West Palm Beach, Florida-based Onity Group, the parent company of top-five reverse mortgage lender Liberty Reverse Mortgage, recorded a decline in income during the second quarter of 2024.
Despite the financial result, Onity — formerly known as Ocwen Financial Corp. — is doubling down on the reverse mortgage space by entering into an agreement to acquire the reverse lending assets of Mortgage Assets Management (MAM) from Waterfall Asset Management.
This is according to the company’s second-quarter earnings results and a subsequent conference call with company leaders on Thursday.
Acquisition of MAM reverse assets
Onity and Waterfall executed a letter of intent for the acquisition on July 26, marking another interaction with MAM’s reverse mortgage assets after the company — then under the Ocwen name — acquired the assets of Reverse Mortgage Solutions (RMS) from MAM in late 2021.
“The transaction would include a reverse mortgage servicing portfolio, which is currently subserviced by PHH Mortgage, with a projected unpaid principal balance of approximately $3 billion,” Onity announced. “The company intends to issue $51.7 million in par value of new, non-convertible, cumulative preferred stock to Waterfall in consideration of the acquisition.”
The deal is still subject to regulatory approval but is expected to close sometime in the second half of 2024.
“We are pleased to announce the proposed transaction with Waterfall,” Onity CEO Glen Messina said in a statement. “We expect this transaction to be accretive to earnings and cash flows immediately upon closing, while strengthening our position in reverse servicing as a hedge to forward [mortgage servicing rights (MSRs)], providing incremental asset management opportunities, and improving our capital structure.”
Messina went on to call MAM a “valued subservicing client.” And Sean O’Neil, Onity’s chief financial officer, offered further details during the earnings call.
“This transaction strengthens and expands an already healthy relationship between our two firms“ O’Neil said. “The Waterfall affiliate MAM has been a subservicing client of ours for some time now, so we know these assets well from a performance perspective.
“This deal is also accompanied by seller-provided financing, and it is accretive to both earnings per share and cash. Our intent is that, on close, we use the proceeds to further reduce corporate debt by an anticipated amount of $40 million.“
Earnings results
A decline in values of certain MSRs slightly diminished income at Onity in Q2 2024, but the company touted improvements in several other metrics. Servicing unpaid principal balance (UPB) and subservicing UPB increased by 6% and 10%, respectively, compared to the end of 2023. Meanwhile, while its year-over-year originations and servicing cost structures decreased by 22% and 17%, respectively.
Total origination volume rose 51% on a quarterly basis to $7 billion, which demonstrates “MSR replenishment capability,” the company said. As of June 30, total liquidity improved to $231 million and book value per share rose to $57.
The company remains bullish on its forward and reverse mortgage servicing businesses, but it was the forward side that helped lead to better operating results in the second quarter, O’Neil said.
“Servicing yet again improved its contribution to adjusted pretax (income) for the quarter,” he explained. “This was driven by the forward servicing business where higher revenue —including higher servicing fees and seasonally higher float — plus continued improvements in our cost structure combined to generate an additional $16 million in adjusted [payment-to-income (PTI)] versus the prior quarter.”
Reverse origination volume grew to $184 million in Q2, up from $166 million in Q1, but the benefit of higher volume was offset somewhat by lower margins on loans that contributed to a lower PTI ratio for the reverse originations segment.
Remaining bullish on reverse
Despite some of these challenges, company leaders expressed continued optimism about Onity’s presence in the reverse space, which echoed previous statements regarding Liberty’s contribution to the company’s diverse portfolio.
“We believe our position as a top reverse lender creates additional earnings upside opportunity with lower interest rates,” Messina said. “Reverse originations volume and profitability have historically increased with falling interest rates.”
In a Q&A segment at the end of the call, O’Neil was asked specifically about the reverse servicing segment, where he said Onity continues to see a lot of upside.
“In terms of reverse servicing, the returns are very strong,” O’Neil said. “It just happens to be a smaller business. It’s a smaller pool of either subservicing candidates, or just fewer assets to originate and own.
“So, as you can imagine, there is a correspondent and a broker market on the originations reverse side that we do participate in to acquire the reverse MSRs, but that doesn’t have quite the volume that the forward market has. It continues to be profitable for us.”
