Onity Group Reports Improved Third-Quarter 2026 Financial Results

Onity Group (NYSE: ONIT ) reported third-quarter financial results on Thursday. The transcript from the company's third-quarter earnings call has been provided below. This transcript is brought to you APIs. For real-time access to our entire catalog, please visit for a consultation.

View the webcast at Summary Onity Group reported improved financial performance in Q3 2026, with net income and adjusted ROE increases from the previous quarter, driven by strong servicing income amid rising interest rates. The company is focusing on servicing scale, portfolio optimization and technology-driven productivity to improve long-term ROE. It aims to reduce costs per loan by increasing servicing UPB and leveraging machine learning for MSR selection.

Management remains optimistic about meeting full-year guidance, expecting servicing to be the primary earnings driver if current interest rates persist, while continuing to invest in technology to enhance customer engagement and operational efficiency. The company's capital allocation strategy includes potential share repurchases and debt reduction, given current market conditions and improved financial metrics, including a 19% adjusted ROE. Onity Group is actively managing its cost structure to adapt to the market cycle, targeting over $50 million in operating expense reductions for 2027, while maintaining liquidity and strategic flexibility.

Full Transcript OPERATOR Hello and welcome everyone joining today's Onity Group third quarter earnings and business update conference call. At this time all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. To register to ask a question at any time, please press star-1 on your telephone keypad.

Please note this call is being recorded. We are standing by should you need any assistance. It is now my pleasure to turn the meeting over to Valerie Hartel, Vice President, Investor Relations. Please go ahead.

Valerie Hartel (Vice President, Investor Relations) Good morning and welcome to Onity Group's third quarter 2026 earnings call. Please note that our earnings release and presentation are available on our website at onitygroup.com. Speaking on the call will be Chair, President and Chief Executive Officer Glenn Messina and Chief Financial Officer Sean O'Neil. As a reminder, our comments today may be forward-looking statements made pursuant to the safe harbor provisions of the Federal Securities Laws.

These statements, which speak only as of the date they are made, may be identified by reference to a future period or by use of forward-looking terminology and address matters involving assumptions, risks and uncertainties, including those described in our SEC filings. In addition, the presentation and our comments contain references to non-GAAP financial measures such as adjusted pre-tax income. We believe these non-GAAP measures provide a useful supplement to discussions and analysis of our financial condition because they are measures that management uses to assess the performance of our operations and allocate resources.

Non-GAAP measures should be viewed in addition to and not as an alternative for the company's reported GAAP results. A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures and management's reasons for including them may be found in the press release and the appendix to the investor presentation. Now I will turn the call over to Glenn Messina. Glen Messina (President and CEO) Thanks, Valerie.

Good morning, everyone, and thank you for joining our call. We're looking forward to sharing our results for the third quarter as well as reviewing our strategy and financial objectives to deliver long-term value for our shareholders. Let's get started on Slide 3. In the third quarter, our balanced business and strong execution delivered improved financial performance versus the second quarter despite continued market volatility and rising interest rates.

Our growth engine is working well with third quarter year-to-date subservicing additions exceeding our full-year target and record origination volume reflecting the tail end of the refinancing surge. Assuming interest rates remain at current levels, we expect servicing will be the primary earnings driver going forward and we're adjusting our originations platform accordingly. We believe we're on track to achieve our full-year adjusted ROE guidance. Let's turn to Slide 4 to review a few key financial highlights.

Both servicing and origination contributed to a profitable third quarter with rising interest rates driving increased servicing income offsetting declining origination income. Total company net income, adjusted pre-tax income and adjusted ROE are all improved from the second quarter. Our third quarter financial results include $11 million pre-tax, or $0.95 per share after tax, unfavorable impact of market volatility on hedge costs and agency loan sales versus the second quarter. Total servicing UPB was up 9% year over year with strong total servicing additions from both origination and subservicing.

Consumer Direct performed well, delivering funded volumes up 67% over last year with continued improvement in refinance recapture rate, which remains above industry average. Overall, despite challenging market conditions, we delivered improved financial performance and believe our third quarter results demonstrate our strategy is sound and execution is strong. Let's turn to Slide 5 to discuss the actions we're taking that we believe will improve long-term ROE performance. Our ROE improvement actions are organized into three categories: servicing scale, portfolio optimization and technology-driven productivity.

Scale is a focus because we estimate that an incremental $50 billion of servicing UPB has the potential to reduce fixed cost per loan by 14%, assuming our current cost structure. As we grow our servicing portfolio, we'll continue to target roughly a 50/50 mix of owned servicing and subservicing, which we believe balances capital efficiency, earnings-per-share growth and ROE. Next is optimizing our servicing portfolio. We're leveraging machine learning, using client, asset and consumer data to identify what we believe are the most profitable MSRs to focus our origination activities and improve returns.

Based on this work and the projected origination market environment, we intend to be significantly more selective in the MSRs we purchase and hold going forward. In subservicing, we're focused on growing with higher-margin accounts and segments like business purpose, residential and commercial that require specialized capabilities that we already possess. Finally is technology-driven productivity. We've significantly reduced expenses since the acquisition of PHH while growing our portfolio and developing new capabilities.

Using robotic process automation, intelligent document processing and natural language processing, we've reduced manual effort, transformed how we work and improved customer engagement. We believe our cost structure is highly competitive and we expect future investments will help drive additional productivity, improve recapture and enhance the customer experience. Let's turn to Slide 6 to review our balanced business model. While we may experience variability in any given quarter due to change in market dynamics, our balanced business continues to demonstrate long-term resiliency.

The complementary profit dynamics of origination and servicing balance each other as interest rates change. In the 12 months ending third quarter 2026 versus the 12 months ending third quarter 2025, origination income has increased over two times due to lower rates in the first half of this year, helping to offset declining servicing income from higher prepayment and MSR runoff. And with interest rates increasing in the third quarter, servicing adjusted pre-tax income has improved, offsetting declining origination income.

We continuously optimize operations capability and scalability as well as our MSR investment profile to enable our balanced business model to operate as intended through interest rate cycles. Assuming interest rates remain at the current levels, we expect servicing will be the primary earnings driver and we're right-sizing our originations platform accordingly. Let's turn to Slide 7 for more about our growth focus and actions. Third quarter origination volume reflects the success of our value-based sales approach as clients clear their inventory of closed loans from the end of the refinancing surge.

We delivered over 30% year-over-year growth in both B2B and Consumer Direct, outpacing the overall industry, with refinance payoff units up 10% year over year. We've improved our overall refinance recapture rate to 57% in the third quarter, up 18 percentage points versus the prior year. Our recapture performance has continued to outpace the ICE industry average for the last 12 months and we believe we're delivering top-tier recapture performance versus our third-party origination-centric peers. With mortgage rates increasing, we've seen a doubling of home equity product volume versus the third quarter last year.

We believe this is a valuable product suite for consumers and one that helps us manage operating capacity and improve customer retention. As a reminder, we do not include home equity volume in our refinance recapture rates. Our originations team is performing well and we remain committed to our prudent, capital-light growth strategy, value-based selling and leveraging technology to enhance performance. Let's turn to Slide 8 to discuss subservicing.

Our differentiated servicing platform and compelling value proposition is driving key wins with new clients as well as growth with existing clients. Year to date, third quarter subservicing additions of $53 billion exceeded our full-year target ahead of expectation. We've earned key wins with capital partners, banks and independent mortgage banks and continue to have an active opportunity pipeline across all three segments. We're excited about the growth we're seeing in business purpose residential and commercial subservicing driven by our expanded product offerings.

UPB is up 46% versus prior year and we remain focused on growing this higher-margin segment. Overall, we're pleased with our results in subservicing and we continue to invest in people, processes and technology to expand our capabilities and deliver superior value and service. Let's turn to Slide 9 to talk about how we've grown our servicing portfolio. Total servicing UPB ended the quarter up 9% year over year, with growth in both owned MSR and subservicing versus 3% for the total industry servicing growth year over year.

Servicing additions net of runoff of $76 billion was largely driven by organic growth and more than offset planned transfers to Rithm and other client-driven deboardings due to asset sales. With higher interest rates and MSR demand keeping prices elevated, we continue to see clients sell their older MSRs while replenishing their portfolio with new originations. We believe our portfolio growth demonstrates the strength of our value proposition and our ability to compete effectively for business. Let's turn to Slide 10 to talk about how our continued investment in technology is improving business performance in Consumer Direct.

Our technology investments help improve the key drivers of recapture: engagement, conversion and platform scalability. Our objectives are to provide a seamless customer experience, increase straight-through processing and automate elements of our processes that require manual intervention by our customers and employees. We use multiple categories of AI, including predictive analytics, to transform borrower signals into actionable decisions. Omnichannel engagement helps maximize customer connectivity across digital and non-digital channels.

Intelligent document processing facilitates data extraction, validation and document routing, and intelligent workflows elevate service, reduce manual effort and enable high-value work. These technologies have positioned us to double cash-out telemarketing conversions, reduce turnaround times, increase approval rates, improve Net Promoter Score and reduce cost per loan. Now let's turn to page 11 to review how we're using technology in servicing.

We've applied many of the same technologies to realize our servicing objectives of enhancing borrower engagement, satisfaction and loyalty, streamlining operations, growing servicing and subservicing relationships and increasing platform scalability. We're using predictive analytics to anticipate borrower needs and drive proactive support. Omnichannel engagement helps us deliver seamless support across customer-preferred channels. Intelligent document processing enables data extraction, validation and document routing, and intelligent automation streamlines exception management and eliminates manual effort to perform routine tasks.

These technologies have allowed us to eliminate thousands of hours of manual work activity, improve agent satisfaction ratings and maintain servicing cost per loan more than 30% lower than the MBA large non-bank servicer cost average. Now I'll turn it over to Sean to discuss our financial results in more detail. Bradley Sean ONeil (Chief Financial Officer) Thanks, Glenn. Let's turn to slide 12 where we describe our income drivers.

Third quarter showed a strong improvement to adjusted pretax income, which more than doubled to $30 million and delivered a 19% adjusted ROE. Net income available to common stockholders also improved $16 million to $3.5 million due to high interest rate volatility. Net income still had to overcome higher MSR hedge costs and origination pipeline execution, which created $11 million of higher expense in the third quarter versus the second quarter. The business model was very balanced across adjusted PTI with servicing contributing $29 million versus a $24 million contribution from originations, and corporate costs came down slightly.

Servicing saw improved PTI as rates increased, with originations coming in lower than the prior quarter. We expect that this trend will continue if rates remain elevated on a sequential basis. Other key financial metrics improved. Diluted earnings per share increased to $0.41 and book value per share rose to $74.

Our end-of-period liquidity was strong at $284 million. As a reminder, servicing typically sees intramonth swings, with peak liquidity occurring at the end of the month as remittances flow in for mid-month subservicing advances. In addition, there are quarterly or seasonal liquidity impacts, such as interest rate payments on our high-yield debt in May and November. Also, rate volatility can cause mark-to-market impacts on the MSR asset that requires margin calls.

These are just a few of the drivers that impact our decisions to allocate liquidity to other uses. Please turn to Slide 13 for details on operating expenses in all three reported segments. Originations, servicing and corporate operating expenses were lower quarter over quarter as we carefully managed headcount and other variable expenses while origination locks slowed in Consumer Direct. We also shed costs in servicing as we reduced some high-cost subservicing relationships.

These actions led to improvements in operating efficiency for the company. We are continuing to reduce costs to be aligned with the market cycle we are currently experiencing in anticipation of generally higher mortgage rates for a prolonged period. We expect to have over a $50 million improvement in lower operating expenses for full year 2027. This represents more than a 10% reduction from the forecasted full year 2026 expense base of about $500 million.

Please turn to Slide 14 for servicing details. Revenue in our servicing segment declined slightly quarter over quarter. Importantly, adjusted pretax income rose as we exited the lower-margin businesses in the first half of 2026. The improved servicing pretax income was also driven by lower runoff.

Finally, growth in higher-margin businesses like commercial subservicing also helped the improvement quarter over quarter. Our owned MSR book grew about 20% year over year, helping drive revenue, net income and cash flows. As a reminder, the fair value of our reverse HECM MSR assets is markedly smaller both year over year and quarter over quarter as a result of the sale to Finance of America, which closed at the end of the second quarter. Please turn to Slide 15 for servicing advances.

We have reduced servicing advance balances by 28% over the last two years, even as we have grown owned servicing UPB, by focusing on the small percentage of loans that drive the biggest advances. As you can see by the dark blue graph, the bulk of our advances are linked to delinquencies in our non-agency owned MSR book. By continuing to deploy various technology strategies, some of which Glenn referenced earlier, we believe we can lower costs and simultaneously improve customer outcomes. Please turn to Slide 16 for our hedging strategy.

Our MSR hedge strategy continued to perform as intended. As a reminder, our strategy is designed to mitigate interest rate risk, and our hedge has been effective in minimizing the impact of interest rates on our MSR valuation net of hedge. Given that an MSR hedge is dependent on the interest rate and related derivatives markets, we frequently review and assess our hedge strategy to manage risk and optimize liquidity and total returns. Please turn to Slide 17 for originations.

Originations pretax income was down slightly quarter over quarter due to higher rates in the third quarter compared to the prior year. Our adjusted PTI was roughly similar despite Q3.26 being less favorable than Q3.25 for an originations rate environment.