Ocwen Financial Corporation
Q1 2015 Earnings Call Transcript

Published: 1 May 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Ocwen Financial First Quarter Preliminary Results. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Steve Swett. Sir, you may begin.

[Stephen C. Swett:]

Thank you. Good afternoon, and thank you for joining us today for Ocwen's First Quarter 2015 Preliminary 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 & Presentations tab. As a reminder, the presentation and our comments this morning 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. Forward-looking statements involve risks and uncertainties that could cause the company's actual results to differ materially from the results discussed in these forward-looking statements. The presentation and our comments this afternoon relate to our preliminary results for the 3 months ended March 31, 2015, and our fiscal year ended December 31, 2014. This financial information is preliminary based upon the company's estimates and subject to the completion of the company's final closing procedures. As such, our preliminary results are subject to revision, and our final results may differ materially. In addition, the presentation and our comments contain references to non-GAAP financial measures such as normalized adjusted cash flow from operations. 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 I just discussed, please refer to today's earnings release as well as the company's filings with the Securities and Exchange Commission, including Ocwen's 2013 Form 10-K/A and our third quarter Form 10-Q. Joining me on the call today is Ron Faris, our President and Chief Executive Officer; and Michael Bourque, our Chief Financial Officer. Now I will turn the call over to Ron.

[Ronald M. Faris:]

Good afternoon, and thank you for joining us on today's call. There's obviously a lot for us to cover today. First, I will briefly discuss the status of our 2014 audit and note that we will not be taking any questions on that specific topic. Both management and our independent auditor are working to ensure that all applicable information is taken into consideration and being evaluated. We believe that the auditors are near completion of their work, and we hope to issue our 10-K in the near future. We understand our auditors are deciding between an emphasis paragraph and a going concern explanatory paragraph in their opinion. We continue to work on this evaluation as does our auditor. There is no single issue here. We are looking at all available information, including things such as the impact of the regulatory environment, the status and impact of our servicer ratings and liquidity. My hope is that today's earnings release and the investor presentation we've posted will give you a much clearer picture of the current status of the company. Let me start by summarizing some key points. A going concern explanatory paragraph, if that were to be the result, will not cause a default under any of our debt agreements. While we are aware of the potential for negative public perception, we believe we will be able to refinance all of our maturing debt and maintain ample liquidity going forward. As you can see from our press release this afternoon, we were profitable in the first quarter, had substantial cash flow from operations, and we currently expect both of these trends to continue for the foreseeable future. We have already refinanced some of our near-term debt maturities. We have announced significant asset sales that we expect will generate over $900 million in proceeds this year, which we intend to use to reduce our debt load and leverage, improve our liquidity, and eventually, we believe, improve our corporate and servicer ratings. We are working closely with our regulators and the third-party monitors. We are not aware of, nor anticipating, any fines, penalties or settlements from any state agencies that would have a material financial impact on us. We have significantly increased the frequency, quality and transparency of communications between management and our regulators and monitors. We expect the next round of results from the National Mortgage Settlement monitor to show that we have made progress in improving our internal testing and compliance monitoring. Unlike other servicers, we have not yet have had any official metric failures under the NMS. However, as we have previously stated, we expect that one or more metrics will require remediation through the corrective action plan process defined under the settlement. We do not currently expect any fines or penalties. On Gibbs & Bruns, we have strong defenses against the erroneous notice of nonperformance claims made by the Gibbs & Bruns investors who are seeking fewer modifications and more foreclosures. Other RMBS investors have also begun speaking out in defense of Ocwen. And finally, the sale by HLSS of its assets to New Residential and the amendments we obtained in return for our consent are big positives for the stability of the company. Our current intention, in conjunction with our independent auditor, is to finalize our closing process and issue our 2014 audited financial statements by May 29, if not sooner. As for the first quarter results, I am proud of what we have accomplished as far as managing the business through this difficult transition period. However, I am not satisfied with making $34 million in the quarter. We intend to do better. Before moving on to discuss in more detail the important issues facing the company, along with our plan forward, I would like to take a moment to thank our 11,000-plus Ocwen employees for their tireless efforts over the recent months. In a challenging environment, they have demonstrated tremendous commitment and a passion to persevere that makes me proud. For that, I say thank you to them. Next, let me discuss our GSE MSR sales. Before I get into this, I would like to clarify that Ocwen is not exiting GSE or Ginnie Mae servicing or lending. We have no current intention to sell any of our Ginnie Mae MSRs. After our announced GSE sales, we will still have $34 billion in GSE servicing rights and approximately $8 billion of GSE subservicing, and we will continue to originate and service new Fannie Mae, Freddie Mac and FHA loans. On the approximately $89 billion of UPB of performing MSR sales we have already announced, we will recognize gains as these MSRs are mostly carried at lower of cost or market. Today, Ocwen closed on 2 more of the previously announced sales, totaling just under $12 billion, at UPB. Initial proceeds from these transactions net of expenses, holdbacks and transfer date payments are about $80 million. We anticipate paying down our term loan tomorrow by 75% of that amount or about $60 million. I'm also pleased to announce that we have entered into transactions with both GSEs to transfer much of our delinquent agency servicing portfolio. The initial transfer under one of these agreements takes place tomorrow with others expected to close over the next few months. These transactions will substantially reduce the number of delinquent GSE loans we service. This meets 2 key strategic priorities. First, it should improve our margins and reduce complexity in our servicing operation. And second, it will improve liquidity by reducing servicing advances, some of which cannot be financed. While our previously announced MSR sales have involved largely performing GSE loans, these servicing transfers, which I just mentioned, include largely nonperforming loans. As most servicing costs and complexity are associated with nonperforming loans, these transactions will have a significant impact on our ability to streamline and refocus our operations. We believe that this will in turn allow us to achieve better operating margins. It should be noted that much of the servicer and bad debt expenses associated with uncollectible advances recorded in 2014 and so far this year was related to our nonperforming GSE portfolio. While we will book losses on the transactions involving nonperforming loans, they improve our liquidity largely because of -- because GSE servicing advances are more difficult to borrow against. In particular, we fund all of our Fannie Mae advances with corporate capital. In each of these transactions, the MSR has a negative value and Ocwen is paying the GSEs to transfer the servicing. In some cases, we are also settling future expense obligations such as compensatory fees. Nevertheless, the cash flow impact of the nonperforming GSE deals is substantially positive. Overall, we expect we will generate net positive cash flow of over $150 million, driven by the repayment of advances in connection with the nonperforming transfers and substantially reduce our GSE advance balances. We estimate the losses we will record in the next few quarters as a result of these transfers to be between $75 million and $90 million. There have been recent reports and rumors that Ocwen is going to get stuck with a toxic pool of GSE loans after selling off the easier-to-sell performing portfolios. This is false. We will be left with a smaller, less volatile portfolio carried at below fair value and one that will benefit in the event interest rates rise. Page 28 of the deck highlights the value of our MSR portfolio. Michael will discuss this page in more detail, but there is significant value in our MSRs that has not yet been recognized in our financial statements. For example, if we were to mark our remaining portfolio to fair value at the end of the first quarter 2015, as our competitors do, we would have an additional $119 million in pretax earnings and over $100 million more equity, assuming a 15% tax rate. There are also other assets and economic drivers that are not reflected on our balance sheet. We laid out some of these factors on Slide 29 and explained the assumptions behind them in the appendix to better help the investment community understand today's equity value of Ocwen. For example, in addition to the MSR fair value adjustment, there is meaningful unrecognized value in the subservicing relationship with HLSS as well as in our call rates. Additionally, unlike our competitors who book servicing fees on delinquent loans immediately into income, we still don't record them until they are collected. For instance, if we were to follow the similar accounting as our competitors on just the MSRs whose rights have not been sold to HLSS, we would immediately recognize over $95 million of additional servicing fees and pretax income. As you can see, including these adjustments, all of which we believe are reasonable, the adjusted book value per diluted share would increase from $8.30 at the end of March to $12.88, an increase of 55%. On Slide 30, we roll forward that adjusted book value to equity per share for some of our traditional MSR valuation adjustments for things like Ocwen's cost to service, deferred servicing fees, and a more market-based CPR and a lower discount rate on non-agency product. Adjusting for these items increases the book value of equity per share to over $20 a share, a 2.4x increase from our reported book value of equity at 3/31. Next, let me summarize the recent HLSS transaction and amendment, which was a great result for Ocwen. First, Ocwen's relationship with New Residential and Fortress is positive, constructive, and we're looking for new ways to work together. The sale to New Residential effectively eliminates any risk of an HLSS funding default related to the BlueMountain claims, causing a liquidity issue for Ocwen. The HLSS amendment significantly limits New Residential's ability to move any of the servicing away from Ocwen for a period of 2 years, even if there are further servicer rating downgrades. If a downgrade to S&P does occur and New Residential's funding costs increased as a direct result, Ocwen would be required to pay up to $3 million of additional fees to New Residential per month, but it's capped at $36 million in total. Finally, the HLSS amendment generally extends the length of our agreement with New Residential for 2 additional years or until April 30, 2020, whichever is earlier. This will result as long as we improve our Moody's servicer ratings to SQ3 or above and maintain or improve our S&P and Fitch servicer ratings. We are reasonably confident our ratings will improve by then. Even if our ratings -- even if our Moody's rating has not improved, we believe there is still a reasonable likelihood New Residential would not take any action to move the contracts to another servicer. Next, I would like to provide more details on our state regulatory exams, which are very positive. Page 8 summarizes the activity that has occurred so far this year. As you can see, we have closed 24 exams in 2015, and none of them have included any findings that should result in a material financial impact to the company. Of course, we take all compliance examinations and findings seriously, and we are committed to correcting any deficiencies remediating any borrower harm and improving our compliance management systems and customer service. We currently have 25 open state examinations. We believe this level of exam activity is consistent with the current regulatory environment and largely similar to the activity of other large state-licensed mortgage servicers. I would also like to provide further information on our current costs related to internal audit, risk and compliance management. As shown on Slide 9, we incurred $14 million of these costs in Q1. We estimate that for the full year, we will incur $56 million in total internal audit risk and compliance-related costs, which is up approximately $7 million from 2014. Additionally, our third-party monitor costs for the first quarter 2015 were $9 million, and we estimate just over $50 million in monitor costs for the full year. This is up over $12 million from 2014, but I would caution that this is just an estimate and the actual amount could be more or less than what we have estimated. These costs are big, but they are manageable. Over time, as we demonstrate ongoing compliance and as the monitors roll off, we should see these expenses decline. As I already mentioned in my earlier remarks, we believe we have very strong defenses against the notice of nonperformance claims made by the Gibbs & Bruns clients. As background, in a letter to RMBS trustees in January 2015, Gibbs & Bruns alleged that Ocwen servicing practices in 119 MBS pools, generally with respect to modification activity and recoupment of advances, demonstrate nonperformance under the servicing agreements. The letter, however, did not ask the trustees to terminate Ocwen's servicing. To be clear, there is no litigation pending or threatened against Ocwen at this time, just a breach claim to the trustees. Gibbs & Bruns clients compared Ocwen's service pools to noncomparable prime pools and made many groundless claims such as Ocwen modifies too many loans; servicers, in general, do not have the right to recover advances at the time of a loan modification; and that Ocwen does not remit all proceeds recovered to the trusts. The allegations are very similar to allegations made by this same group in a 2013 attempt, ultimately unsuccessful, to stop the servicing transfer to Ocwen. Their attempt was unsuccessful because trustees hired an independent third party to review the allegations, and after the review, the trustees approved the transfer to Ocwen. These select investors generally hold front-pay bonds in the pools and would benefit from increased foreclosures, which would accelerate cash payments to them potentially to the detriment of other MBS bond tranches. The current unpaid principal balance of the 119 pools is approximately $8.8 billion and represents just 5% of our PSL -- PLS portfolio. Ocwen has publicly and thoroughly responded to the Gibbs & Bruns allegations and clearly demonstrated that the allegations are false and no event of default or breach has occurred. 77% of the principal modifications in the Gibbs & Bruns pools were HAMP modifications, which are required to be NPV positive versus foreclosure and are deemed to constitute standard industry practice. Note

[Michael R. Bourque:]

Thanks, Ron. I will spend some time first reviewing our preliminary financial results and then spend time discussing our cash, liquidity and leverage outlooks. Before I begin on the financials, I would note that Pages 32 to 35 of the investor presentation on our website cover our traditional financial earnings slides. In the first quarter of 2015, Ocwen returned to profitability and generated substantial cash flow from operating activities. Ocwen generated total revenue of $510 million, which was an increase of 3% from the fourth quarter of 2014. Both servicing and lending revenues were higher. Servicing revenues of $471 million were up 3% on a $13 million gain on the sale of whole loans, and our lending revenues of $38 million were up 16% on higher volume. Total operating expenses for the company were $378 million. Included in the operating expenses was an $18 million charge due to a decline in the fair value of our government-insured MSRs, primarily as a result of the 50 basis point reduction in the mortgage insurance premium rate. If the value of the this portfolio increases in the future, we have the ability to recover this charge. Additionally in the quarter, we recorded $9 million of monitoring expenses, $8 million of negative fair value marks on the small agency pool that is carried at fair value and over $8 million of strategic adviser costs. Noteworthy was the significant reduction in servicer and bad debt expenses associated with uncollectible advances. We recorded $9 million of these expenses in the first quarter of 2015, down $52 million from the fourth quarter of 2014 and our lowest quarter since the fourth quarter of 2013. Total other expense in the first quarter 2015 was $89 million, which was made up of $119 million of interest expense offset by a gain of $27 million on our agency MSR sale to Nationstar. In total, Ocwen delivered $0.27 of earnings per share. Cash flow from operating activities, or CFOA, was $323 million. Additionally, normalized adjusted cash from operating activities, a non-GAAP measure we typically provide, was $151 million in the quarter on lower advances and improved operating performance. This metric adjusts our reported CFOA for changes and advances that are financed and also adjust for fluctuations in loans held for sale coming out of our forward origination business as any positive or negative cash flow impact of these loans is largely timing driven. Moving on from the consolidated Ocwen results, I'd like to spend a few minutes on the lending business. We are encouraged by the progress the business made in the first quarter. Even if you adjust out for the goodwill impairment in the fourth quarter of 2014, the profit in the business doubled. Revenues were up 16% on higher gains on loans held for sale, and expenses were down over $2 million quarter-to-quarter. The business made a conscious decision to scale back the volume in our Correspondent channel to focus on higher-margin volumes in our direct and wholesale channels. In addition to the financial performance, we are actively working on building out our lending platform to create what we believe can be a leading multichannel originator that will drive stand-alone earnings growth and feed Ocwen's servicing business. We are focused on building best-in-class systems, leveraging the proprietary technology we have in our Liberty reverse mortgage business and instilling Six Sigma fueled process discipline to drive differentiated speed and cost advantages. We believe these scalable differentiators can be the foundation of a new growth engine for the company. From a financial perspective, we believe we can effectively self-fund the investments needed to build out the platform from our existing and expected lending profits over the next 12 to 18 months. Now I will talk about MSR valuation. Effective January 1, we changed our accounting methodology for our non-agency MSRs from lower of cost or market to fair value. This should substantially reduce the volatility we saw in 2014 from having our liability to HLSS fluctuate based upon fair value, while the asset remained at lower of cost or market, making this accounting election resulted in a $52 million increase to our MSR carrying value into equity. We did not, however, elect to change the accounting methodology for any of our GSE or Ginnie Mae servicing, most of which is still carried at lower of cost or market. On Page 28 of the presentation, we have included information on our MSR valuation to help investors better understand the value over time of our primary asset. This is a bit different than the pages used in the past as we believe it is simpler to outline for investors only those economics that will accrue to Ocwen's benefit over the life of the MSR. There are 2 primary differences to note. First, we have excluded from each of the bars the value of the MSRs whose rights have been sold to HLSS and replaced them with the lifetime value of the subservicing agreement we have. Note that we have also removed the portion of the OASIS notes that have been sold off to other investors. The second change is around the values for the agency MSRs. You'll note we keep the balance at fair value in each of the bars, in line with our recent transactions. There were no other material changes in assumptions or methodology from past quarters. As the chart shows, we retain economics on roughly $1.2 billion of the $1.8 billion MSR value on the balance sheet. The fair value of these MSRs is approximately $1.3 billion. Note that we are using our bid prices as fair value for the agency MSRs we are selling. In addition, we also benefit from the HLSS subservicing contract, which is not reflected on the balance sheet. Using the assumptions consistent with the third-party broker process, that income stream is worth roughly $270 million to the company, bringing the total value of the MSRs and HLSS subservicing to $1.6 billion. As we adjust, consistent with past quarters for full recognition of deferred servicing fees and Ocwen's lower cost to service, that $1.6 billion grows to over $2 billion. Finally, when we adjust for more market-based prepayment and discount rates, the value is over $2.7 billion. To put this in a shareholder context, if it were added to equity today, it would add over $10.52 of incremental value per diluted share of Ocwen's stock. Before moving on, I would like to note that we included a more detailed MSR valuation reconciliation, along with many of our supporting assumptions, in the appendix of the presentation. Next, I will discuss our liquidity. Cash generation has been a consistent strength of the company, and every year since 2008, Ocwen has generated more operating cash flow than net income. That was especially true in 2014 and again demonstrated in the first quarter when the business delivered over $323 million of CFOA. We expect this trend of operating cash flow greater than net income to continue this year. Also worth noting is that since the beginning of the year, we have maintained an average daily cash balance of over $225 million. Despite this strength, one of the questions from our auditor has been whether or not Ocwen would be able to refinance or extend out some of the debt maturities coming due in 2015. Page 24 of the presentation summarizes our success to date in this area. We have worked closely with our lenders to successfully put backstop lines into our commitment letters in place for $450 million of servicing advanced financing coming due in June and $375 million of lending warehouse lines that will expire later this year, ensuring adequate liquidity for our lending business. Additionally, earlier this year, we secured commitment letters for a $1.8 billion OMART servicing advanced facility but did not execute them as it was not apparent that those letters alone would resolve our auditor's going concern question. We are having discussions with the OMART banks now to address the October maturity well in advance, and we are confident in our ability to reach a solution. Ron mentioned this already, but I think it is worth repeating. A going concern explanatory paragraph, if it should be required, will not cause a default under any of our debt agreements. I would like to take a moment to thank all of our lenders for their patience and support of the company so far this year. They have stuck with us through a very difficult transition, and we are deeply appreciative of their support and continued partnership. Next, I would like to discuss the agency asset sales and the servicing portfolio transformation we are working through. There are multiple significant benefits from this strategy that we think will be welcomed by shareholders. First, Ron mentioned the plans to use the proceeds from our agency MSR sales to deleverage the company. We have presented a pro forma lock [ph] of this impact on Page 23 of our investor presentation. Reducing our corporate debt to equity ratio down to approximately 0.8x will further strengthen our position as the least-levered major nonbank servicer. This provides us flexibility and will further reduce interest expense, helping go forward cash flows and earnings. We expect this combination will also eventually help improve our corporate and servicer ratings, which will further stabilize the company. Secondly, this should help to improve the margins of our servicing business over time. On Page 12 of the investor presentation, you can see how our pretax operating income margins declined as the servicing mix shifted towards agency product. While we are not providing forecasts or estimates for future margins, the combination of the performing MSR sales and the nonperforming MSR transactions with the GSEs will remove a significant amount of traditionally lower-margin servicing. The removal of the nonperforming servicing, in particular, should have a significant -- should have significant benefits as we right-size the cost structure that handles this high-touch, high-cost servicing later this year. Additionally, we believe that with continued performance and stabilization in the environment around the company, we will see a decline in outside legal spend, advisory and consulting costs, and eventually, our spend on regulatory monitors. These changes will further improve margins. We anticipate providing more detailed cost outlooks and updates as the year progresses. Now a few closing remarks. As Ron mentioned, we continue to have constructive discussions with our auditor about the state of the company. These last few months have seen significant progress in the stabilization of Ocwen, and we remain committed to working through the auditors remaining open questions and concerns. We expect to file our full year 2014 and first quarter 2015 financial statements by May 29 and sooner if possible. Despite this delay in issuing our financial statements, we remain focused on executing our 2015 plan and building a stronger business. With that, I will now open it up for questions. Operator?

[Operator:]

[Operator Instructions] And our first question comes from the line of Mike Grondahl of Piper Jaffray.

[Michael J. Grondahl:]

I just want to clarify something. I think you had kind of stated, if you get a going concern opinion, you really don't have any default risk on the financing side. Is there any risk on the operational side, the actual servicing?

[Ronald M. Faris:]

So Mike, this is Ron. We don't believe so, but we are in active communication with all of our major counterparties, including the GSEs, regulators, trustees, et cetera. But at this point, we don't believe that there would be any material negative impact.

[Michael J. Grondahl:]

Okay. Secondly, through the regulatory changes, through the compliance enhancements, have you seen the time lines for modifications or foreclosures extend, I guess, compared to maybe a year or 18 months ago?

[Ronald M. Faris:]

I would say modestly. I mean, keep in mind that about a little over a year ago, the new federal rules went in place that delayed the start of foreclosure until, at the earliest, 120 days. There, I think, are more stringent requirements on making sure that certain documents are in hand and in place before initiating foreclosure. But I wouldn't say they've been significant. They've been -- there have been modest changes. With the economy improving and other things, I think you've also seen some benefits on the other side of more borrowers rolling current, et cetera, which offset some of the extension of the foreclosure time lines.

[Michael J. Grondahl:]

Okay. And then just lastly, your comment about Ocwen growing again, would you describe that as sort of a 2016 priority or late 2015 priority? When do you sort of get real focused on that?

[Ronald M. Faris:]

So I mean, I think, Mike, we're focused on it now, but I would agree it probably doesn't start to actually kick in until a ways out. I mean, as we reduce the size of the servicing portfolio through these announced sales, we'll have a smaller base. The runoff in absolute amount will be less on a monthly basis. At the same time, we'll be growing our origination platform, and hopefully, at some point, we'll hit an equilibrium and even be at a point where originations exceed the runoff. So it's hard to predict exactly when that will be. It's also going to be somewhat of a function of runoff speeds as well as our ability to ramp up the origination platform. So I'm not going to give an exact time on it, but it's definitely something that we're focused on now, but you won't see the growth until out in the future.

[Operator:]

And our next question comes from the line of Bose George of KBW.

[Bose T. George:]

Just a quick follow-up on the question about the qualification. Does that also -- does it not impact the servicer rating? Is there any risk on that side if there's a qualification?

[Ronald M. Faris:]

So Bose, the rating agencies will make their own evaluation and decisions based on the information available to them. So I don't know that, that qualification in and of itself will impact their decision-making one way or another. We have been in close contact with them and provided them a great deal of information. And I think that if you step back and look at the fact that we're profitable, we're generating a lot of cash, we're managing effectively kind of the regulatory environment, we're looking to delever the operation, all of those things from a ratings standpoint should be viewed positively. So I would be hopeful that if that was the case for an opinion like that, that it would not have any sort of negative impact at the rating agencies, but they will make their own assessment.

[Bose T. George:]

Okay, great. That makes sense. And then actually just in terms of future MSR sales, the -- are you guys done? I mean, the $34 billion of GSEs is that going to remain and then you've got a fair amount of jumbo as well, what's the outlook for future MSRs sales?

[Ronald M. Faris:]

So I think I would put it this way. I mean, we are -- what we are most focused on right now is now on the execution side of things. We're starting to close the sales. We closed one in the third quarter. We just mentioned that -- or I'm sorry, in the first quarter. As we just mentioned, we closed a couple more today. We're going to start to close on transfers of some of the nonperforming starting tomorrow. So between now and August, I think most of our energy and effort is going to be focused on execution of those servicing transfers, working closely with the servicers that we're transferring the loans to, working closely with the regulators and others who are monitoring that activity and much less on looking at any additional sales. I don't want to say definitively that there won't be anything more, but that is much, much lower of a priority right now than on the execution side of things.

[Bose T. George:]

Okay, great. And then just in terms of the delinquent pools that you guys are selling, actually, what's the size of that, just the UPB?

[Ronald M. Faris:]

Yes, so I think we're not kind of giving that information right at this moment, but you can look at some of the data that we've provided on the percentage of delinquencies within the GSE portfolio. As we indicated, we're looking to move a big portion of the delinquent GSE loans, so it's going to be a pretty sizable portion of it. But I'll let you kind of go back to other information to kind of make your own estimates of that.

[Bose T. George:]

Okay, great. Actually, let me just sneak in one more. The tax rate on the MSRs you're selling, is that the same as your usual tax rate?

[Ronald M. Faris:]

So what we've done, for the purposes in the presentation, is used sort of the -- generally, the 15%, which is sort of roughly kind of the overall corporate rate. But definitely, there's opportunities for the gain on the sales to be at the lower rate that we are subject to in the U.S. Virgin Islands. But for purposes of presentation, we've used more the overall corporate rate.

[Operator:]

And our next question comes from Henry Coffey of Sterne Agee.

[Henry J. Coffey:]

Just a couple of questions. You talked about a $52 million fair value mark on your non-agency servicing. Was that picked up in the servicing revenue line?

[Ronald M. Faris:]

No, it doesn't go through -- you won't see it to go through income at all. So it was not in the income numbers at all. It's simply sort of a beginning-of-period adjustment. So you basically increase your asset value and increase your equity, but that will not flow through the income statement.

[Henry J. Coffey:]

Okay. So in terms of assessing the asset gains, however you want to quantify them, we had the -- we had the sale of -- you had some reported gains, but those were the only real extraordinary items on the revenue side. You had some offsetting fair value marks with your Ginnie Mae book, but there were no other asset sale gains except for those sort of 2 or 3 highlighted in the first paragraph. [indiscernible]

[Ronald M. Faris:]

Yes. You had a -- we sold some kind of legacy whole loans that were on the books that closed in the first quarter. And we -- I think it was a $13 million gain. And then you had the first sale of the announced MSR sales, which was with Nationstar that closed, the $1.9 billion, which I think was a $27 million gain or whatever that we recorded there. So those are really the only 2 items. You did, as you mentioned, because of the changes to the Ginnie Mae program, you saw a much faster -- a lot more loans are eligible for refinance now, which impacted the value of that portfolio. So we had an $18 million write-down there, which Michael mentioned could be recovered. But based on the fair value, there was a write-down there. And then we do have some MSR -- agency MSRs, not very much, that are carried at fair value, and interest rates declined during the first quarter again. And so there was some fair value losses reflected there as well. But I think we've laid them all out for you.

[Henry J. Coffey:]

Do you have what that number was?

[Ronald M. Faris:]

Yes, I think it was $8 million or something. I think we reflected it in the release and in the presentation.

[Henry J. Coffey:]

Yes, I might have missed it. So really, when all is said and done, if we were to reverse -- if we're going to go back to a core number or something, you made about $23 million. I mean, it was a very -- even on a purely operating basis, it was a very solid quarter.

[Ronald M. Faris:]

I will definitely agree with your last statement, Henry. Assuming you did the math right, I agree with you. I haven't...

[Henry J. Coffey:]

Right. The only thing that -- that caught my attention, and of course, we haven't had the kind of detail we need from the K and the Q and we'll get it soon, I'm sure, it looked like your servicing revenue was about 47 basis points of average balances, and that's higher than it's been in the past. What resulted in a higher level of servicing revenue, say, than we would have seen in a prior quarter? Just trying to get my arms around that.

[Michael R. Bourque:]

Yes. Henry, so that's going to be the impact of the -- the whole loan gain of $13 million flows through the servicing revenue line. So that's what brought that number higher.

[Henry J. Coffey:]

Okay. So the 40 -- yes, so in the $44.6 million, there's that $13 million gain?

[Michael R. Bourque:]

That's right. You saw the traditional fees come down. I think some of the other fees ticked up a bit that helped offset some of the decline in the portfolio, but you'll see that eventually in the statements.

[Henry J. Coffey:]

So just back of the envelope, you're still realizing gross revenue from your servicing asset of about 40 basis points? Have I done that math correctly?

[Michael R. Bourque:]

Yes. That sounds directionally correct.

[Henry J. Coffey:]

Taxes were about 20%?

[Michael R. Bourque:]

Yes, so just given the mix of where the income was generated in the quarter, I would say just from a jurisdictional basis, you were around 15% or 16%, given the higher mix in the U.S., particularly around lending. And then a couple of small discrete items caused it to tick up. I think it was 19% or 20%.

[Henry J. Coffey:]

And then in terms of looking at the business on a going-forward basis, your origination business was profitable this quarter. Is that going to be a business primarily focused on originating a Ginnie and Fannie and Freddie product? Or will you be reaching into the non-agency market? And maybe you could comment a little bit on what's going on in the reverse mortgage business.

[Ronald M. Faris:]

Yes. So Henry, I mean, we'll try to get into more detail on that in coming quarters. But I mean, we definitely continued to -- with our reverse mortgage business. The reverse mortgage business is one that with the type of product today, you generally originate the loans and book income pretty much -- there's really not much of a gain in the month that you originate. But over time, as the seniors make additional draws, there's no expense related to that, but you're going to then securitize that draws and you'll pick up all the revenue. So as time goes on, you're kind of building up a pipeline of future profits as the seniors continue to take draws, but that remains a small but important business for us. Right now, a lot of our focus is on the HARP refinance. Obviously, one of the challenges for all originators as the year goes on is that, that will start to go away. But yes, I mean, right now, we're focused mainly on Fannie, Freddie and some FHA refinance business in our forward business. Over time, we want to grow those capabilities. We want to cast a wider net, so that we're not just refinancing our own customer base but really going after a broader customer base. We're exploring other lending products. I'm not going to get into the details of what those are, but our objective would be to have a broad lending platform that, where appropriate, has some hopefully niche high-margin capability, but at the same time kind of serves the broad customer base that we service today.

[Operator:]

And our next question comes from Kevin Barker of Compass Point.

[Kevin Barker:]

I had a question on the mark-to-market fair value of the MSR. Am I correct in saying that the difference between the GSE value of $1.22 billion and the $800-and-so million that's currently on the books is basically all of the remaining fair value gains that you could recognize over time in the MSR?

[Michael R. Bourque:]

Can I have those numbers, again, Kevin. And maybe are you looking at a page or the...

[Kevin Barker:]

Yes. So the $1.22 billion that you mentioned on the GSEs in Slide 46 and the $880 million that you have at book value on the GSE portfolio. So the difference between those 2, is basically the potential fair value gains that you could recognize in your entire portfolio remaining. Is that right?

[Michael R. Bourque:]

That's right. And I would just -- I think there's -- as you go through some of the other details, you'll see some different cuts of it. But there are some of that fair value difference relates to the portion of the OASIS notes that have been sold. So you'll see on some other pages, we take that out and you can tie it back.

[Kevin Barker:]

So if I were to take the loss that you're expected to take on the GSE portfolio sales, the delinquent portfolio sales, and then the sale -- the OASIS portion of the MSRs and then mark to fair value the GSE loans, would you be able to recognize any gains? Or is that basically a net breakeven?

[Michael R. Bourque:]

No. You can see -- Page 50 actually has the kind of what the embedded gain looks like today that basically adjusts a few things. The biggest impact actually is just the decline in interest rates over the last, really, since the end of September was kind of the basis we had in kind of looking at the potential embedded gain in the portfolio through the fourth quarter. And so as that has come down, so has the value. And then you've got the impact of some of the NPL -- or the nonperforming MSR sales, which basically has been driven by different assumptions, but ultimately we still think are very smart trades for us.

[Ronald M. Faris:]

Yes. I would also point out, Kevin, just maybe so it's clear, the sales that we've announced so far as well as kind of the nonperforming kind of negative value that we've discussed are largely already incorporated into the fair value numbers that you're seeing in the presentation.

[Michael R. Bourque:]

That's right.

[Kevin Barker:]

What I'm trying to understand is the reconciliation between the $8.30 book value reported and a $2.59 fair value increase you estimate, if you've already booked your MSR to fair value.

[Ronald M. Faris:]

Well, we haven't booked our MSRs to fair value. I mean, we've booked -- the non-agency portion is at fair value. The agency and the Ginnie Mae -- the Ginnie Mae book is effectively at fair value because it's carried at lower of cost or market and so it's been written down actually to market. And on the Fannie and Freddie portion, there's a small amount that is at fair value, but the bulk of it is not at fair value yet. So the future sales that we're going to -- that we have that haven't closed yet will result in gains, but those are gains that are reflected in the fair value. The nonperforming will have losses, and then whatever is left over has embedded gains in it. So does that help you?

[Kevin Barker:]

Yes. And then -- so when I think about the $2.59 that you lay out on Page 28, the light blue bar regarding HLSS subservicing is basically your expectations for future earnings tied to that servicing portfolio. Is that the right way to think about it?

[Ronald M. Faris:]

That's right. So that's the value -- that's not on -- that's effectively not on the balance sheet anywhere. That's the fair value estimate of the earnings stream from effectively what some people would refer to as the subservicing that we have on that contract.

[Kevin Barker:]

Okay. And then on the deferred servicing fees, you lay out a $0.64 number on Page 29 of the release. Yet back in the third quarter of the 10-Q, you mentioned $559 million of deferred servicing fees then. What's the difference between the number in the third quarter 10-Q and the number that you're reflecting on Page 29 of deferred servicing fees?

[Ronald M. Faris:]

So the page on -- the number on Page 29 basically just represents the deferred servicing fees on the non-agency portfolio where we own the MSRs outright and have not been sold to HLSS. The higher number in the third quarter reflected the entire deferred servicing fee on our entire portfolio, including the portion with HLSS.

[Kevin Barker:]

So the potential fees that you could -- so if you had a termination occur in a non-agency portfolio, this $0.64 is essentially the total amount you could potentially recover. Is that right?

[Ronald M. Faris:]

No, not exactly. In fact, if -- for example, let's say, this can't really occur now based on the amendment that we had, but let's say HLSS decided to terminate Ocwen as servicer and transfer servicing to somebody else, effectively, the way the calculation would work is all of that $500-plus million would come to us.

[Michael R. Bourque:]

Again, I think said another way, we wanted to lay out a very conservative base case here for folks to understand without kind of the complication of the HLSS waterfall and other things, what is the true value identifiable that kind of accrues to Ocwen. It's not complicated. It's very straightforward. That was the basis for putting in the $95 million as opposed to the $500-plus million.

[Kevin Barker:]

Yes, that makes sense. And then, are you able to sell any of your MSRs that are OASIS-financed without prior approval?

[Michael R. Bourque:]

No, we're not.

[Kevin Barker:]

So could you effectively fully exit GSE servicing, given that they're OASIS-financed?

[Ronald M. Faris:]

Well, as we said, we're not -- we have no intention. We've never stated that we intend to exit GSE servicing.

[Kevin Barker:]

Okay. And then you're supposed to take roughly a $20 million expense in the first quarter related to moving from the ResCap platform to the real servicing platform. Did you take that charge? Or is that something that's going to come down in the future?

[Michael R. Bourque:]

No. It'll come down in the future, Kevin. I think as you go through and see the operating expenses, we did end up shutting down a bunch of legacy, I'd say, bolt-on systems around the legacy Fiserv platform from ResCap. So our costs did come down in the technology space. And as we keep going month-by-month, that termination charge actually drops by a little bit less than $1 million a month. So it's not going to be $20 million when it happens. And at some point here over the next coming couple of quarters, we'll exit that system, but it's declining every month.

[Kevin Barker:]

Right. And then on the call rights, you mentioned in the past that you had about a $5 billion potential portfolio that you could do with 2 to 3 points that you could earn on it. How has that value changed, given that you sold the call rights with about 50 basis points left over to HLSS? The call rights that you have here, it seems like there's a much larger portfolio that you think you can call and at a -- or at a much higher gain that you could potentially get out of that portfolio. Could you help quantify the potential amount of call rights that you think you can exercise?

[Michael R. Bourque:]

Well, we're not going to go into a lot of detail on it, Kevin. I think it's -- until -- I think we're out executing on it. It's tough to get into, and frankly, we don't want to tip our hand in certain places. But the -- what we quantified for folks was the amount of what we'd call a premium call. That was something where the -- your underlying collateral was well worth more than the value of calling the bonds and it was a quick type of transaction. And so those still exists, the number's smaller. There are other types of transactions out there with -- where you might be at a discount and you're looking at a longer execution or you're actually buying up bonds where we think we can get significant value. So there's a couple of different ways that we're thinking of approaching this that drives some of that difference. But you're right, we did sell off a bunch of the value to NRZ or it was part of the consent transaction. And -- but we're not going to get into kind of reconciling that just yet.

[Ronald M. Faris:]

Yes. But Kevin, you made a statement that we're showing a much larger -- what did you mean by all that?

[Kevin Barker:]

Well, in previous -- I believe in your previous calls back in -- around the third quarter of last year, you mentioned there was a $5 billion potential opportunity to call off of your private label servicing to basically clean up that portfolio and earn a gain of close to 2 to 3 points on that, which would imply anywhere, $100 million to $150 million potential gain. Now a lot of -- the 2 or 3 points can exist if you sold the rights to -- or the majority of the rights to HLSS where you're retaining only 50 basis points of the potential gain. So what I'm trying to understand is the $0.47, which would imply -- and the $0.40 on the HLSS-owned MSRs on Slide 29, it would imply a much higher value or a much higher portfolio that you think you can call than previous. So I guess, I'm just trying...

[Ronald M. Faris:]

So the $4 billion to $5 billion was a number that we said was going to be -- was either already in the money or would be coming into the money over the next, I can't remember exactly what we said, but reasonable time frame. This is more our valuation of what those -- in the one hand, the $0.40 is what we think that 50 basis points is going to be worth to us as NRZ ultimately calls the deal. And the $0.47 is on the value of the call right on the portfolio that we still retain outright, which we'll earn wider margins on, although it's a smaller book.

[Kevin Barker:]

Okay. And then finally, is the New York operations monitor put in place yet? And the $50 million of expenses regarding the monitor this year, does that include the New York operations monitor?

[Ronald M. Faris:]

So the New York operations monitor is now in place. And yes, the $50 million or whatever we mentioned is our best estimate of the various monitors that we -- expense that will occur this year. Like we said, it could be more, it could be less. It's just our estimate, but it does contemplate and include the new New York monitor.

[Operator:]

And our next question comes from Matt Liebowitz of Nomura.

[Matthew Liebowitz:]

I think most of my questions were answered by previous callers. But to me, it seems like by any measure, you're going to be generating a substantial amount of cash over the next 2 years. So obviously, you're going to pay down the term loan. But even after that, just wondering if you guys had any high-level thoughts on what priorities for cash would be following deleveraging.

[Ronald M. Faris:]

Sure. So I mean, yes, I mean, we think in the near term, we think it's most important that we delever. We think that that's our -- that, along with kind of solid operations and solid earnings, is our best way to get our corporate ratings back up and get our servicer ratings back up, which I think we'll benefit all stakeholders, including shareholders, if we can get that accomplished and the sooner the better. But once we've accomplished those couple of things, the additional cash flow will -- we'll evaluate it, but stock repurchases would definitely be one of the things that we would be looking at. Some of it will depend on how well we're doing in the origination business, how fast it's growing and how much capital we need to deploy into that business into the -- and into the retained MSRs there. But I think that with the speed that we're generating cash and the speed at which we will be able to pay down some of the corporate debt, we'll probably be in a position to evaluate a lot of alternatives, including stock repurchase.

[Operator:]

And our next question comes from the line of Henry Coffey of Sterne Agee.

[Henry J. Coffey:]

I'm just still trying to sort through some of the servicing information, but assuming that you're probably generating about 40 or 45 basis points from the servicing business, it also looks like your overhead is running somewhere between about 25 and 30 basis points of servicing or about, I'm excluding amortization, of course, or about $300 million.

[Ronald M. Faris:]

I mean, Henry, maybe we can follow up. I mean, I'm not sure it's a best use of our time to try to sort through all that basis point stuff on the call. But we're happy to kind of discuss with you kind of what you're looking at and make sure that your calculations make sense.

[Henry J. Coffey:]

And then in terms of the servicing that's remaining, I know you've gone over some of these numbers, but can you give me a quick breakdown again between agency, government servicing and the PLS business?

[Ronald M. Faris:]

So why don't you -- if you turn to maybe one way, there's various ways, I think, in all this information. But if you go back to Page 46 of the presentation and you take a look at where we sit today kind of after you take out the announced sales, you're going to have $10 billion of Fannie and Freddie loans in the OASIS transaction. So another $24 billion of Fannie and Freddie that has not been sold. Moving over to the right, you're going to have $25.6 billion of Ginnie Mae -- or I'm sorry, yes, Ginnie Mae servicing and you've got, including HLSS, you've got $188 billion of PLS. Now there's also some subservicing that's not included in here, so there would be a little bit additional Ginnie Mae subservicing and a little bit additional GSE subservicing that's not reflected on this particular chart. But hopefully, this is enough information to give you a reasonable sense as to what it will look like after the sales which have been announced, which is the far left-hand column.

[Operator:]

And that appears to be the last question in the queue. Thank you for attending the Ocwen Financial Corporation's First Quarter Earnings Call. You may now disconnect.