Ocwen Financial Corporation
Q1 2018 Earnings Call Transcript

Published: 2 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Ocwen Financial’s First Quarter 2018 Earnings Call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today’s conference, Mr. Stephen Swett. You may begin.

[Stephen Swett:]

Good morning, and thank you for joining us for Ocwen's First Quarter 2018 Earnings Call. Please note that our first quarter 2018 earnings release and slide presentation have been released and are available on our Shareholder Relations website for your review. Speaking on the call, we have Ocwen's President and CEO, Ron Faris; and EVP and CFO, Michael Bourque. As a reminder, the presentation and our comments today may contain forward-looking statements made pursuant to the safe harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology. Forward-looking statements by their nature address matters that are to different degrees uncertain. Our business has been undergoing substantial change, which has magnified such uncertainties. You should bear these factors in mind when considering such statements and should not place undue reliance on such statements. Forward-looking statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. In the past, actual results have differed from those suggested by forward-looking statements, and this may happen again. Our forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. In addition, the presentation and our comments contains references to non-GAAP financial measures, such as adjusted operating expense, adjusted pre-tax income, adjusted pre-tax income before corporate debt expense, normalized adjusted cash flow from operations, illustrative servicing cash flow, available liquidity and adjusted pro forma liquidity among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition. We also believe these non-GAAP financial measures provide an alternate way to view certain aspects of our business that is instructive. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported results under accounting principles generally accepted in the US. For an elaboration of these factors I just discussed, please refer to our presentation in today's earnings release as well as the company's filings with the Securities and Exchange Commission, including Ocwen's 2017 Form 10-K and the first quarter 2018 Form 10-Q, which are available on our website. Now, I will turn the call over to Ron.

[Ronald Faris:]

Good morning, everyone, and thank you for joining us today. As you’ve already seen from our earnings release earlier this morning, I am very pleased to report that Ocwen reported a profit in the first quarter. While [the tempting] simply end my prepared remarks right there, there are so much more to report on. For those of you who may be new to the story, Ocwen is a leading mortgage servicing and lending company with special capabilities. We are the largest servicer of non-conforming mortgage loans in the country. We are also one of the leading reverse mortgage lenders in the US. While reporting our first quarterly profit in over a year is important and demonstrates progress on the financial front, we are most proud of the tremendous impact we had this quarter helping consumers achieve financial stability. Optimum servicing has a slogan, ‘Helping Homeowners Is What We Do’, and help we did. During the quarter, we helped almost 11,600 families remain in their home and get a fresh start through a sustainable loan modification. By performance, helping homeowners in Q1 represents a 19% improvement over the prior quarter. We also helped almost 1,100 of our servicing customers refinanced into a better loan through our forward lending business. That’s almost 13,000 families helped in the first quarter alone and all of them should help improve RMBS performance. But that is not all we did. Our reverse mortgage subsidiary Liberty also had a great quarter. Liberty has a tagline ‘Changing Lives’, and changing lives we did. In Q1, Liberty helped change for the better the lives of 1,200 seniors and their families through a reverse mortgage. On top of that, our Reverse Mortgage Lending business had a record quarter recording a $9.8 million pre-tax profit and the Servicing business had its 7th consecutive profitable quarter. I am very proud of the optimum servicing, forward lending and Liberty teams that make up Ocwen Financial Corporation and that achieve these outstanding first quarter results. At the corporate level, we also had a very busy and fruitful quarter. As most of you already know, we received $280 million from new residential during Q1, following the completion of our amendment to our 2017 agreement. We largely completed the liquidation of our Auto Lending business. We remained a Fannie Mae STAR, or a Servicer Total Achievement and Rewards performer, for 2017, and we announced that we intent to acquire PHH Corporation later this year for $360 million. We also continued our progress on the regulatory front, but there is still more to do there before we can resume growth. I am also pleased to report that we have identified some good opportunities to profitably deploy or excess liquidity. For example, in March and April, we executed some of our owned call rights and called a total of 11 deals with an unpaid principal balance of over $80 million. We intend to hold the loans for now, most of which are performing and couponed above 9%. We are also strategically deploying capital in our reverse lending business and Ginnie Mae servicing business to improve margins. These accomplishments reflect not only the quality of our management team and staff but part of the ongoing transformation of the company. Strategically right now, the team and I are focused on the following

[Michael Bourque:]

Thank you, Ron, and good morning. My comments today will be brief, beginning with a short update on our announced merger with PHH. I will then review our financial results for the first quarter and our balance sheet and liquidity position. As noted, our first quarter investor presentation, including financial and cost slides, are available on our website. Let me begin with a few comments on our announced merger with PHH. Integration planning efforts began almost immediately after the deal announcement and continue to move forward at pace. As we stated at the time of the acquisition, we believe in Ocwen and PHH merger provides significant economies of scale, improves operating margins and accelerates our transition to an industry-leading servicing platform. We still believe that to be true today. From a closing perspective, we are working closely with all stakeholders, including regulators and the GSEs, to obtain all necessary approvals and consents. PHH has scheduled a shareholder meeting for June 11, 2018, to consider and hopefully approve the transaction. We remain on track with the timing we laid out on our last call and expect to be able to close the acquisition in the second half of this year. Please understand that beyond this, we do not plan to comment further or answer questions regarding the merger or the ongoing integration planning process. Turning to our results. Our first quarter results demonstrate continued operational improvement for the company, despite various headwinds. We recorded revenue of $260 million, which was down $70 million from the prior quarter, primarily due to portfolio runoff and our exit from the forward wholesale lending channel. We reported pre-tax income of $5 million, which was a $50 million improvement over Q4. Adjusting for various items, as shown on slides 21 and 23 of the investor presentation, adjusted pre-tax income would have been $6 million in the first quarter. Regarding our MSRs. At the beginning of the year, we made a change in accounting elections to carry the remainder of our owned MSRs at fair value. Previously we had only carried our PLS MSRs and a very small portion of our GSE MSRs at fair value. This brings us more aligned with most of our competitors’ account for the assets and added $82 million to our shareholders equity in the quarter. As a result of this, however, it could lead to additional income statement volatility driven by interest rate changes. With this accounting election, you will note that we no longer reflect MSR amortization as an expense. This impact is now captured in the fair value mark-to-market. Please note that the fair value changes related to the MSRs, which were previously recorded in servicing and origination expenses, have also now been reclassified within operating expenses as MSR valuation adjustments net. In our slide deck, we tried to layout the MSR impacts for you in a clear way, and we'll be happy to follow up on any questions. Because of this change and the first quarter profit, stockholders’ equity increased $0.58 per share or $85 million from the end of last year and currently stands at $630 million. Please refer to our 10-Q, which was filed this morning, for additional details which includes previously disclosed MSR amortization reflected as part of the MSR valuation adjustments net for prior periods. Our servicing segment delivered $20 million of pre-tax income, including $20 million of favourable interest rate change, fair value adjustments for Ginnie Mae and GSE MSRs. This was our seventh consecutive quarter of profitability in the servicing business. Servicing revenue was $226 million, down 5% quarter-to-quarter, primarily due to the runoff of our servicing UPB and the NRZ transaction. Servicing expenses were $171 million. We also continue to focus as a company on cost reductions, a process that we expect to continue once the PHH acquisition closes. In our lending segment, overall funding volumes were down significantly compared to the prior quarter due to our exit from the wholesale channel on the forward lending side and an overall slowdown in activity in the reverse industry. However, due to continued efforts to reduce our cost structure and improve margins driven by increased investor demand for our reverse mortgage securities, our lending segment produced $9 million of pre-tax income in the first quarter compared to a $4 million loss for all of 2017. During the first quarter, cash flow from operating activities was $99 million compared to $4 million in the fourth quarter of 2017. This generation was primarily driven by the collection of $71 of advances. At quarter end, our financial position remained strong. We ended the quarter with $286 million of cash in the balance sheet and available liquidity of $467 million. We have total corporate debt outstanding of $644 million, representing a 1.0 times book-to-equity ratio. I note that following the quarter we paid down an additional $25 million of our term loan, reducing our leverage further. Adjusting for accrued litigation and regulatory reserves, our voluntary April paydown of the term loan, and cash allocated to complete the merger with PHH, our pro forma adjusted liquidity at March 31, 2018 was $330 million. In summary, we continue to make progress operationally and our current financial position provides adequate liquidity and balance sheet strength for the near term. Now I will turn the call back over to Ron for a few closing remarks.

[Ronald Faris:]

Thank you, Michael. As most of you know, I will be retiring as CEO at the end of June, after more than 27 years at Ocwen. I've been participating in these quarterly earnings call for almost 17 of those years, and this will be my last. It has been an honor to represent and serve Ocwen shareholders, Ocwen employees, our corporate and consumer clients, our Community Advisory Council and so many other stakeholders. I especially want to thank Fannie Mae, Freddie Mac and Ginnie Mae, our many lenders, and especially Michael Nierenberg in the New Residential team for their constant support as we have addressed our challenges and opportunities these past few years. I look forward to seeing Ocwen expand our relationships with the GSEs, Ginnie Mae and new residential in the future. I thank all of you who have reached out over the past couple of weeks to wish me well. While I would not directly part of the search and selection process for the new CEO, I can say that the independent directors conducted a thorough process in ultimately selecting Glen Messina. I have known Glen for many years, and I have great respect for him and his capabilities to lead. With the pending acquisition of PHH, it is a good jumping-off point for me and allows for truly fresh start for Ocwen. I look forward to helping the board, Glen and the Ocwen team with this transition. I am hopeful that at some point Ocwen will once again be in a position to compete for new servicing growth. Most of all, I look forward to Ocwen continuing to help homeowners and changing lives with the better. As much on more than any other organization that I am aware of, Ocwen has helped this country rebound from the housing crisis, and I believe we can and will be an important part of the housing and mortgage industries going forward. Thank you. This completes our prepared remarks. Operator, please open up the call for questions.

[Operator:]

[Operator Instructions] And our first question comes from Bose George with KBW. Your line is open.

[Bose George:]

Let me just start by saying Ron best wishes on your retirement, then it’s been a pleasure of working with you over the years.

[Ronald Faris:]

Thank you.

[Bose George:]

In terms of questions. Now that you’ve settled with the states, what is the outlook for that, the $21 million of expenses that you called out, the litigation and regulatory settlements, that number going forward?

[Ronald Faris:]

So you look. We have been spending a fair amount of legal fees in working towards the settlement with the various states, and the good news is that that’s largely behind us now. But we still are defending ourselves against the CFPB action and the Florida and Massachusetts actions, and so we will still have ongoing legal fees associated with those matters. Hopefully we can come to a reasonable resolution; but if not, we will continue to vigorously defend ourselves. I think the good news is with the states, the settlement amounts were under $2 million in total. So that was good, and we -- but it’s difficult for us to predict where those remaining litigation cases will ultimately end up or how much it will cost to continue to prepare for our defence.

[Bose George:]

Okay, makes sense. Thanks. And then actually just in terms of the new accounting for the MSR, the - if you can just point out the slide that breaks -- that sort of shows the breakout to get to that $17.1 million number?

[Michael Bourque:]

So -- good morning, Bose. There’s a couple of places you can see the impact, I think first at the highest level on the summary results on Page 7 of the deck. The way to think about kind of the net $20 million benefit in the quarter is you will note that quarter-to-quarter we were about $8 million worse in OpEx. This was driven by large favorability in the fourth quarter last year. That didn’t repeat to that extent in the first quarter this year. However, we were about a $100 million better in interest expense. And so if you look at those two lines together, that makes up to $20 million favorable kind of P&L impact that really represents the kind of the sum impact for the quarter. We’ve added an additional slide that also tries to give folks a more adjusted view or an alternate view of the results on Page 14, whereby we took the MSR valuation adjustments and the NRZ interest expense and move them up into revenue, which is again how we know some other servicers report to try to take some of the noise out of the different pieces of the income statement. And so you can see that there. And then finally we have our kind of traditional reconciliation slide, which is I believe 24 or 25, plus 25 that breaks out the traditional line item details and it all kind of ties back to the numbers I just described.

[Ronald Faris:]

Just take a look at those, Bose, if you have additional questions on how things go between the pages, let me know, but hopefully it's all there for you.

[Bose George:]

Okay, great. Thanks. And actually just one last one from me. The $114.5 million, the gains from the expected future draws on existing reverse loans, are there any offsetting expenses we should think about when the draws take place? And then just what's the rough timeframe when those are likely to happen?

[Ronald Faris:]

Yeah, very little expense. I mean, basically all the expense incurred in originating the loan has always already been baked in. So as the borrower makes these additional draws, we have modest amount of expense in our capital markets group to basically securitize those through the Ginnie Mae process, but very, very little expense. Those tails flow in over out a 3- to 4-year period, but keep in mind that each month, each quarter we add to that population through new originations. So you’ve actually I think seen a gradual increase in that balance that we report over the last year or so because we've actually been adding more to it than we've actually been recognizing into the P&L. But it 3- to 4-year time horizon.

[Bose George:]

Okay, great. Thanks.

[Ronald Faris:]

You're welcome.

[Operator:]

Thank you. And our next question comes from Henry Coffey with Wedbush. Your line is open.

[Henry Coffey:]

Yes. Good morning, everyone. And, Ron, I can't thank you enough for everything you've helped us with over the years. It won't be the same without you. But congratulations. It's been amazing. You guys have helped me as much as probably you've helped your customers at different times. So just going with Bose’s question. To understand the reverse mortgage business, if you stopped originating today, would the business be profitable in the future? Or do you continue to…

[Ronald Faris:]

No, no. So that's an excellent question, Bose. So while not our intent by any means, as you saw we had a record quarter. But if we were to close down the operations tomorrow, yes, we have some cost to close down the operation, but those tail income amounts that we described would continue to be generated and come in over the next 3- to 4-year timeframe that I just mentioned. So that's a good question. If we did close up the operational piece, which we don't intent to do, we would still earn that income over the next 3 to 4 years with, as I mentioned in my answer to Bose, with virtually no expenses.

[Henry Coffey:]

And then in terms of the actual nature of that business, is it all direct? Is it some direct and some purchase from other originators? Or what is it?

[Ronald Faris:]

Good. So I think what maybe distinguishes us is we are pretty effective in what I would say all three channels. We have a corresponded channel. We have a wholesale channel, and we have a direct-to-consumer channel. We don't spend as much money on advertising as some of the competitors do to drive some of their retail business, but that's very expensive. So we have a more balanced business model that has all three channels, and we’re very focused on maybe to ensure that all three channels are performing well and performing profitably. We’re much more focused on bottom line profits than we are on generating just the volume of loans. And so depending on different cycles that we go through, you will see more corresponding or some quarters you will see an increase in wholesale and some quarters you will retails is better or less volume, depending on what the circumstances are and where the market is. But we’re - we think that we have a really good business model there because we have all three channels. And just to remind everybody, we don’t directly service the loans. We do own mortgage servicing rights, but we use third-party servicers to serve the reverse mortgage portfolio.

[Henry Coffey:]

And then on the forward servicing business, on an operational basis, that business is profitable now. Obviously you have the PHH transaction in front of you. That's a lot to digest the platform transition. That’s a lot to digest -- as you go forward, there are still other portfolios and other companies that are in need of a stronger partner. Thoughts on acquisitions on the long term?

[Ronald Faris:]

Yes. So as we reported, the servicing business has been profitable for the last seven quarters, but it is - it does remain challenge because we continued to - the portfolio gets smaller and smaller every quarter and so revenue is going down and some of our expenses are fixed, which eats into that margin. Look, it's really difficult at this stage to, and as it has been for quite a while to discuss, future MSR acquisition opportunity. With the most of our settlement agreements that we entered into, we are - our restrictions on acquiring MSRs in most states and on April 30, what really ended this past April 30. But we still do have restrictions on boarding loans on to our existing servicing platform. It’s one of the reasons why the PHH acquisition is so important to us. But I would note that, as many of you are aware, we still have restrictions from the state of New York on our ability to acquire bulk MSR. And so continue to look towards the future and prepare ourselves for the future when we might have opportunity to either acquire MSRs or maybe partner with somebody like new residential on deals that they do, but there's not much more we can say about it at this point in time because we still do have certain restrictions on us.

[Henry Coffey:]

Well, congratulations, and I look forward to seeing the hearing about next chapter.

[Ronald Faris:]

Thanks, Henry.

[Operator:]

Thank you. And our next question comes from Kevin Barker with Piper Jaffray. Your line is open.

[Kevin Barker:]

Good morning. Ron, congratulations. I wish you the best. Good luck.

[Ronald Faris:]

Thank you.

[Kevin Barker:]

In regards to the transaction with NRZ, the $280 million in cash, how is the - can you walk through some of the moving parts on how the gain associated with that cash is recognized through the income statement outside of the MSR net that you showed of $17 million this quarter. ? And would we expect roughly $17 million to continue for the foreseeable future?

[Michael Bourque:]

So good morning, Kevin. The way to think about it, it’s basically again that represents the cash flows that we sold to NRZ as part of the kind of restructuring or the amendment of the transaction. And so while we’ve got the cash upfront, we will effectively continue to recognize to earnings, those -- that -- when we receive the cash flows, frankly, between now and the end of those contracts which are now into early 2020. The benefit basically will come in through - rest MSR liability kind of mark-to-market that shows up in interest expense. And so on line 24 that benefit is broken out. You can see it for the fourth quarter and the first quarter, depending on -- fourth quarter isn’t a perfect comparison just because we hadn’t yet closed the entire transaction. So I think in the fourth quarter the number was something like $5 million, and so it was a little less than we would expect going forward. But as time passes, that number will come down just because the size of the portfolio will continue to run off, but it is effectively an approximation of the additional cash flows that NRZ acquired through the restructuring between when we entered the agreement and when that those initial contracts would have expired. So that should remain consistent assuming all else remains equal, but will come down as the portfolio declines between now and then.

[Kevin Barker:]

So it’s basically contract expense that’s going through interest expense. Is that the right way to thin about?

[Michael Bourque:]

Yes, you can think about it that way. It’s deferred gain or something like that. But just given the nature of how we account for this as a financing liability instead of kind of a sale transaction, it flows through interest expense.

[Kevin Barker:]

Okay. And then could you -- how much was it is going through interest expense? Like I can’t quite reconcile Slide 24.

[Michael Bourque:]

Yes, so it’s the -- it’s the liability runoff line, so which is the current line down under NRZ’s expense on Slide 24. So actually it’s quite down. It’s a long line, but it’s the MSR liability runoff, which is the amortization of the next MSR liability was $36 million in the first quarter.

[Kevin Barker:]

Okay. And so we should see something slightly less going forward coming through on the interest expense until early 2020. Is that right?

[Michael Bourque:]

Yes, and the way to think about it is the upfront cash we’ve received, we’ll have to recognize that income over time. And so that just a couple of years less than that to run out and that’s how to think about it.

[Kevin Barker:]

Okay. And then in regards to you have a drop in expenses, operating expenses, this quarter. Obviously there has been dramatic move into account for lending initiatives and other initiatives that you have in place. Do you still feel like there is runway to have the operating expense decline again in second and into the third quarter, given you're about to go through acquisition with PHH?

[Ronald Faris:]

Yeah, I would say we do. We’re not forecasting anything or providing guidance, but really for the last couple of years the team has been very focused on gradually reducing headcount. And I think if you go back, you've seen a consistent kind of 3% to 5% reduction per quarter in our servicing business. In the corporate functions, it's maybe a little bit more challenging to enact that kind of run rate, given just the relative fixed nature of that, but it's something the team continues to focus on and it’s something that as we are in our kind of planning process now around the PHH integration, where we're kind of mindful of how the two companies will come together. But we're not taking the brakes off. There's no guarantee at this point the transaction will close, although we expect it will and hope it will push through running our business as we had been prior to the announcement of the deal. So we - with the continued pressure on the top line, it's just a reality of where we find ourselves and we continue to push that teams to continue to find productivity.

[Kevin Barker:]

Okay. And then in regards to the servicing origination expenses which dropped significantly in the first quarter versus what we saw previous years, now part of that may have been in Ginnie Mae losses which typically go through. But was there any other items that may have come through on the servicing origination line that were benefit this quarter in particular?

[Michael Bourque:]

Yes. I think if you look at the adjusting OpEx lock in the appendix, servicing origination expenses actually went up in the quarter on an adjusted basis, and that's really - that really reflects the - we had a $29 million recovery of a claim in the fourth quarter last year that if we didn’t kind of adjust out from our results. And so that obviously didn't repeat in the first quarter. So it looks like servicing origination expenses would have risen. I think the number was about $13 million. And so the difference between that $29 million headwind quarter-to-quarter and the actual $13 million increase was driven by lower G&A claims, lower other servicing expenses, and just kind of continued execution within servicing.

[Kevin Barker:]

Okay. Thank you for taking my question.

[Ronald Faris:]

Sure.

[Operator:]

Thank you. And our next question comes from Sam Martini with Omega. Your line is open.

[Sam Martini:]

Hey, guys. Good morning. Thanks for taking the question. I have just three questions, all are pretty much housekeeping. Can we talk about sensitivity? There is -- you always have this segment in the queue on -- segment on the correlation into rising rates, but you raised sort of up 35 basis points or so in Q1 and up another 25 basis points quarter to-date. Obviously it's a month and not three months. But can you just post us on a balance sheet sensitivity post NRZ through an incremental 25 basis point rate rise? Question one. Question two on the tail draws present values, I just wanted to confirm that the right present value number is $81 million, which I'm sort of pulling out of the queue, but that's not on the balance sheet, and it was $66 million a year ago went to $67 million, went to $68 million, went to $71 million, went up a $11 million in the quarter, and I'm just curious looking forward if you would talk through how that may or may not evolve in the future. I'm also curious using a 12% discount rate, the present value that what you think market discount current rates are if you wanted to monetize it, because that would seem to me to be reasonably attractive. And then finally maybe a question for Mike. Any thoughts on the balance sheet? Your loan is trading well above par at this point L plus 5. The loan market is probably the strongest capital market in the United States right now other than Internet stocks that earn no money. But other than that, I am just curious if there’s plans to just continue to delever organically with unscheduled paydowns together with amortization or if there’s some more formative plan in place to look that loan even if you took it down to L plus 4 or L plus 3.5? I mean that’s all accretive to shareholder. So those are three questions. Thank you.

[Ronald Faris:]

Okay, Sam. So let me start and then I will pass it over to Michael. On the first question, I think one of the things that you people need to think about in our industry is that the reason the MSR values go up when rates go up is because prepayment speeds drop and you basically end up with life of your income. But prepayment fees can’t go to zero. And so there’s always going to be some people that move or whatever. And so the rate movement has been so dramatic over the last four months or so that the amount of upside there is probably significantly muted at this stage because the evaluation firms have already lowered their prepayment speeds so low that there’s not -- there’s not much lower that they can go. So while I think if rates were to go down, there is actually conclusion in there where if rates were to go down, you probably wouldn’t see the evaluation firms increase prepayment speeds a lot until they go down a lot. So in some way, even though we are pointing out that by marking everything to market now, it does allow for more volatility where we are in the interest rate cycle relative to our particular portfolio. We may not see a lot of volatility for the remainder of the year even if rates do go up 25 basis points or down 25 basis points just because of how does that move [Indiscernible].

[Sam Martini:]

Understood. On tail draws?

[Ronald Faris:]

Yes. So on tail draws, first of all, Michael, have you confirmed that the amount that’s in the Q that you referenced, Sam, is basically the discounted number for the -- undiscounted number that we reported in our earnings release. The -- this is an asset that rarely trades. There are not many eligible buyers for the asset, because generally would need to be a Ginnie Mae have issuer in order to buy the assets so the most likely buyer would be another reverse mortgage issuer. But I think our belief is that, as you pointed, out 12% is a good return and that it should be something that another firm would be interested in acquiring, if that was ever something that we wanted to do. It’s really hard to predict whether it’s 12% or 10% or 15% discount rate, but we think that that’s a reasonable number. And if there's others out there in the world’s listing and they want to sell them at that level, we’ll definitely take a look. But as far as kind of the jump in the quarter, a lot of that is assumption-based and some of that has to do, there was the fourth quarter we saw volumes rise up a good bit as some of the - there’s the pull-forward of volume related to something that changes that the industry has made. And so that's probably some of what increase that balance. We may have to come back to you on the details, unless, Michael, you’ve got additional information at this stage.

[Michael Bourque:]

Yeah, that's exactly what I would have said. And as Ron mentioned in his - I think answering a question with Bose, as we considered to originate, we kind of top up or potentially grow the population of estimated future tails. And so we've seen that balance increase obviously over time. But it's a complicated asset. We do go through third-party evaluation processes to ensure we've got a good deal with it. But it's something that, like [Indiscernible] part of your question, Sam, is you’re correct. It's not on the balance sheet today, and so this is kind of incremental value above and beyond the balance sheet.

[Sam Martini:]

Got it. So that’s sort of $0.60, not in your book value that you talked about earlier?

[Michael Bourque:]

Correct.

[Sam Martini:]

And, Mike, while I've got you, can you just update me? I know we saw most of the deferred servicing fees in the NRZ trade, but I thought there's a stump piece that remains outstanding. It's usually in the Q and I haven't sort of scanned it yet to find it. What's the remaining amount of sort of present value deferred servicing fees that are out there for us?

[Michael Bourque:]

I was actually just skimming the Q myself. I'm going to blank, Sam. So I'll come back to you on that. But I know it is in there. So we can follow up on that. And then you had one other part of your question.

[Sam Martini:]

Yeah, just talking about the balance sheet. The loan - it’s not often you see loans sort of sitting out there 1 to 1.5, and L plus 5 is a fancy rate for a loan market that's got record issuance and start for supply and it just - it's not going to change anyone’s life to take 100 and 150 basis points off this thing. But it’s a small facility. I don't know what your thoughts are on the bonds or on the loan or on the balance sheet in general on the ABS market, which is incredibly accommodative right now. So just like a high-level picture on how you guys are thinking about the balance sheet for right now? You got a lot of cash, a lot of liquidity, which is still paying out. Is it paying out? The LIBOR is 2.5. So you’re paying out 7.5 on a loan. It seems crazy.

[Michael Bourque:]

Yeah. So I would say we continue to look at all of our expenses. And interest expense certainly being a big one, we have been through a lot here in the first quarter. It's kind of we talked about this morning. I think positive momentum here for the company, we wanted to get through today certainly to give a good update or a wholesome update for the market, but that's something that we continue to look at. I think the term loan could be more attractive just given it doesn’t really have some of the prepayment penalties and other things that the second-lien notes would have. But we continue to assess our capital structure both today and then with an eye towards the future thinking ahead towards integrating PHH into the company and assuming there we get about $190 million of debt outstanding that we’ll assume at the time of the transaction. And so it’s all part of the calculus, and so I take your point. It’s something that we've been thinking about and hopefully there’ll be more to talk about at some point in the future.

[Ronald Faris:]

Yeah, I just kind of follow on that. Michael and his team as well as some of our traditional bankers, like Barclays, are definitely focused on this and a lot of it is -- we’re looking at not just see today’s needs but how we’re going to look once we integrate with PHH and what’s the optimal capital structure to get us where we want to be on that integration and merger. So it all kind of has to go together. We don’t want to be something now that handcuffed us for something that we want to do six or nine months later. So all that is going into the evaluation. But we’re definitely focused on it and I think there will be more to come on that.

[Sam Martini:]

Thanks, guys. I just want to echo on the record what everyone else has said, Ron, and to you and employees, all the employees to get your cheesed and grind through what you guys have been through in the last couple of years. You don’t read this in the papers, but I think all the borrowers, all the millions, 1.2 million today and more than that a year ago and two years and three years ago are all better off for your service. And servicing might not be glamorous. It might even have been insulting to be in that business for the last long period of time. But you really did a great job and I think your borrowers are better for it, despite all the regulatory morass that you guys were forced to undergo. I really commend you for your grit and for the ability to get up and persevere through all of this. I hope you enjoy some lower end time off. So thank you for all you’ve done.

[Ronald Faris:]

Thank you, Sam

[Operator:]

Thank you. And our next question comes from John Devaney with United Capital Markets. Your line is open.

[John Devaney:]

Yes. So first of all I just want to congratulate you on your retirement. At first I was a little bit worried about your leaving Ocwen. One of the reasons that I invested in Ocwen in the first place was and built my position was because of you. As I think I’ve said before and as Sam echoed a minute ago that by far the RMBS holders in the subprime category have very greatly benefited by Ocwen’s strategy of doing principal loan mounts earlier in 2012 and ‘13 and it’s just that those Ocwen deal in fact have outperformed every other servicer in the market. So the RMBS bondholders have benefited. In fact, I bought so many bonds at $0.05, $0.10 to the dollar, like hundreds and hundreds of millions of faith that it actually made me so much money that it allowed me to buy pretty my entire Ocwen stake. So that’s kind we’re tuning in. Over time, and I can tell you this Ron that I’ve gotten to know you and that you are straight shooter. And I deal with a lot of people in the bond market and there’s a lot of scandals out there and many of them have been caught lying to their customers that have gotten all kinds of trouble. But I have been a very, very good lie detector. And as I told many people out there in the industry, Ron Faris is a total straight shooter. And I really, really appreciate your dedication. I didn’t missed out for three years and although many colleagues and other people even some of my family have advised me potentially to give up on the this invest and I’ve decided not to, and much of that has all been because of you and all of the actions that you’ve taken over this three-year period. I mean you sold over 1 billion of proceeds of Fannie, Freddie, Ginnie and got higher prices than almost anybody in the market, de-levered the company and really saved the company. I mean, it’s just like - [Indiscernible] You expanded a lot of the corporate bonds and corporate loans in the time when many of the equity investors were short stocked and it just simply couldn't have been possible, although that again is because you had the respect of all those bondholders. You’ve in a way won over both New York and California and got rid of the monitors, which saved the company almost a staggering $80 million of expense a year paying those guys you've just recently won over in the 30 states that for whatever reasons, vertical or otherwise, enjoying with the CFPB on April 20 OCN bomb day. I like to think about it because my huge position went down 3 points in just a matter of hours, which was awful. But - and you’ve done that, as you just stated, with almost no penalty to Ocwen. You’ve continued to be by far the best partner that [Hindenburg] and NRZ could ever dream of. Your servicing practices -- just like it made me a lot of money in RMBS bonds that I invested in, your servicing practices drive the highest amount of profit for NRZ. These are just facts. Your loss litigation techniques of loan mods driving delinquency lower make the servicing advances at NRZ pays on earning these MSRs lower and because of that Ocwen outperformed their better system relationship NSM, anybody else out there by a very wide margin. So anyhow, thank you for all of your dedication. At first I was a little bit worried and upset hearing that you’re leaving. Although having spoken to you and others, I'm comfortable going forward that Ocwen is going to be in good hands with the client, anyway. So that's my retirement speech to you, but I really think extremely, extremely highly of you and I would really, really encourage all of the GSEs and state regulators to really see what I've seen over many, many years. I mean, I've been trading our profit 20 years. My firm United Capital Markets has its 20-year anniversary coming up this February. So I'm very experienced in subprime. I’ve been extremely experienced in servicing practices for my entire career and I'm very, very disappointed that some of this against Ocwen, it does seem to have been political. But Ocwen, by far, has benefited there its bondholders and also has very - obviously very greatly benefited homeowners that have remained and retained home retention under Ocwen quite a bit better than everyone else. So I'm looking forward to the next chapter in Ocwen. I'm glad to be an investor and all that so. Okay, question number one. Sorry for that lengthy goodbye to you, Ron, but I look forward to talking to you later on into your retirement event. So question number one. So in subservicing, Ron, can you comment a little bit on your ability -- you now won over all 30 states, New York is the one that says you can't buy MSR, but could you potentially add subservicing contracts? It just seems to me that because NRZ thinks so highly of you, and they have to, it’s just math and with your servicing practices that NRZ should be talking to some very big banks that their cost of service, and I have done some research recently, but - of like Citibank, Bank of America, Wells Fargo, these guys do not like servicing at this borrowers. So there’s FHA or some of the legacy private label, securitizations that are out there. Their cost of service is higher than yours. You guys are expert in doing this and they're not. And they don’t do as good as job at that they don’t help this many homeowners. So everybody, regulators, bondholders, NRZ, everybody should want you guys to be more. Now the question is, since NRZ thinks highly of you, is it possible -- and because your cost of service is lower than the clearly Bank of America, well, some of the guys, would it make sense for potentially you and NRZ to partner together? NRZ goes and buys MSRs and some of the agency, like some FHA stuff that has more of a delinquency of legacy private label, would it make sense for NRZ to go and buy that stuff and then hire you as a subservicer and that would be a great first step of you guys growing? And is that allowable under all the current regulatory landscape that you are operating under?

[Ronald Faris:]

So, John, I think -first off, I think the scenario you laid out does make a lot of sense. I hope, and as I’ve said in my prepared remarks, I hope that we do have opportunities to work with NRZ on new transactions and very much in line with what you described, where they would be more the capital partner and we would be the servicer or subservicer. But a couple of comments here. First off, what’s really important for us right now hopefully to get to the point where we are able to close the PHH transaction so that we can then complete the migration of our portfolio off of our existing servicing platform on to the Black Knight MSP platform that’s used by PHH today and then hopefully have the opportunity to add subservicing to the PHH platform. PHH is already in the market, as far as we are aware, looking for subservicing opportunities, and we would want to continue that effort going forward. All that being said, we are going to be in close communication with all of our regulators to make sure that they are comfortable whatever our business plan is, make sure that we are meeting whatever requirements were under relative to the different agreements that we’ve signed. And so I think you have to understand that this is a business that the company and regulators need to be in constant discussion about what they are doing, why they are doing, and with hopefully they’re blessing at the right time, we will be able to move forward with what you described as hopefully other opportunities. But I think first and foremost we need to be focused on closing the PHH transaction and getting our loans on to their platform so that we have one single platform that can be then used for the future.

[John Devaney:]

And then another question. Could you view -- but first of all, congratulation on calling RMBS deal. This is a big deal. If you guys did 10 deals and just basically bought $80 million worth of loans with a 9% growth factor, I mean that’s a total home buying. I mean that’s obviously a strategy that NRZ has. Could you discuss, number one, how many of the -- what is the unpaid principal balance of the portfolio that’s non-NRZ connected that your own call rates to, is it like $25 billion to $30 billion, may be? And give estimate of how many of those deals are in the money. I think that NRZ has said they’re making a couple of points on these deals.

[Michael Bourque:]

Yes. So, John, the number of PLS deals or UPB that's not NRZ-owned, you can see it on Page 26, it’s about $28.5 billion worth UPB, so you're right in the ballpark there.

[Ronald Faris:]

Yeah. And we may not own the call rights on all of that, but a big chunk of it we do. Look, we’re not going to report out at this stage what we think an opportunity is or how much is in the money versus out of the money, but and up until recently we were in a great place to actually execute on some of that. But I think it is a great sign that we’ve started to execute on that strategy. It’s going to be a lot smaller than that NRZ opportunity because they're this much bigger. But it’s good that we're able to start doing that and we're going to continue to scour the portfolio looking for additional opportunities where we can and where we can deploy capital at above where our corporate debt is trading. So - but I can't really give you any more details at this stage. Sorry.

[John Devaney:]

Okay. And then specifically about some of the - you stated that you made all this progress with all of the state cease-and-desist orders and there's more work to do with the CFPB and with Florida and Massachusetts. And I noticed that the docket for the CFPB case in Florida went sealed and restricted on April 10, which means that the whole docket went confidential. Is there settlement talks were going on or any progress that's been made with the CFPB?

[Ronald Faris:]

Yeah. There's no relevance to that and I would caution you from reading anything into that. That’s just part of the normal process as the case progresses. So I think I wouldn't - I would caution you from reading anything additional into it.

[John Devaney:]

Okay. Okay, that’s it. I want to -- enjoy your retirement and I very, very much appreciate all of what you've done for Ocwen, and I would really welcome all those others out there to see the same thing that I’ve seen over many years.

[Ronald Faris:]

Well, thanks, John. I'm not quite off the door yet. I have couple of months here to go and, look, other team here, Michael Bourque, John Britti, Scott Anderson, Tim Hayes and the rest of them have been around for many years and are a solid team. And like I said, I have great respect for Glenn. And so I’m optimistic about the future and hopefully it’s a fresh start for Ocwen and we can become a big player again in the mortgage and housing industry and help more consumers. But I appreciate all the kind words, John, but it wasn’t just me, it was the whole team. But thank you.

[Stephen Swett:]

Operator?

[Operator:]

That concludes the Ocwen Financial Corporation’s First Quarter Earnings Call. Thank you all for attending, and have a nice day.

[Ronald Faris:]

Okay. Thank you, everybody.