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Ocwen Misses Significantly, Rev Up

Zacks Equity Research

Ocwen Financial Corporation’s (OCN) first quarter 2012 earnings of 14 cents per share substantially lagged the Zacks Consensus Estimate of 31 cents. This also compares unfavorably with the prior-year quarter earnings of 21 cents.

Significantly higher operating expenses along with a surge in interest expenses were the negatives during the quarter. However, the result benefited from higher revenue and interest income.

Performance Details

Ocwen’s net income for the reported quarter stood at $19.3 million compared with $22.1 million in the year-ago quarter.

Ocwen’s total revenue in the first quarter surged 48.2% year over year to $164.5 million. The improvement was mainly attributable to a 51.3% rise in servicing and sub-servicing fees and 12.8% increase in process management fees, which were partly offset by a 7.5% drop in other revenues. Total revenue also surpassed the Zacks Consensus Estimate of $159.0 million.

Operating expenses more than doubled to $86.1 million in the reported quarter. The main reason behind this rise was the drastic increase in compensation and benefits costs. Apart from this, expenses related to amortization of mortgage servicing rights, servicing and origination costs as well as expenses related to professional services were also high during the quarter.

Interest income grew 6.6% year over year to $2.23 million, while interest expenses leaped 25.0% year over year to $46.9 million.

Balance Sheet and Other Developments

As of March 31, 2012, Ocwen recorded cash of $683.9 million compared with $144.2 million as of December 31, 2011. Debt securities totaled $26.1 million as of March 31, 2012, compared with $82.6 as of December 31, 2011.

During the first quarter, Ocwen completed 23,491 modifications (including 14.8% in Home Affordable Modification Program). Further, modification offers rose 32.3% to 28,539 during the reported quarter.

Ocwen utilized $615 million of capital to purchase the mortgage servicing rights on $30.3 billion of unpaid principal balance (:UPB) by closing deals with JPMorgan Chase Bank, a unit of JPMorgan Chase & Co. (JPM) and Saxon Mortgage Services Inc., a mortgage subsidiary of Morgan Stanley (MS).

On March 20, 2012, Ocwen entered into an agreement with Aurora Bank FSB to purchase the servicing rights on a portfolio of commercial mortgage loans. As of March 31, 2012, the portfolio consisted of 3,389 loans with a total principal balance of $1.9 billion. The deal is expected to close by the end of this month.

Additionally, in March 2012, Ocwen completed the sale of the right to receive the servicing fees relating to about $15 billion of UPB to Home Loan Servicing Solutions (HLSS), along with an additional $2.9 billion sale on May 1.

Our Viewpoint

Although the near-term outlook remains cautious owing to market volatility and subprime MSR market contraction, Ocwen remains committed to new business acquisitions and loan modifications. These will likely convert into increased profitability over time. Additionally, the company’s acquisition of Litton and Saxon would benefit its financials over the long term.

Furthermore, with the ongoing deterioration of home prices, Ocwen might get even more opportunities to acquire distressed servicing portfolios at low prices. In spite of these positives, persistently weak capital market and slow economic recovery drive us on the sidelines.

Ocwen currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we maintain our long-term “Neutral” recommendation on the stock.

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