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Text: Speaking on the call will be Ocwen's chief executive officer, Glen Messina; and Chief Financial Officer June Campbell.
You should bear this uncertainty in mind when considering such statements and should not place undue reliance on such statements.
We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition and an alternate way to view certain aspects of our business that is instructed.
Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported results under accounting principles generally accepted in the United States.
So we'll get started with some highlights for the third quarter.
I'm really proud of what our team has accomplished and really appreciate all their hard work.
We delivered strong GAAP net income and adjusted pre-tax income, and our ROE exceeded guidance largely due to strong top-line performance.
I believe this demonstrates the strong operating leverage we have in our business.
This was our eighth consecutive quarter of positive adjusted pre-tax income.
Our team continues to execute well against our operating objectives, strong originations growth and servicing additions, solid operational execution, and performance.
Cost reduction is tracking ahead of targets.
We also closed our planned call rights transaction for the third quarter and have deployed more than 50% of MAM's investment commitment.
October as well, we had some milestones.
So in October, we closed our acquisition of the RMS reverse mortgage servicing platform.
And also in October, I'm pleased to announce that we exceeded our recapture rate objective.
We continue to make solid progress on our actions to expand our addressable market.
We're growing in higher-margin channels, services, and products giving us strong momentum, and the RMS platform acquisition gives us access to a potential $86 billion reverse mortgage subservicing market, which is an exciting new growth opportunity for us.
And finally, we continue to navigate a volatile and unpredictable environment, and I'll talk a bit more about that later.
Originations again delivered really solid performance against our operating objectives.
We closed $20 billion in total servicing additions in the third quarter with very strong performance in subservicing additions.
With the closing of the TCB acquisition, correspondent volume doubled versus last quarter.
The TCB team is off to a really strong start, and I'm so glad to have them with us and appreciate the contributions they're making to the business.
We're seeing great results from our actions to grow subservicing.
We secured $20 billion in new awards and expect this volume to commence boarding in the fourth quarter.
Our subservicing pipeline has never been more robust.
Our top 10 prospects represent roughly $63 billion in opportunity, and our total prospect pipeline has grown to slightly over $200 billion.
We're excited about this activity level and believe we have a very compelling value proposition.
I'll spend a little bit more time on our subservicing value prop a little bit later.
Our enterprise sales approach and the TCP acquisition have allowed us to grow our base of sellers to 700 at the end of Q3.
That's roughly 2.5 times over third quarter last year, and we're continuing to grow.
Nondelegated and Best Efforts delivery services were rolled out as expected, and we're seeing steady adoption as well.
Our Ginnie Mae product mix is improving.
It's up to about 10% of total originations, excluding co-issue, we're still well below industry mix in Ginnie Mae.
So I believe we have room for improvement here.
We recently attended the MBA, Mortgage Bankers Association Annual Convention and client attendance at our meeting room exceeded our expectations, and the response to the quality of our team and operating execution was very positive.
We look forward to serving them and supporting new clients as we expand our addressable market.
Our Consumer Direct team continues to improve recapture performance.
We did see a little bit of slippage in the third quarter versus the second quarter due to accelerated runoff in select client portfolios versus Q2.
That said, we saw a very strong recovery in October with refinance recapture rate achievement of 36%, which is a milestone for us and a huge congratulations to our recapture team.
We believe we're on track to meet our 30% refinance recapture rate objectives in the fourth quarter.
Overall, our originations team is making terrific progress against their objectives for this year, and they're energized for the fourth quarter and for 2022.
The team continues to make strong progress growing higher-margin products, channels, and services.
These actions do help us expand our addressable market, as well as deflect margin pressure, as industry buying mobiles contract.
Year over year, consumer direct volume in both forward and reverse is up 61%, both forward and reverse delivered record retail funding and lock volumes in October.
The marketing eligible population for our forward recapture business increased about 43% from the second quarter to the third quarter.
And we now have roughly 174,000 loans where borrowers could save $100 or more per month by refinancing, and our team will be focused on trying to help these borrowers.
Total reverse originations were up 86% year over year.
Team is executing very well.
Our reverse market share is up from 6.5% in third quarter 2020 to 7% in third quarter 2021, and this compares to about 4.2% in the third quarter of 2019.
So great progress by the team, growing our share and our business.
In forward correspondent, we have meaningful opportunity to grow our best efforts and non-delegated delivery services.
Our team is focused there, and we've launched those recently.
Today, these services are just a fraction of the levels we see across the industry generally.
Our long-term goal is to get best efforts in non-delegated to roughly 25% to 30% of volume and about 40% to 50% of our gain on sale revenues.
In servicing, continuing to improve cost and customer experience are the key objectives for us, and the team is performing really well.
To achieve these objectives, we're focused on moving the needle in four key areas: technology, process simplification, scale, and portfolio composition.
The results have been good so far.
Overall, servicing operating costs are down roughly 25% from third quarter 2020 levels, and we've already achieved our full year target for 2021.
Technology is a big driver for us, and our technology agenda has a three-part focus.
That's reduce cost, improve execution and improve the customer experience.
We believe our actions to improve client borrower and investor experience are critical elements to support our growth and recapture rate objectives over the long run.
And with technology as the enabler, we can reduce cost and improve execution at the same time.
In terms of scale, we've increased our total servicing UPB about 33% versus the third quarter of 2020.
And our percentage of prime servicing is now 70% of our total servicing UPB.
In terms of portfolio composition, increasing the percentage of agency loans is helping to increase average loan balance and decrease delinquencies, both of these trends will improve our ratio of operating expenses as a percent of UPB.
We believe we have tremendous operating leverage in our servicing platform, and we're focused on increasing scale by growing our own servicing and subservicing.
Again, here, the team continues to perform very well in several areas.
Average beat of answer and call abandonment rate continued to outperform the industry average as reported by the MBA.
Our average speed of answer is just a fraction of the MBA average, and abandonment rates are roughly half the industry average.
We continue to be laser-focused on supporting borrowers who are exiting forbearance and helping them understand their options.
We believe the best path for the homeowner and the investor is to find what works within investor guidelines to keep the consumer in their home.
In this regard, we outperformed the industry as reported by the MBA, relating to the percentage of borrowers with an agency loan who exit forbearance with the reinstatement or loss mitigation solution in place.
Between September 2020 and June 2021, roughly 93% of our borrowers who exited forbearance had a reinstatement or loss mitigation plan in place, and that compares to the industry average of 83%.
And what that means is about 7% of our borrowers on forbearance have exited without a reinstatement plan or a loss mitigation solution versus over 17% for the industry.
Based on the MBA data, we're delivering 20% more loss mitigation solutions for homeowners versus the industry average.
And again, I believe this demonstrates how our servicing capabilities deliver superior performance for homeowners and investors.
NPS is up 6 points over third quarter 2020, and that's even with the impact of boarding over 280,000 loans in the third quarter onto our servicing platform and helping over 4,700 borrowers exit forbearance.
Also worth noting, Moody's and S&P upgraded our servicer quality assessment as Master servicer, along with Fitch -- and along with Fitch, all three affirmed our servicer ratings.
Some of the key strengths noted by the agencies were our reporting and remitting processes, proactive servicer oversight in master servicing, management and organization, industry experience, multiple levels of internal controls, and our diligent response to the pandemic, as well as our enterprisewide risk and compliance management framework.
We've put significant effort into diversifying our servicing revenue streams over the last two years.
Our focus has been on growing own servicing, growing our subservicing, and taking advantage of ancillary or intrinsic revenue streams in our business, Ginnie Mae EBO gains at call right opportunities.
These efforts have paid off as the percentage of our servicing revenue derived from the NRZ subservicing agreement has been reduced by more than 50%.
It's now just 17% of our revenues.
From a loan count perspective, the NRZ loans are down to 33% of the total as, compared to 54% in third quarter of last year, and the NRZ loans also comprise about two-thirds, 67% of our total nonperforming loans as of the third quarter of 2021.
EBOs and call rights continue to be an opportunity for us.
We settled our planned call rights transaction in the third quarter, involving seven deals, and we're pleased with the results.
As of the third quarter of 2021, our call rights, our owned call rights were approximately 121 deals.
And we estimate the near-term opportunity for call rights that could potentially be actionable is about 30 to 40 deals.
Market appetite for seasoned non-agency loans remain strong, and there is sustained activity from other legacy non-agency servicers.
With respect to our previously announced fourth quarter transaction, we received a request from the trustee Deutsche Bank asking us to pause the cleanup calls.
They wanted to confirm the call price, met the requirements of underlying PSAs.
We believe the call price we've calculated is consistent with the applicable PSAs in our course of conduct with Deutsche Bank and relevant third parties and with established industry practice.
We intend to work with Deutsche Bank in their analysis, including if Deutsche Bank chooses to seek input from a court of competent jurisdiction.
Meanwhile, we have agreed to pause our calls to allow that analysis to take place.
Regarding EBOs, we realized $12.3 million in EBO gains year-to-date third quarter with loans now emerging from forbearance, we expect to see an increase in EBO activity as loans are modified throughout 2022.
We believe we've built a best-in-class servicing platform for performing and special servicing with capacity for growth that can offer a compelling value proposition to existing and prospective clients.
During 2020 and 2021, we performed an end-to-end review of our platform and capabilities against what we believe are client expectations.
Based on this review, we believe our platform delivers best-practice performance levels for clients across six C's of performance.
These include competency, putting the client first, customer centricity, technology-enabled capabilities, a well-staffed bank-grade risk, and compliance model and a strong value-based culture that underpins everything we do.
We've made several investments in bar and client-facing technology to address the needs of clients and consumers and to streamline our business and improve the ability for consumer and client self-service.
We can offer swift onboarding, responsive service to our clients and consumers.
And as we covered on Pages 7 and 8, industry-leading operating performance.
We believe our operations can deliver superior total cost and service-level performance versus our peers.
And we've been rewarded for the investments we've made in our platform.
We've secured $28 billion of subservicing additions in the last 12 months.
We secured $20 billion in new awards in the third quarter, and we have a $63 billion opportunity with our top 10 prospects and a potential prospect pipeline of $200 billion and growing.
With the closing of RMS as well, we are positioned to enter the $86 billion reverse mortgage servicing market once the integration is complete.
So while these opportunities do have a longer sales cycle, I'm nonetheless very excited about the opportunity we have here.
Generally, this year, industry volume levels continue to be very robust, certainly as compared to historic levels of both forward and reverse.
We continue to deal with incredible interest rate volatility in August.
The 10-year treasury rate was trading at 117 basis points.
By quarter end, it was 153.
It's now in the high 140s.
So it's been volatile.
We are seeing non parallel interest rate movements, as well as mortgage to treasury spread compression, and discount margin volatility in reverse as well.
These risks are not covered by our hedging program, and we did feel the effects of this in the third quarter.
June will talk a little bit more about that later.
Consensus industry forecast is for rising rates and about a 28% average reduction in industry origination volumes.
This is based upon the consensus of Fannie Mae, Freddie Mac, and MBA forecast.
That said, 2022 projected volume levels are still relatively high compared to historic levels, especially in the 2018, 2019 time frame.
Reverse mortgage endorsement volume remained strong and is expected to remain strong compared to last year.
In a contracting market, we would expect some continued pressure on originations margins until capacity -- excess capacity in industry could be eliminated.
That said, margins were roughly stable in the third quarter.
With rising rates, we would expect increased servicing profitability and MSR values as payoffs and runoff -- portfolio runoff decreases.
And we also expect perhaps some M&A and bulk purchase opportunities may emerge as market participants consider exiting as the origination market contracts.
And we also expect to see the agencies buy box expand a bit with higher loan limits and support for first-time and low- to moderate-income buyers.
To address the dynamic environment, we're focused on a few straightforward strategies, prudent growth by expanding our client base, product, services, and addressable markets.
continuing to drive best-in-class operating performance to deliver superior value proposition to clients, investors, and consumers, providing a service experience that delivers on our commitments, enhancing our competitiveness through scale and low cost aggressively pursuing our subservicing opportunity pipeline, and expanding into reverse subservicing.
And lastly, continuing to be prudent in bulk purchases through MAV and M&A opportunities to increase scale and capabilities.
By now, you're familiar with our key operating objectives for 2021, and we're well on our way to achieving our targets.
In each of the five categories, we believe we've got strong momentum.
And our key operating objective framework will remain the same for 2022.
We are targeting over $100 billion in total owned servicing and subservicing additions.
We're targeting to maintain recapture rates over 30% with the long-term objective of industry best practice levels by investor type.
Continuous cost and process improvement is part of our DNA, and we're driving base cost and variable cost productivity improvement to support our competitiveness.
We're targeting roughly another 1-basis-point reduction in servicing and overhead opex as a percent of UPB from third quarter 2021 levels.
Industry-leading operation execution and delivering on our commitments to clients, borrowers, and investors is a critical component of our value proposition.
So this will continue to be a focus and emphasis for us in 2022 and beyond.
And for 2022, we're targeting about 50% growth in subservicing additions and harvesting embedded EBO and call rights income to diversify and grow our revenue.
Consistent with our operating objectives this year, we continue to target low double-digit to mid-teen after-tax operating ROEs in 2022.
We reported $37 million in adjusted pre-tax income and 32% in adjusted pre-tax ROE.
This is the eighth consecutive quarter of positive adjusted pre-tax income.
Net income in the quarter was $22 million, including $27 million in unfavorable notables, largely driven by MSR fair value changes from higher actual prepayments than modeled, Negative effects of basis risk, partially offset by higher market interest rates net of hedging.
We achieved 19% after-tax GAAP ROE exceeding our low double-digit to mid-teen guidance.
Our earnings per share was $2.35, beating analyst consensus by over two times.
On the top right bar chart, you can see that we're delivering on our growth objectives and cost leadership.
Revenue increased 38% year over year, largely due to higher servicing fees on an additional $66 billion in UPB and executing the call right transactions.
Operating expense as a percentage of average UPB was favorable year over year after absorbing cost to maintain capacity for both the new bulk volume reported in August and September, incurring temporary interim subservicing expense on MSR bulk acquisitions and as I mentioned previous quarters, carrying excess costs during foreclosure moratorium and expectation of borrower need.
Equity increased to $470 million, and book value per share increased $2 to $51 per share.
This slide demonstrates that our balanced business model is operating well with originations growth replenishing our servicing portfolio more than offsetting runoff.
The replenishment rate in the quarter was 170%.
On the left side of the slide, you can see that volume is up across all channels, approximately 77% versus the same quarter last year.
Adjusted pre-tax income was impacted by lower revaluation gains on MSR cash window and flow purchases and expected margin normalization.
You can see on the margins graph, Consumer Direct margins increased slightly versus last quarter but lower than this time last year.
Mix-adjusted correspondent lending margins were relatively flat versus last quarter.
The adjustment in the second quarter correspondent margins is attributed to gains recognized in the second quarter on certain loans that were acquired under favorable circumstances, resulting in higher than market average margins for these loans.
Adjusting for these loans, second quarter margins were consistent with the first quarter at approximately 12 basis points.
As Glen mentioned, we're growing higher-margin products, channels and services, which we believe will help deflect margin pressure as industry volume levels contract.
On the right side of the slide, you can see the results in our Servicing segment from building scale.
Third quarter total servicing UPB is $248 billion, a $62 billion increase over the third quarter of 2020.
The Subservicing plus NAV UPB, and as you know, we began subservicing NAV this quarter, doubled year over year, largely replacing the NRZ UPB decline.
NRZ UPB concentration dropped from 46% to 24% year over year.
We expect this trend to accelerate as we grow subservicing for other clients in NAV.
Servicing adjusted pre-tax income of $41 million was largely driven by higher servicing fees from higher UPB, expanding servicing revenue with approximately $23 million in call right gains, as well as cost leadership.
You saw earlier that servicing operating costs are down 3 basis points year over year, and we expect continued improvement, which I'll show you on the next slide.
This is our road map page.
We told you last quarter that we were positioned for a step function change in profitability in the second half of the year, and we delivered on this in the third quarter with GAAP earnings and 19% ROE.
This is our operating framework for 2022 assuming a stable interest rate environment and no adverse changes in market conditions or legal and regulatory environment.
The page is broken down by our operating objectives in the origination, servicing, and corporate segments.
I'll provide a few highlights, but please let me know if any of you want to review in more detail separately, and I'd be happy to.
We reflect the full quarterly impact from the bulk transactions closed in June we talked about last quarter.
flow MSR volume was redirected to MAV in the third quarter, and we continue to grow performing subservicing, which results in a mix shift to higher-margin consumer direct and reverse channels.
We expect EBO, call rights, and other revenue diversification in the range of $20 million to $25 million, and the segments continue to achieve productivity targets.
A couple of comments just to wrap up before questions.
We had a great quarter, delivered really strong financial performance.
I'm proud of how the team is executing and we're excited about the opportunities ahead.
We're demonstrating a solid track record of delivering on our operational and financial commitments and continued development of our balanced and diversified business model.
We're focused on a few straightforward strategies to navigate this dynamic market environment, prudent growth by expanding client base product services to expand addressable markets.
superior value proposition to clients, investors, and consumers through best-in-class operating performance, providing a service experience that delivers on our commitments and enhancing our competitiveness through scale and low cost.
I'm proud of what our team accomplished in the third quarter and very appreciative of all their efforts.

user
ocwen financial q3 earnings per share $2.35.
compname says subservicing sales pipeline grew to more than $200 billion in quarter.
q3 earnings per share $2.35.

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