, entering into credit lines with 22 dealers. Total commitments added up to a modest $19 million, but Ocwen sees considerable growth potential ahead for the unit.

Still, Ocwen faces some challenges. The company saw its delinquency rates rise slightly during the quarter, climbing to 13.7% from 13.1% in the September quarter. Prepayment rates fell by nearly a percentage point and a half to 13.3%, suggesting that refinancing activity is slowing and borrowers aren't selling their homes as extensively as they had in the past.

Ocwen investors weren't satisfied with the mortgage-servicing specialist's slow progress, sending the stock down nearly 20% in morning trading following the announcement. Without a quick turnaround, shareholders don't have the confidence that Ocwen can avoid worse consequences down the road.

The article Ocwen Financial Plunges as Deleveraging Continues originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Ocwen Financial. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.