Ocwen Gives Investors a Nice Surprise: Profit

By Markets Fool.com

The key to long-term business success is maximizing profit. Yet for mortgage servicing specialist Ocwen Financial (NYSE: OCN), earnings have been elusive, and coming into Wednesday's third-quarter financial report, Ocwen investors were ready to see yet more red ink appear in the company's latest results. What they got instead, however, was the company's first net profit since the second quarter of 2015, and investors celebrated that news by pushing the shares sharply higher. Let's take a closer look at how Ocwen Financial did and what lies ahead for the company.

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Ocwen has programs to reach out to borrowers in need. Image source: Ocwen Financial.

Ocwen's big surprise

Ocwen Financial's third-quarter results weren't entirely positive, but they gave shareholders more than they had expected to see. Revenue was still down significantly, but the 11% decline to $359.4 million wasn't quite as steep as the 13% drop that most investors following the stock had expected to see. The biggest shock came on the bottom line, where Ocwen managed to bring in $9.4 million in net profit. That worked out to $0.08 per share in earnings, even when the consensus forecast among investors was for Ocwen to post a loss of $0.32 per share.

Taking a closer look at how Ocwen Financial did, there were quite a few ways in which the company captured more money to help its overall results. Ocwen said that the execution of mortgage-servicing call rights helped bring in $12 million in gains, while the sale of mortgage servicing rights pulled in $5.7 million. Even though monitor costs and the need to keep added reserves for settlements and other potential losses ate into those gains, Ocwen nevertheless relied on those efforts to break into the black during the quarter.

Drilling down on Ocwen's segments, most of the positive performance came from its servicing segment. A $33.2 million pre-tax profit for the segment reversed a loss in the year-earlier period, with the company specifically mentioning the mortgage modification program known as Making Home Affordable or HAMP. Operating cost improvements also fell through to the bottom line. By contrast, the lending side of the business didn't do as well, with pre-tax income of $3.6 million falling by more than half from year-ago levels. Nevertheless, the automotive capital services business kept building momentum and added $11 million to its finance receivables count.

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Ocwen's operational figures were also solid. The company completed more than 21,000 modifications, the majority of which were part of HAMP. Delinquency rates fell half a percentage point to 11.4%, and consumer complaints from the Consumer Financial Protection Bureau dropped by more than a quarter compared to a year ago.

What's ahead for Ocwen Financial?

CEO Ron Faris tried to emphasize that the company still needs to look forward for further progress. "Our mortgage lending business saw growth in origination volume," Faris said, "but we must improve margins." Only by doing so will Ocwen take full advantage of the opportunities in front of it.

At the same time, Ocwen is working hard to resolve some of the outstanding legacy issues that have plagued it for a while. Board Chair Phyllis Cardwell said that "we continue to progress toward a potential resolution with the California Department of Business Oversight to end the current consent order and associated third party auditor before year-end," and the chair also thinks that other third-party monitoring could conclude as scheduled as long as Ocwen continues to meet the required conditions for doing so.

Ocwen investors responded incredibly favorably to the news, sending the stock upward by more than 12% in after-hours trading following the announcement. With a stock that has been so badly punished so far this year, even the first glimpse of a turnaround is enough to build a lot of quick upward momentum for Ocwen's shares. More importantly, Ocwen investors hope that internally, the company's business efforts will produce greater growth in the quarters and years to come.

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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.