Onity Group's servicing and lending businesses benefited in the second quarter from higher rates and seasonal homebuying, respectively, but the company reported a loss on nonrecurring negative fair value changes and portfolio restructuring.
The company recorded a $13 million net loss to common shareholders but taking out those negative items had adjusted pre-tax income of $14 million. S&P Capital IQ's consensus for net income under generally accepted accounting principles was $12 million. The latest earnings to common shareholders compared with a positive $7 million in the first quarter ($7.6 million under GAAP), and $21 million a year earlier.
Revenue clocked in at $283 million, up 15% from seasonally comparable numbers a year ago but under a consensus estimate for $293 million. Rising rates made servicing the bigger contributor to adjusted pretax income even though originations set a new record. The company generated $294 million in revenue during the first quarter and $247 million a year earlier.
"Our double-digit portfolio growth, despite the risk transfer and client MSR sales, highlights the strength of our value proposition and the power of origination capability," Glen Messina, chairman, president and CEO at Onity, said during the company's earnings call.
The company ended the quarter with a $341 billion total servicing portfolio, up from $338 billion in the first quarter and a revised $310 billion a year earlier.
Originations, which were driven primarily by correspondent and co-issue activity, rose to more than $15 billion from $14 billion the previous fiscal period and over $9 billion a year ago.
Onity was able to increase scale in servicing while selling more than $5 billion in reverse mortgage assets from its portfolio to Finance of America. While forced to cut the size of the sale and retain some assets to win approval for the sale from government securitization guarantor Ginnie Mae, the assets it retained are older and anticipated to run off relatively quickly.
The company remains involved in reverse mortgage subservicing and has been building out expertise in that area as well as commercial, which it has found profitable. Subservicing clients generally remain more open to considering new alternatives due to consolidation activity in the space, Messina said.
In line with its growth in the broader servicing portfolio Onity sees opportunity in traditional mortgage servicing rights. It invested a little more heavily in this during the quarter than its typical 50-50 split with subservicing.
Industry trends and opportunities
Banks, which may be attracted to MSRs by some combination of customer recapture prospects and anticipation of a proposed loosening in capital rules, have been more active buyers in the market, Messina said.
"We think that's good for valuations, but obviously creates an interesting competitive dynamic," he added.
Messina said he has not seen so much the entry of new bank players as increased activity from existing ones. The dynamic could have depositories looking at nonbanks in a new light, Messina said.
"It makes businesses like ours more valuable in the sense that if somebody is thinking about getting into the mortgage space, it's hard to start de novo. You want to get in, you get in with scale, and you look at a business like ours that has billions of dollars of custodial and escrow deposits, which are considered to be sticky deposits.," Messina said. "That's an interesting situation."
When asked about reports of more competition from the government-sponsored enterprises' cash window for loans, Messina said the company's record-setting lending volumes and a 3 percentage point increase in its recapture rate to 51% from last year, show it competes effectively.
The portfolio restructuring due to the FOA transaction and a discontinued contract with Rithm contributed $9 million to costs but the fair value changes had a more negative impact at $24 million, about half of which was attributable to reverse mortgages, Messina said.
The volatile market also had an impact on the broader outlook for the company's return on equity.
"Management maintained the full-year 2026 adjusted pre-tax ROE guidance of 10-15% but indicated that they expect to be towards the lower end of this range given geopolitical instability, inflation and market volatility," BTIG analysts Douglas Harter and Will Nasta noted in a report.
The restructuring is aimed at reducing Onity's exposure to reverse mortgage assets that have been particularly volatile, Messina said.
"We've reduced our investment in reverse MSRs because yields are 2 percentage points lower than forward, and they're not easily leveraged, and they have a higher relative volatility," he said.
The company reported an improvement in the 30-day delinquency rate of traditional Federal Housing Administration-insured loans and what it said was a seasonal uptick in arrears among loans that government-sponsored enterprises Fannie Mae and Freddie Mac buy. It's monitoring both trends to see whether and how much of that activity rolls more permanently into long-term delinquencies.
Cost cutting versus capacity
The company has been pursuing efficiencies with actions that include a reduction in its headcount by around 3.1% since 2023, according to Revelio Labs, a company that provides workforce data and analytics.
"With respect to staffing, our objective is to balance efficiency with flexibility," Chief Financial Officer Sean O'Neil said during the call. "We optimize our capacity levels to balance current earnings growth and accommodate any future interest rate decline; hence, our origination staffing is at levels to support higher than current volumes."
The company also has been applying artificial intelligence to operations to produce savings in addition to strategic gains.
"We have been deploying various strategies such as AI-enabled agents that assist our contact center in quickly providing the most effective range of solutions for the borrower," O'Neil said. "Ws we scale AI-powered solutions for our contact center, we are targeting an annual savings of about $3 million in our current portfolio size."
Onity also has been doing some hiring, posting an average of 3 jobs per month, Revelio found. One notable recent hire was Jim Shirreffs, a former managing director at Change Lending who has taken on the role of senior vice president, capital markets and margin management at Onity.
Strategies in that area were generally effective during the second quarter, according to O'Neil.
"The volume improvement did not come at the expense of margins, as those also improved due to our strong enterprise sales efforts and continued improvements on analytics," he said.
Revenue margins in consumer direct and other channels both improved with the former up 18 basis points to 261 and the latter up by 3 at 26, the BTIG analysts noted.
The relatively small consumer-direct business was profitable but reported lower pre-tax income in part due to a 30% reduction in lock volume relative to the first quarter. A temporary increase in operating expense due to lagging commission payments from a first-quarter refinance surge also contributed.
At press time mid-morning, the company's stock was down nearly 10% on the day and trading at $34.33 per share.
Onity has been actively repurchasing shares this year and after a previous $10 million authorization ran out earlier this year, it put in place additional authority that gave it the option to buy back another $20 million in common stock through June of next year.
Messina did not immediately disclose the pace of repurchases but said it would be revealed as part of a subsequent Securities and Exchange Commission filing.
"The share buyback should continue generally at the rate that we saw in the second quarter," he said.
