ONITY GROUP INC. 10-K Analysis & Summary – 2/21/2025

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Onity Group Inc.

10-K

Annual report

Filing date:

02/21/2025

TLDR:

ONITY GROUP INC. returned to net income in 2024, driven by MSR valuation gains and increased originations. However, the company faces significant legal and regulatory risks and relies on key clients and vendors.

ELI5:

ONITY Group, a mortgage company, made a profit this year after losing money last year, mainly because their mortgage servicing rights (MSRs) increased in value. However, they still face risks from regulations and depend on a few big clients.

Accession #:

0001628280-25-007126

Published on

March 16, 2025

Analyst Summary

Net income attributable to common stockholders was $33 million in 2024, compared to a net loss of $63.7 million in 2023.
Servicing and subservicing fee revenue totaled $832 million.
Originations gain on sale was $58 million.
MSR valuation gain, net of hedging, was $60 million.
Revenue decreased by 9% year-over-year, primarily due to the accounting derecognition of MSRs previously sold to Rithm.
Operating expenses increased by 6%, driven by higher compensation and benefits expense.
Stockholders’ equity was $443 million, with a book value per common share of $56.26.
MSR investment totaled $2.5 billion, with a total servicing and subservicing UPB of $301.7 billion.
Cash position was $185 million.
Total assets were $16.4 billion.

Opportunities and Risks

Legal and Regulatory Risks: Extensive regulation and supervision by federal, state, and foreign governmental authorities, including the CFPB, HUD, and SEC. Potential for adverse regulatory action, fines, and penalties.
Financial Performance, Financing, Liquidity, and Net Worth Risks: Inability to execute strategic plan, access capital, comply with debt agreements, or meet minimum net worth and liquidity requirements. Exposure to liquidity, interest rate, and foreign currency exchange risks.
Operational Risks: Disruption in operations or technology systems due to service provider failures, cybersecurity breaches, or system failures. Adverse changes in political or economic stability in key operating locations.
Credit Risks: Consumer credit risk, counterparty credit risk, and concentration risk.
Tax Risks: Changes in tax law and interpretations, challenges from taxing authorities, and inability to utilize net operating losses.
Growth in Servicing and Subservicing Portfolio: Potential to grow the servicing and subservicing portfolio through multiple origination channels, MSR bulk acquisitions, and subservicing additions.
Originations Volume and Margin: Opportunity to increase originations volume and margin through increased recapture rates and expansion of correspondent lending network.
Reverse Mortgage Business: Potential for growth in the reverse mortgage business, leveraging the company’s expertise and brand recognition.

SEC Filing Report: ONITY GROUP INC. 10-K for 2024

Executive Summary

This report analyzes ONITY GROUP INC.’s 10-K filing for the fiscal year ended December 31, 2024. The company, a financial services provider specializing in forward and reverse mortgage servicing and originations, rebranded from Ocwen Financial Corporation in June 2024. Key findings include a return to net income driven by MSR valuation gains and increased originations volume, offset by losses on debt extinguishment. The company faces significant legal and regulatory risks, as well as challenges related to its reliance on key clients and vendors. Overall, the company’s strategic plan to achieve sustainable profitability is dependent on successful execution and favorable market conditions. A hold rating is suggested, pending further observation of the company’s ability to manage its risks and capitalize on opportunities.

Company Overview

ONITY Group Inc. (formerly Ocwen Financial Corporation) is a financial services company that services and originates both forward and reverse mortgage loans through its primary brands, PHH Mortgage and Liberty Reverse Mortgage. The company is headquartered in West Palm Beach, Florida, with significant operations in the U.S., USVI, India, and the Philippines. ONIT operates in three segments: Servicing, Originations, and Corporate.

Detailed Analysis

Management’s Discussion and Analysis (MD&A)

Management highlights the company’s strategic initiatives focused on balance and diversification, prudent capital-light growth, industry-leading cost structure, top-tier operating performance, and dynamic asset management. The MD&A emphasizes the importance of the Servicing business, supported by the Originations platform. A key risk identified is the potential loss of the Rithm subservicing agreement, which represents a significant portion of the company’s portfolio. The company also discusses its relationship with Oaktree and the sale of its interest in MAV Canopy.

Financial Statement Analysis

Income Statement

Net income attributable to common stockholders was $33 million in 2024, compared to a net loss of $63.7 million in 2023.
Servicing and subservicing fee revenue totaled $832 million.
Originations gain on sale was $58 million.
MSR valuation gain, net of hedging, was $60 million.

Key ratios and trends:

Revenue decreased by 9% year-over-year, primarily due to the accounting derecognition of MSRs previously sold to Rithm.
Operating expenses increased by 6%, driven by higher compensation and benefits expense.
MSR valuation adjustments improved significantly, driven by higher market interest rates and favorable assumption updates.

Balance Sheet

Stockholders’ equity was $443 million, with a book value per common share of $56.26.
MSR investment totaled $2.5 billion, with a total servicing and subservicing UPB of $301.7 billion.
Cash position was $185 million.
Total assets were $16.4 billion.

Key observations:

Total assets increased by 31% year-over-year, primarily due to an increase in loans held for investment.
HMBS-related borrowings increased significantly, reflecting the acquisition of reverse mortgage assets.
Senior notes decreased due to debt redemption.

Cash Flow Statement

Net cash used in operating activities was $574 million.
Net cash provided by investing activities was $401 million.
Net cash provided by financing activities was $183 million.

Key observations:

Operating cash flow was negatively impacted by net cash paid on loans held for sale.
Investing cash flow was positively impacted by net cash received in connection with HECM reverse mortgages held for investment.
Financing cash flow was positively impacted by proceeds from the issuance of senior notes.

Risk and Opportunity Assessment

Risks

Legal and Regulatory Risks: Extensive regulation and supervision by federal, state, and foreign governmental authorities, including the CFPB, HUD, and SEC. Potential for adverse regulatory action, fines, and penalties.
Financial Performance, Financing, Liquidity, and Net Worth Risks: Inability to execute strategic plan, access capital, comply with debt agreements, or meet minimum net worth and liquidity requirements. Exposure to liquidity, interest rate, and foreign currency exchange risks.
Operational Risks: Disruption in operations or technology systems due to service provider failures, cybersecurity breaches, or system failures. Adverse changes in political or economic stability in key operating locations.
Credit Risks: Consumer credit risk, counterparty credit risk, and concentration risk.
Tax Risks: Changes in tax law and interpretations, challenges from taxing authorities, and inability to utilize net operating losses.

Opportunities

Growth in Servicing and Subservicing Portfolio: Potential to grow the servicing and subservicing portfolio through multiple origination channels, MSR bulk acquisitions, and subservicing additions.
Originations Volume and Margin: Opportunity to increase originations volume and margin through increased recapture rates and expansion of correspondent lending network.
Reverse Mortgage Business: Potential for growth in the reverse mortgage business, leveraging the company’s expertise and brand recognition.

Uncommon Metrics

Employee Engagement: Employee survey indicated strong engagement levels of 85% favorable.
Community Development: The company contributed nearly $7 million to nonprofit organizations since the COVID pandemic.

Conclusion and Actionable Insights

ONITY Group Inc. has demonstrated a return to net income in 2024, driven by MSR valuation gains and increased originations volume. However, the company faces significant legal and regulatory risks, as well as challenges related to its reliance on key clients and vendors. The company’s strategic plan to achieve sustainable profitability is dependent on successful execution and favorable market conditions.

Overall Assessment: Hold. While the company has shown improvement in financial performance, the risks and uncertainties surrounding its business model warrant a cautious approach. Further observation is needed to assess the company’s ability to manage its risks and capitalize on opportunities.

Recommendations:

Actively manage regulatory and contractual compliance obligations to mitigate the risk of adverse regulatory action.
Diversify funding sources and maintain adequate liquidity to meet the financing requirements of the business.
Monitor and manage counterparty credit risk, particularly related to Rithm.
Continue to execute on strategic initiatives to improve operating performance and reduce costs.
Evaluate and refine the MSR hedging strategy to effectively manage interest rate risk.

Financial Ratio and Metric Analysis

Note: All calculations are based on the provided data. Industry comparisons are based on my general knowledge as a financial analyst and data that is publicly available. A specific source will be listed if used.

Profitability

Gross Profit Margin:
- Ratio/Metric: Since the cost of revenue is not explicitly provided, we cannot calculate the Gross Profit Margin.
Operating Profit Margin:
- Ratio/Metric: Operating Income / Revenue = (Revenue – Operating Expenses) / Revenue = ($976.0 – $436.5) / $976.0 = 55.27%
Net Profit Margin:
- Ratio/Metric: Net Income / Revenue = $33.9 / $976.0 = 3.47%
Return on Assets (ROA):
- Ratio/Metric: Net Income / Total Assets = $33.9 / $16,435.4 = 0.21%
Return on Equity (ROE):
- Ratio/Metric: Net Income / Total Stockholders’ Equity = $33.9 / $442.9 = 7.65%
Earnings Per Share (EPS) – Basic and Diluted:
- Ratio/Metric: Basic EPS = $4.28, Diluted EPS = $4.13

Liquidity

Current Ratio:
- Ratio/Metric: Current Assets / Current Liabilities. We need to identify current assets and current liabilities.
  Current Assets: Cash and cash equivalents ($184.8), Restricted cash ($80.8), Loans held for sale ($1,290.2), Receivables, net ($176.4) = $1732.2
  Current Liabilities: Advance match funded liabilities ($417.1), Other liabilities ($420.6) = $837.7
  Current Ratio = $1732.2 / $837.7 = 2.07
Quick Ratio (Acid-Test Ratio):
- Ratio/Metric: (Current Assets – Inventory) / Current Liabilities. Since inventory is not listed, we will assume it is zero.
  Quick Ratio = $1732.2 / $837.7 = 2.07
Cash Ratio:
- Ratio/Metric: (Cash and Cash Equivalents + Restricted Cash) / Current Liabilities = ($184.8 + $80.8) / $837.7 = 0.32

Solvency/Leverage

Debt-to-Equity Ratio:
- Ratio/Metric: Total Liabilities / Total Stockholders’ Equity = $15,942.5 / $442.9 = 35.99
Debt-to-Assets Ratio:
- Ratio/Metric: Total Liabilities / Total Assets = $15,942.5 / $16,435.4 = 0.97
Interest Coverage Ratio (Times Interest Earned):
- Ratio/Metric: EBIT / Interest Expense. EBIT = Earnings Before Interest and Taxes = Income (loss) before income taxes + Interest Expense = $39.3 + $288.9 = $328.2
  Interest Coverage Ratio = $328.2 / $288.9 = 1.14

Activity/Efficiency

Asset Turnover:
- Ratio/Metric: Revenue / Total Assets = $976.0 / $16,435.4 = 0.06

Valuation

Price-to-Earnings Ratio (P/E):
- Ratio/Metric: Market Cap / Net Income. Market Cap = Stock Price * Shares Outstanding = $31.94 * 7,873,053 = $251,445,327.82 or $251.45 million.
  P/E Ratio = $251.45 / $33.9 = 7.42
Price-to-Book Ratio (P/B):
- Ratio/Metric: Market Cap / Total Stockholders’ Equity = $251.45 / $442.9 = 0.57
Price-to-Sales Ratio (P/S):
- Ratio/Metric: Market Cap / Revenue = $251.45 / $976.0 = 0.26
Enterprise Value to EBITDA (EV/EBITDA):
- Ratio/Metric: EV = Market Cap + Total Debt – Cash and Cash Equivalents. Total Debt = HMBS-related borrowings + Other financing liabilities + Advance match funded liabilities + Mortgage loan financing facilities + MSR financing facilities + Senior notes = $10,872.1 + $846.9 + $417.1 + $1,528.2 + $957.9 + $487.4 = $15,109.6
  EV = $251.45 + $15,109.6 – $184.8 = $15,176.25
  EBITDA = Net Income + Interest Expense + Taxes + Depreciation and Amortization. Depreciation and Amortization is not explicitly provided, so we will use Operating Expenses – Compensation and benefits – Servicing and origination – Technology and communications – Professional services – Occupancy, equipment and mailing – Other expenses = $436.5 – $232.5 – $52.3 – $52.9 – $52.6 – $31.4 – $14.7 = $100.1
  EBITDA = $33.9 + $288.9 + $5.3 + $100.1 = $428.2
  EV/EBITDA = $15,176.25 / $428.2 = 35.44

Growth Rates

Revenue Growth:
- Ratio/Metric: ($976.0 – $1,066.7) / $1,066.7 = -8.50%
Net Income Growth:
- Ratio/Metric: ($33.9 – (-$63.7)) / (-$63.7) = -153.22%
EPS Growth:
- Ratio/Metric: ($4.28 – (-$8.34)) / (-$8.34) = -151.32%

Other Relevant Metrics

MSR Valuation Adjustments: The company reports MSR valuation adjustments, which are significantly influenced by interest rate and assumption changes. These adjustments can create volatility in earnings. In 2024, the net MSR valuation adjustment was a loss of $96.2 million, compared to a loss of $232.2 million in 2023.
Servicing and Subservicing Fees: A key revenue driver, these fees decreased by 12% from 2023 to 2024, from $947.3 million to $832.5 million. This decrease could be due to runoff in the servicing portfolio and changes in subservicing agreements.
Non-Performing Loans: The percentage of non-performing loans to total loans serviced decreased slightly from 4.1% in 2023 to 4.0% in 2024.

Commentary

Onity Group’s financial performance in 2024 presents a mixed picture. While revenue decreased, the company achieved net income profitability after a loss in the previous year. The company’s profitability metrics, such as net profit margin and ROE, show improvement but remain relatively low. The company’s leverage remains high, as indicated by the debt-to-equity and debt-to-assets ratios. The company’s revenue is highly dependent on servicing and subservicing fees, which decreased in 2024.