Ocwen Financial's Second Quarter Pleases Wall Street

By Jordan WathenMarketsFool.com

Image source: Ocwen Financial.

Mortgage servicer Ocwen Financial's (NYSE: OCN) second-quarter earnings results pleased investors as shares rallied more than 27% in after-hours trading after the company reported its first quarter-over-quarter increase in revenue since the first quarter of 2015.

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By the numbers

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Data source: Company presentation.

Ocwen noted that its pre-tax earnings were negatively affected by a few particularly large items. The company incurred $40.1 million in legal defense costs, $28.1 million in monitor costs, and $15 million in expenses related to a reserve for future regulatory settlements in the second quarter of 2016.

The company also reported about $16.7 million in charges related to the decline in fair value of its mortgage servicing rights and interest expense under agreements with New Residential Investment Corp. (NYSE: NRZ). Net of these charges, Ocwen would have reported a pre-tax profit of $2.5 million.

What happened this quarter

  • Ocwen settled two major lawsuits, collectively known as the "Fisher Cases." The company agreed to pay $15 million to the United States in addition to $15 million to private citizens to cover their attorney's fees costs. Whistleblowers claim that the mortgage servicing company lied about its compliance with federal guidelines as part of the HAMP program for underwater homeowners.
  • The company's upstart financier of auto dealer inventory is building traction. Ocwen noted that its Automotive Capital Services segment had 40 active dealers in the program as of mid-July 2016 who currently have outstanding balances of $18 million, up from 14 dealers and $3 million of loans outstanding in January.
  • Ocwen continues to look to reduce costs by shedding employees in its mortgage servicing business as its portfolio winds down. The company reported headcount of 9,531 employees in the second quarter, down from 9,714 at the end of the first quarter, and expects that roughly 40 more positions will be eliminated by the end of July.
  • The servicing business benefited from increased HAMP modifications. The company reported 10,940 HAMP modifications in the second quarter, the highest level since the second quarter of 2015. Conference call commentary suggests that higher modification revenue could flow into the third quarter of 2016 before tapering off in the fourth quarter.

Looking ahead

Ocwen's future hinges on its ability to wind down its mortgage servicing business while building up its new automotive financing and mortgage origination units. To date, servicing overshadows its new business lines, and the profitability of the servicer will be determined in no small part by the company's ability to avoid costly and difficult-to-predict legal costs.

Ocwen set aside $15 million for a potential settlement in California , which suggests yet another impending lawsuit could soon be behind the company.

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Jordan Wathen 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.