Ocwen Financial Corporation
Q3 2016 Earnings Call Transcript

Published: 27 Oct 2016

[Operator:]

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Ocwen Financial Third Quarter 2016 Earnings Conference. At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions] We will have a question-and-answer session later and the instructions will be given at that time. Now I would like to welcome and turn the call to Mr. Steven Swett. Please go ahead.

[Steve Swett:]

Good afternoon. Thank you for joining us today for Ocwen’s third quarter 2016 earnings conference call. Before we begin, please note that a slide presentation is available to accompany today’s call. To access the presentation, please go to the Shareholder Relations section on our website at www.ocwen.com and click on the Events and Presentations link. 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 a different degree 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 contain references to non-GAAP financial measures, such as adjusted operating expense, normalized adjusted cash flow from operations, Illustrative servicing cash flow and adjusted pre-tax income and the economic value to Ocwen of our MSRs. 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 United States. For an elaboration of the factors that I just discussed, please refer to our presentation and today’s earnings release as well as the company’s filings with the SEC, including Ocwen’s 2015 Form 10-K, Ocwen's second quarter 2016 Form 10-Q and once filed Ocwen's third quarter 2016 Form 10-Q. Joining me on the call today is Ron Faris, President and Chief Executive Officer; Tom Gilman, President of Automotive Capital Services and Michael Bourque, Chief Financial Officer. Now, I will turn the call over to Ron.

[Ron Faris:]

Good evening. And thank you for joining us today. Last quarter I highlighted our superior servicing results for both homeowners and RMBS investors, our progress in resulting our legacy issues, our path to return to profitability and our strategy for future growth. I intend to highlight much of the same today. However, I would like to start with our path to return to profitability. Following last quarter’s earnings call, I began to believe that we had a chance at achieving a quarterly profit, not next year but in the third quarter. So I challenged the entire Ocwen team to respond. From our press release released earlier today, you already know the result. The team did respond and we achieved GAAP net income of $9.5 million, our first profit since the second quarter of 2015 and a $97 million improvement over the second quarter of this year. Frankly when I made the challenge to the team, I had hoped that we would get some help from a rise in interest rate that would have helped us recover some of the MSR impairment taken earlier this year. We didn’t get much help from rates, and we continued to incur some large legacy expenses yet we still met the challenge. Included in the third quarter results was an additional $10 million reserve for the potential regulatory settlement in California, which I will discuss further in a few minutes. If you adjust for the additional $10 million California reserve, third party monitor spend at $15 million, new remediation, and legal settlement reserved the $6 million and ample of other normalizing items all of which are summarized on pages 40 and 42 of our investor presentation. Our illustrative adjusted pre-tax profit would have been $28 million, up $25 million or over eight times higher than Q2. I am also extremely excited to say that the servicing segment reported a pre-tax profit of $33.2 million for the quarter, which is a $47.9 million improvement over the prior quarter’s loss of $14.7 million. Included in the Q3 profit, was $12 million related to the gains associated with the execution of various call rates. Our capital market and servicing teams did a great job executing these call rates and achieving this positive result. Servicing revenue was strong due to our superior borrower system results and operating costs continued to decline. Going forward, we must closely manage our servicing and corporate costs, maintain quality service, improve efficiencies and better integrate with our leading, our lending business to improve our recapture rate. Our inability to grow over the past 30 months due to our regulatory constraints has resulted in a significant reduction in the size of our servicing portfolio and revenue. However, we have used that time to continue to improve our customer service, community relations, compliance, risk management, technology and processes. It has made us an even better servicer. This quarter’s results for both our customer and shareholders helped to demonstrate that. Our lending segment on the other hand had a disappointing financial quarter, delivering only $3.6 million of pre-tax income despite origination of volumes rising 8%, but we are continuing to make progress at rolling our new and improved origination technology that should help in enhanced results in the future. Bottom line, I believe for our company to be successful long term, we will need a far better contribution from our lending business in the future. Let me spend a minute explaining why I believe we can achieve better lending results in the future. Our existing servicing portfolio provides us a tremendous opportunity that we must take advantage of. We want to grow our mortgage origination so we can better serve and retain our customers. At our current capacity, we are reaching only about 25% of our customers that can benefit from a lower interest rate or lower payments. We’ve intentionally ramped up slowly and carefully to maintain quality in an environment with intense regulatory scrutiny on the entire mortgage market. The mortgage originations industry is very competitive and to win we need a competitive advantage. We believe, we can gain that advantage through better technology. We are now about half way through a two and a half year project to implement a new proprietary loan origination system that will automate significant portion of the verification and underwriting process. It will implement systematic controls for items that we check manually today. Best of all, it should easily plug into third party capabilities including some of the more promising Fintech technology. We implemented a similar technology and approach in our reverse mortgage origination business a few years ago and dropped our operating cost by over 50%. We simultaneously improved our quality, cycle time and service. That is why we are one of the leading reverse mortgage originators in the country. We believe the key differentiator for all future mortgage origination is technology and we are making investments now to build this necessary foundation. Automotive capital services or ACS continued to make progress growing outstanding receivables by 66% over June 30, 2016. As we have briefly discussed in the past, we believe we have discovered a great opportunity in an underserved market. We are currently providing inventory financing to use car dealers at an interest rate of 9% to 9.5% and we are earning a similar amount in fees. Later on in this presentation, Tom Gilman President of ACS will discuss in more detail our Auto Floorplan lending business. Turning back to the total company results, compared to the second quarter, Ocwen revenue was down $13.6 million or 3.8% driven UPB runoff in our servicing segment and lower margins in our mortgage origination business. Reported operating expenses were down $113.3 million or 29% compared to the prior quarter and adjusted operating expenses as shown on slide 41 were down $57 million or 19% highlighting the progress we had made with our cost improvement initiative. As outlined on page eight, we continue to believe that we have substantial value estimated at $463 million that is not currently reflected in our balance sheet. Our call rates changed this quarter were a great example of one of these items. While we have made great progress and reported a profit this quarter, I do want to point out that we will continue to face certain significant financial challenges and risks in Q4 and next year including the exploration of HAMP at year end, the continued run off on the servicing portfolio, ongoing third party monitor cost, uncertainty around regulatory settlements in action and known and unknown legal exposure. Next, I would like to report on our ongoing progress in resolving some of the legacy issues which have hampered our ability to grow and return to sustainable profitability. If you recall, in Q2 we agreed to settle the Fisher DOJ [ph] cases for $30 million. I want to note that we didn’t incur an additional $2 million of legal expenses in Q3 related to these cases. The $30 million amount has not yet been paid and the parties are working to finalize the settlement document. We also received last quarter a positive report from Duff & Phelps and a separate more recent positive report from Murray Analytics, which found that certain 2015 RMBS investor allegations they reviewed were also baseless. In addition, this month we reached an agreement in principle to settle the previously disclosed consolidated shareholder derivate action from2014. We believe this resolution will be covered in full by our applicable insurance coverage. This quarter we received a long awaited upgrade to our servicer ranking from S&P to average. We believe this upgrade eliminates a significant risk and any reasonable chance that new residential could request the transfer away from us for any other related servicing rights it controls for effective servicing agreements come April 2017. We remain committed to providing new residential best in class servicing performance and we continue to work collaboratively with Michael Nierenberg and his team on various fronts to strengthen our partnership. While we have not yet reached a settlement with the California Department of Business Oversight, which would among other thing end the current consent order and associated third party auditor. We believe, we have made good progress since we last reported out here. At this point, we believe the $25 million settlement reserve will be adequate although there is no final agreement and things could change. It is not appropriate for us to discuss any additional details at this time, but we would very much like to resolve this matter this year. As for the New York Department of Financial Services, we are getting closer to requesting that their ban on us acquiring mortgage servicing right on loan portfolios be lifted. We will be making this request after achieving over 170 specific benchmark established by the New York monitor in accordance with the 2014 consent order. We hope to make the request in the coming weeks. I would note however that even if we have the ability to acquire MSR from a regulatory perspective, we would not necessarily expect to engage in significant transaction. Any future MSR acquisitions will have to take into consideration various factors, including but not limited to our cost of incremental capital the type of MSRs available, advance financing etcetera. I would also like to note that our CFPB consumer complaint volumes continue to decline year-over-year. For the three month period of May to July, they declined at 28% and at a higher level than other mortgage companies. We continue working to resolve all of our remaining legacy issues. I would also note that notwithstanding our progress we continue to invest in our compliance and risk management systems. Next, I would like to briefly report on our continued superior servicing performance for both homeowners and RMBS investors. We received some additional good news during the third quarter related to our performance under the U.S. Treasury HAMP program through the second quarter of 2016. Ocwen along with Chase SBS and Wells Fargo were assesses meeting only minor performance improvement the best category. Nationstar and Citi received moderate improvement needed and Bank of America received substantial improvement needed. Ocwen received three stars, the best rating on all primary complaints assessment metrics. Ocwen was the best or second best of all services in all secondary rating criteria established by the treasury department. Of the 7,811 streamlined modifications completed by all servicers in Q2, Ocwen completed 4,112 or 53% of the total industry wide. Ocwen is responsible for 20% of all HAMP modifications completed like to date. Ocwen has completed 52% more modification than the next best servicer Wells Fargo, and Ocwen has completed 48% of all HAMP principle reduction modification done industry wide. Without question, we have outperformed the rest of the industry under President’s Obama Making Home Affordable program. This is a great accomplishment and one that should be recognized. Overall, Ocwen helped more than 21,000 families through owned modifications in the third quarter, an increase in borrower systems over both the first and second quarters of this year, despite the run off of our portfolio. For the year, we have helped over 57,000 homeowners obtain a loan modification and retain their home. A large part of our success in helping families continues to be attributable to our partnership with numerous non-profit housing counselling agencies across the country. In partnership with groups such as NID Housing Counselling and the NAACP, we have recently held very successful outreach events in Sacramento and San Bernardino, California along with an event [ph] in Des Moines, Washington. We continue to work closely with our community advisory council which is made up of true leaders in housing counselling and housing advocacy. Having just met with the council in September we are working together to try to ensure homeowners continue to receive the assistance, education and services they so desperately need as part of the homeownership process. Ocwen strives to be a leader in better servicing and better serving consumers through partnerships with non-profits and government agency. As I've said before many times without question a homeowner whose loan is serviced by Ocwen has a much better chance of avoiding foreclosure then if they're loan is serviced by any other company. Independent third-parties continue to recognize Ocwen's outstanding servicing performance. Earlier this year, Fitch upgraded our service already. In our last call I reported that Moody's success that Ocwen continues to have the best total care and cash only metrics among all the servicer they assess. This quarter we saw S&P upgrade our servicer ranking. I hear from RMBS investors all the time how pleased they are with our performance. Indeed some have published analysis showing our superior performance that has and continue to benefit RMBS investors. Moving forward, in terms of specific action items within our strategic business plan we have the following key objective. Resolve our remaining legacy, regulatory and legal issues, improved regulatory relations and end the various monitorship [ph] on time, maintain adequate liquidity and a strong capital structure. Further reduced and control operating cost while continuing to focus on compliance and risk management, complete our build out of our mortgage lending technology and then grow our lending business into a top originator. Complete the nation-wide rollout of our auto floor plan lending business. We believe Ocwen can eventually renew its growth even if that in more moderate pace than in the past and we do not believe we are business in run off. I also believe non-bank servicers such as Ocwen fill much needed mortgage industry role that large banks generally cannot and do not want to provide. A profitable, healthy, effective Ocwen is critically important to the state's stability of the U.S. housing market and for the non-agency RBMS market. We have quality assets and non-agency servicing portfolio has very little interest rate sensitivity. We also have substantial value that's not reflected on our balance sheet. However to be profitable on a sustainable basis we must get the remaining legacy issue behind us, we must become more efficient and we must resume growth. We seek to control our own destiny on the growth side by originating more loans and retaining our existing customers and mortgage servicing rights. We also seek to diversify through our commercial automotive floor plan lending business. In a moment, I'm going to have Tom Gilman, spend a few minute describing in more detail the business plan for automotive capital services. I'll then have Michael Bourque discuss the progress we have made on controlling our operating costs and maintaining adequate liquidity going forward. Before I do that however, I would like the highlight the outstanding job, our highly qualified and diverse Boards of Directors is doing. Let by our independent Chair women Phyllis Caldwell, the board is actively involved in promoting a culture of compliance, diversity, risk management and service excellence. They are committed to carrying out a strategic business plan and continuingly challenging management to do better. They are aligned with shareholders and all stakeholders to evolved Ocwen into a leader in mortgage and commercial auto finance and more importantly a model company for others to inspire to. I'm honoured to help, carry out their vision. With that, I would like to turn the call over to Tom Gilman. Tom is President of Automotive Capital Services and has over 30 years of industrial experience. Before joining Ocwen in the fall of 2014 he served as President and CEO of TD Auto Finance, and before that as Chairman and CEO of Chrysler Finance. Tom?

[Tom Gilman:]

Good afternoon everyone. It’s a pleasure to join the call today to describe for you the automotive lending platform that the team at ACS has been building for Ocwen. While filling our initial build out, ACS is seeing positive and significant progress towards its ultimate objectives. The concept of ACS came about through the identification of a niche within the auto lending environment. I had been independently studying the auto finance industry after having this Chairman and CEO of Chrysler Financial as well as the President, CEO of Toronto-Dominion Bank's Auto Finance Group. As a result of the sale of Chrysler Financial to TD Bank, I can recognize the impact of the economy and other factors had on community banks, causing many to go out of business almost 1600 of them in fact. These banks were primary source of financing for many independent used vehicle dealers. These used vehicle dealers relied on community banks to provide consumer retail instalment financing for used vehicle customers and they also relied on them for inventory financing. Inventory financing which is most commonly known as floor plan financing was not because of the problems of the community banks, efficiently run floor plan financing businesses have been able to demonstrate strong performance in very economic cycles with historically low actual losses. In 2009 on the day the Chrysler Corporation filed bankruptcy. Chrysler Financial had a multibillion dollar portfolio of floor plan assets. Within nine months we had liquidate the entire portfolio and experience the loss ratio of under 50 basis points. The lesson we learned from that performance was it if you know what you're doing in the floor plan business you can be very successful. Most of us have heard of the auto industry numbers that hit the headlines every month. You know there were 17.4 million vehicle sales in 2015 which represents the seasonally adjusted annual rate or SAR, this describe unit sales of new light duty cars and trucks predominantly through franchise dealers. Many of us don't realize is that the used car market is twice the size of the new car market, an independent used vehicle dealer represent almost 33% of the total used car sales in the U.S. New car dealers generally received their floor plan financing through captive auto finance companies or from banks that provide the financing as a courtesy to the dealers that provide them large volumes of consumer retail instalment loans. Independent used vehicle dealers are different. Many of them lack access to a national finance company unaffiliated with the major national vehicle option. Interestingly according to the national independent automobile dealers association of there 11, 500 members, 61% finance their inventory with cash. There are only two major competitors in used vehicle floor plan business and both are linked to large auction groups. Their annual originations we believe were about 1.7 billion each representing about 40% market share of those independent dealers who use outside floor plan financing. This creates a significant opportunity for ACS. Even more important is the fact that as a result of increased consumer leases over the past three years, in each year of 2016, 2017, and 2018, 500,000 off lease vehicles are projected to enter the used vehicle market which we estimate will represent a $5 billion to $8 billion opportunity for inventory financing in each of those years. Ocwen executives and I saw this opportunity and that's why we joined forces. The first step after partnering with Ocwen was to build the team. Now fortunately ACS has been able to hire a highly experience team of auto industry executives to join me in developing ACS. Among those executives our ACS is VP of sales, VP of credit, VP of operations and ACS’s General Counsel. Collectively we have just about 150 years of experience in the automotive industry and in automotive financing. Our next step was to create a product offering that we compelling to the independent dealers. Our initial market research indicated that many dealers had no real business relationship with the competitors. And our prior experience we knew that automotive lending is a relationship business. We believe that ACS's dealer relationship managers offer high quality advice and expert guidance to our dealer partners, which helps maintain the trust and disciplines we required of our dealers. Dealers also wanted a trusted partner and advisor and that was exactly what we could offer. Dealers also wanted to financing then help them achieve their goals not the goals of the auction house. ACS offers independent dealers and inventory financing program that support their vehicle sales goals and improves their cash flow. We offer one simple term plan, our 120 day term plan gives dealers the option to sell their vehicles within 60 days or they may holder their vehicle longer in anticipation of our upcoming changes in consumer demand by paying extension fees. A clear differentiator is the fact that ACS does not require curtailments if the car does not sale within a prescribe time period. We believe this unnecessarily restricts the dealer's cash flow, instead ACS charges higher extension fees math to the aging of the inventory. ACS does not charge additional fees for vehicles that are not purchases at specific auction as our competitors do. Buy it anywhere, just pay the standard booking fee is what we offer. We also offer a singly monthly billing statement which makes the dealerships accounting and cash management much simpler than the daily billings they receive from our primary competitors. The ACS loans to dealers are collateralized and can be understood as separate loans on a vehicle by vehicle basis. These loans have a short duration that reduces interest rate exposure. ACS holds a title as collateral. ACS's objective is to produce the nationally scalable and repeatable product offering that has minimal requirements from Ocwen's management and financial resources. Floor plan assets are financeable asset class as seen in past capital market transactions by our competitors. Anticipated financial returns on an unlevered basis are attractive. Interest rate charges to the dealer are approximately 9% and addition to origination extension fees which potentially can yield a similar amount. One of the most important processes that ACS is the underwriting process, today we concentrate on 16 characteristics ACS considers in relation to one and other as well s the overall circumstances surrounding the dealers request for credit. We then make quantitative and qualitative assessment as to the credit worthiness of a potential customer. Now as we learn more and more about unique need of the used vehicle business ACS will develop additional criteria to help with the underwriting process. But based on our current process as ACS's application approval rate to-date is about 40%. Dealerships are subject to events of the fall minimum reporting requirements and additional financial requirements. Also dealerships require to carry inventory insurance that's comprehensive in collision on all financed vehicles and garage insurance which is generally an excess liability coverage. Accepted insurance carriers are subject to minimum AM best policyholders ratings. ACS conducted a pilot program in two markets Central Florida and South Florida. We set objectives to determine pilot success and we achieve those objectives within eight weeks. ACS funded its first loan on September 2015, just September 17, of actually of 2015, and began a national rollout in December 2015. As of today ACS is open in 32 markets in 21 states and has 57 active dealers throughout the United States. We are generally finding that the ACS product offering is well received in the market with interest from a wide range of dealers across the U.S. We currently have approximately 50 staff in the business and at its peak we expect that number to be no more than 175. We also are working to secure warehouse line from one or more major financial institutions to help fund our medium term growth. Currently ACS loans are funded through existing Ocwen liquidity. Once ACS reach its scale we anticipate accessing the securitization market to fund further growth. In summary, ACS offers commercial inventory financing a B2B product that does not involved consumer lending and presenting unique growth opportunity with attractive potential returns. By creating an automotive dealer lending platform we will help broaden Ocwen into a multiproduct diversified financial services company, and ACS should lead the way to accomplishes for Ocwen. Thank you. And I will now turn the call over to Michael Bourque.

[Michael Bourque:]

Thank you, Ron and thank you, Tom. In my comments today I will briefly summarize our third quarter results and discuss the progress we have made on operational cost controls. I will also discuss and update you on our liquidity position. Please note that our earnings presentation includes all the regular slides that we typically include and I won't cover them all in my remarks today. And my comments will be focus on other areas; I will let you review these on your own. As Ron said we are extremely pleased to report a profitable quarter on a GAAP basis. This was a significant achievement for the company reflecting the focus efforts we've made over the last 18 months to invest in technology reduce costs and improve operational efficiency across our platform. Ron cover the reported results and I'd like to direct you to slide 48 in the appendix, I'm sorry slide 42 in the appendix and see our adjusted pre-tax income, a non-GAAP measure which attempts to show the underlying performance of the business excluding legacy and other onetime matters. Adjusted pre-tax income for the third quarter was $28 million, an improvement of $25 million versus the prior quarter and the sequential quarter-to-quarter improvement for the third quarter in a row. Turning to our cost performance, I'll refer you to slide 17 of the investor presentation to follow along. Total operating expenses were $272 million in the quarter compared to $385 million in the second quarter, $113 million or 29% decline and we saw decreases in every single one of our cost categories. We reported a $76 million decrease in servicing and corporate costs, a $10 million reduction in lending and new initiative spending and $27 million decrease in "uncontrollable costs" Beginning with servicing and corporate costs, as we stated in the past we are actively working to reduce these costs to align more efficiently with our current servicing portfolio and we achieve decreases in every cost category. Compensation and benefit costs were down $6 million from the prior quarter where we saw the benefit of headcount reductions in our servicing and corporate divisions where we continue to right size our teams. Most of our savings are from onshore reduction, and we continue to identify additional savings opportunities within our various corporate functions. We also had a reserve releases. We trued up our year to-date incentive compensation accrual. Amortization and servicing and origination costs were $58 million in third quarter down $18 million from the second quarter. Reduction in amortization and servicer expenses as well as lower MSR fair value changes were partially offset by higher Ginnie Mae losses relating to HUD note sales program which I mentioned last quarter and which should materially reduced future servicing losses on these highly delinquent loans. We'll provide more detail on this program on slide 38 of the presentation. I would note that the $22.6 million lower MSR fair value expense would more than offset NRZ interest expense which was $25.2 million higher as those two line items are linked in directly related to our rights to MSRs owned by NRZ. Technology costs were down $7 million versus the second quarter, most of the decrease was related to a $5 million expense for customization and software upgrade cost which were incurred in the prior quarter which were non-recurring. Professional service costs were $48 million in the third quarter, down materially from the $92 million expense in the second quarter. The decrease is driven almost entirely by lower legal fees and settlement charges in the current quarter and we continue to make significant progress resolving outstanding legal matters. The third quarter did include an additional $10 million reserve for the potential future California regulatory settlement and the $7 million additional reserve which should now be final relating to the 2014 another dating issue. Lending and new initiative expenses decrease $10 million in the third quarter driven by our CR limited business where our expenses were normalize in third quarter after we had recognized six months of financial activity in the second quarter of this year. Finally, we saw a $27 million reduction in our uncontrollable cost in the third quarter. Most notably our monitor expense decrease to $15 million in the quarter down from $28 million in the second quarter. While we have little ability to control these costs, the continued trend in total expenses is welcome. Now, turning to liquidity. Ocwen continues to generate strong cash flow. On slide 18 you can see the illustrative cash generated by the servicing business which is a non-GAAP measure but informative. Even in periods of losses the business generates significant cash flow. Regarding our reported cash, our cash flow from operating activities in the third quarter was $178 million driven by operating performance, reductions and advances and lower working capital tied up in loans held for sale. Moving on to slide 19, you can see our term loan debt and liquidity position. We paid down the senior secured term loans further in the quarter. This $45 million reduction brought the [Indiscernible] balance to $324 million which represents a 25% loan to value. There's a dedicated $1.3 billion collateral pool supporting this loan. At quarter end we have $264 million in cash and we continue to believe that we can maintain sufficient liquidity to support our operational and growth objectives. However, when looking at our cash number bear in mind that we have approximately $77 million of key litigation and settlement reserves that we would expect to pay from our existing cash balance over the next three to six months. So our pro forma net liquidity for lack of a better word is closer to $187 million. As I mentioned in July we continue to evaluate the optimal capital structure for our business in order to complement our business plan and provide the necessary capital for growth. We've made tremendous progress in reducing corporate debt by paying down the term book this year and last year and we continue to explore our options. In summary we are pleased with our continued progress on rightsizing the cost structure and the success we have had thus far allow us to report our first profit for Ocwen in almost a year. As we move forward, we'll continue to look for additional opportunities to drive new revenue in our lending segment and at ACS and to reduce our costs wherever we can with the dual goals are providing world-class customer service and restoring the company to sustainable and more predictable earnings growth. That completes our prepared remarks. Operator, can you please open the call for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question is from the line of Bose George with KBW. Please go ahead. Q - Bose George Good afternoon guys and congratulations on the improved profitability. I had a couple of things. First, just can you go through the different things that went through the amortization line item you know the HUD note sales or anything else?

[Ron Faris:]

Sure. So, previous, if you look at page in the appendix I think its slide 25, there's really two things happening here that impact most of the lines kind of in that central column. The first is kind of the MSR fair value change. In the quarter the MSR fair value didn't decline significantly as one would expect given run off of the MSRs. We have more detail on the queue, but we had some basically MSR value increases as a result of periodic process we go through sometimes the FICO scores for our portfolio, to update the underlying collateral values and the underlying traits of the loans that making up the MSRs. So that largely offset what would be typically seen as run-off or negative fair value change and that positive benefit there however was offset by a increase in the interest expense payable to NRZ. You'll recall that dynamic where the cash payment is determine separately and then related with what the payment between a liability, amortization and interest expenses. And so, since the liability which is link to the fair value of the MSRs really didn't change this quarter, it all shows up as interest expense. So that’s kind of the biggest driver on why the MSR fair value change went from $28 million to $5 million there. Q - Bose George Okay.

[Ron Faris:]

The second… Q - Bose George Sorry….

[Ron Faris:]

Just to finish the comments on kind of the second driver going on in some of these categories is around the Ginnie Mae losses and the HUD note sale program. In the quarter we had $24 million of Ginnie Mae losses as a result of the note sale program which is kind of in the fourth. makes up the majority of the increase in that fourth graph in the central column, that was offset by a positive 18 million benefit in lower amortization that shows up in the first graph and the way to think about this is you accelerate basically claim losses by – accelerate by assigning basically these highly delinquent loans Ginnie Mae, but then we do that you remove what's essentially a negative value in your MSR, so you show a positive amortization benefit. So there's an offsetting impact there. You can see the total results on page 38 that help you pieces together after the fact, but at the end of the day the net impact in the P&L between those two lines was about $6 million loss. Q - Bose George Okay. And the operating expense, the $23.6 million just went through operating expenses?

[Ron Faris:]

Yes. Q - Bose George Okay. That's great, helpful. Thanks. And then, actually going back to a couple of comments from the call, I mean, you noted that, I guess you'll apply to New York to have for permission to grow again. But we still might not see a lot of growth. But I'm curious, is it, I mean, could we see a situation where you're at least acquiring enough for growing enough to stabilize your portfolio?

[Michael Bourque:]

I just want to make sure I clarify. So, we have not yet made that request as I indicated in the – in my remark, so we hope to do that in the coming weeks. We are definitely trying to first and foremost grow our origination volume such that ultimately originations will eventually cover the run off. It will depend on when we get that approval and they are not restricted from regulatory standpoint. It all depend on like I said, what kind of MSRs are available, what kind of returns we think we can do the math relative to our cost to capital. But there is really no way at this point we can or would predict what kind of volumes we would do on the acquisition side next year. Q - Bose George Okay, thanks. And then, just one more on, when you look at the HAMP income going forward after the program ends, this year I mean, will be essentially kind of the run rate HAMP revenues kind of run-off over that three-year period, as their payments start faced [ph] out, and is there any offset to that, are there other pieces that could go up?

[Ron Faris:]

I mean, I guess, so without kind of giving guidance and that's not something we do, I mean, it’s important factor to understand and while we know industry is looking at different kind of modification programs, it’s uncertain how and if and when anything else may happen. We've always been a big believer in modifications and that something that's not going to change when the programs expires. Getting to the financial impact I think year to-date we've recognised about $88 of HAMP fees and rough order magnitude about $5.50 million of those have been associated with the kind of the modification concluded in the year or kind of the upfront fee we earned. So if you want to model out kind of a change in HAMP fees in the future using that proposition you can do that, you recall HAMP fees are driven by first an upfront fee ad then you have success fees on each of the three or anniversary, so there won't be a step down next year, but that tail will run off over two or three years assuming nothing else changes around the program. Q - Bose George Okay, great. Thanks a lot.

[Operator:]

And our next question is from the line of Fred Small with Compass Point. Please go ahead.

[Fred Small:]

Hey. Thanks for taking my questions. So just first one assuming that your servicer ratings with the ratings agencies stay where they are currently, is there still a risk that NRZ can transfer servicing away from Ocwen next April?

[Ron Faris:]

We don't believe there is.

[Fred Small:]

Okay. Thanks. Then, looking at MSRs and the potential for acquisitions there, what are the -- I mean assuming everything, assuming you get cleared by and not from under the consent orders with the monitors. What are the most attractive areas for you right now that you would look, I mean I know there's not a lot of non-agency may be out there for sale, but would you look for Ginnie servicing or there are specific areas you would want to acquire?

[Ron Faris:]

Yes. Definitely, our strength is the non-agency world, which as you pointed out. There may not be much of that available. We are originating FHA loans and so – and we have a portfolio of FHA servicing, so we not to oppose to looking at as an opportunity. But it really will just depend on what's available and whether it would make sense for us at that point in time.

[Fred Small:]

Okay. Thanks. Then on the -- just following up on Bose's question about HAMP. Can you provide any color on the profitability of HAMP revenues number one? And number two, as I guess the application deadline is the end of this year, but the markets will continue to be approved through I think September, will you continue to receive the upfront fees sort of over that, will they trickle in over the nine months or does that sort of all end this year?

[Ron Faris:]

So there is an opportunity for certain type of HAMP notes as long as certain things have occurred before the end of the year to still finalize and be eligible for paying them next year as you just kind of described, I would expect however that the follow up in the new modifications under HAMP will be pretty significant after the end of this year. So there will be some but I would expect it will be pretty significant follow up after that point of time.

[Fred Small:]

Okay, got it. And then just on the profitability of revenues that you're getting from HAMP mods, does that basically just all fall to the bottom line or how should we think about the costs associated with that?

[Ron Faris:]

Yes, I mean as Michael said we are going to continue to do modification so I don’t know that there will be much of a change in our cost structure simply because of the end of HAMP. As we do modifications we do that does allow us to recover advances, it does allow us to basically record deferred servicing fees which is you know we don’t record in until we resolve alone. So there still are benefits from continuing to do modification some which would be included in revenue through deferred servicing fee and then you know reducing advances flow come through in lower interest expense, but I wouldn’t model in anything for any need for reduction in operating cost just because the program is ending.

[Fred Small:]

Got it. Okay. On – then just maybe it could be on the presentation and I just haven’t seen it, but on the ACS business can you just maybe explain number one where that is flowing through the – where we see the impact of that in P&L or its flowing through? And then on you know just thinking about the business as its scales, what sort of a good run rate profitability or operating margin to assume for that business?

[Ron Faris:]

Yes, so maybe taking the first part of your question first, Fred I mean the way it will show up and I mean in the quarter it’ still relatively immaterial but you’ve got a couple of million, yes the expectation is, you have obviously revenue flowing through kind of this fee income and other revenues, your expense categories you’ll have kind of CMB [Ph] in compensation and benefits you’ll have your provisions for loan loss reserves that will hit OpEx and then you’ll have some other income from kind of – the interest income basically. So your income components will be split between kind of your revenue line or your other income and then you’ll have OpEx and then to the extent we are successful in putting together first our warehouse financing you know hopefully in the coming quarters you’ll then report interest expense as well. So that’s kind of how you would expect to see it right now, those all flow through the corporate segments and you can see the impact there but it doesn’t yet stand out. I think just to be clear in the quarter you know ACS lost about $1 million and we are excited to see that business continue to grow and get leverage on its cost structure and begin earning money for us. From a return profile, you know it’s consistent with what we’ve said back when we first introduced the business in February. We are excited about this business. As Tom mentioned, you know it’s kind of a 9% interest rate on the top line and then you have a chance to earn potentially an amount similar to that and different fees as Tom gave some examples of that dealers can basically decide to do and that comes in the form of additional income. The operating expenses are going to be driven by the people and Tom talked about having potentially 175 folks scale. You know your loss reserves and then your interest expense. So, we think this is an attractive, you know could be very attractive from a return standpoint and I would defer you to some of the earlier comments we’ve made, but you know we think we can earn well above our cost capital in this business.

[Fred Small:]

Okay, great. Thanks a lot for taking my questions and congrats on the improvements.

[Ron Faris:]

Thanks, Fred.

[Michael Bourque:]

Thanks, Fred.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day everyone.

[Ron Faris:]

Thank you.