Ocwen Financial Corporation
Q2 2015 Earnings Call Transcript

Published: 31 Jul 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Ocwen Financial Second Quarter 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would like to introduce your host for today's conference, Steve Swett. You may begin.

[Stephen Swett:]

Good afternoon, and thank you for joining us today for Ocwen's Second Quarter 2015 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 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. 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. In addition, the presentation and our comments contain references to non-GAAP financial measures such as adjusted book value of equity per diluted share and 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 SEC, including Ocwen's 2014 Form 10-K and our first quarter Form 10-Q and our second quarter form 10-Q once filed. Joining me on the call today is Ron Faris, President and Chief Executive Officer; and Michael Bourque, our Chief Financial Officer. Now, I will turn the call over to Ron.

[Ronald Faris:]

Good afternoon, and thank you for joining us on the call today. I would like to provide a general update regarding the state of the Company. Although it now seems like a long time ago with the time of our last update on April 30th, we have not yet filed our 2014 10-K or first quarter 10-Q. I want to thank our investors for their patience, our counterparties for their support and the Ocwen team of professionals and advisors for their tremendous efforts and sacrifices which ultimately culminated in successful filings. I am pleased to announce that we expect to file our second quarter 10-Q later tonight. As you are aware in the first half of the year, Ocwen was profitable, generating $55 million of pre-tax income and generating cash flow from operations of $535 million. We have been executing on our agency MSR sale strategy, having close sales on the MSRs underlying $63 billion of performing unpaid principal balance per UPB. We also executed our first non-performing MSR transaction on $3 billion of UPB. These deals have collectively brought in $358 million in transaction proceeds and $57 million of net gains. As previously announced, we have used the bulk of the asset sale proceeds to reduce our corporate debt by paying down the senior secured term loan by $341 million, reducing our corporate debt to equity ratio from 1.7 times at the beginning of the year to 1.2 times at the end of the second quarter. As we close the remaining announced transactions, we anticipate further reducing our corporate debt to equity ratio to 0.8 times, in line with our previous communications. As for the upcoming transaction, I would note that there have been some updates to what we previously announced. In late March, Ocwen announced a $25 billion UPB MSR sale to Nationstar. We closed $3 billion of that announced sale at the end of April and transferred the servicing in May. We are working through the process on the remaining $22 billion, but at this point, we cannot say exactly when and how much of the remaining portion will close as there are still approvals and details to work through. In any case, we still believe that we will meet our asset disposition objectives to the full year with proceeds and pricing execution in line with what we previously communicated. Of course, there are no guarantees and all of our announced sales may not close as we currently envisage. From a regulatory standpoint, we continue to work closely with our regulators and the 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 continue to devote substantial resources to our regulatory compliance and risk management efforts while engaging in frequent and transparent communications with our regulators and monitors. During our last call, we expressed our expectation that the next report from the National Mortgage Settlement monitor would demonstrate that we have made progress in improving our internal testing and compliance monitoring. We are pleased to note that the second interim report issued by the NMS monitor on May 7th covering the first two quarters of 2014, indicates that the monitor now has increased confidence in the independent capacity and competency of our internal review group or IRG, based on the steps we took as a Company as are similarly pleased that the retesting of nine of the metrics for Q1 2014 deemed to be at risk by the monitor resulted in substantially similar results for the work of our own IRG. We have continued to cooperate with the monitor in the retesting of metrics and assessment of our IRG and we are optimistic that the next monitor's report will demonstrate continued progress in resolving the monitor's concerns. We do not anticipate any fines or penalties resulting from the national monitors review and retesting efforts. During the quarter, the New York Department of Financial Services operations monitor, Goldin Associates began its engagement. We believe our relationship is off to a positive and productive start. Goldin brings with them, a seasoned team of professional who are adding helpful perspective and experience. Their focus on helping me, along with Ocwen's leadership team and Board managed through this transition period while making the necessary improvements to ultimately help us succeed long-term. We are especially focused on improving the customer experience. In line with the settlement consent order, we are also working with the New York operations monitor on criteria for Ocwen to be able to purchase mortgage servicing rights again, but it is too early to say when that process will be completed. Also during the quarter the California DBO announced that it had selected fidelity information services as its auditor, while the engagement is just beginning, we understand the scope will be focused on reviewing servicing files and assessing often compliance with applicable California and federal laws. We're committed to working closely with the California auditor and the California regulator. In order to receive approval from the California regulator, to resume mortgage servicing right purchases in California we must demonstrate our ability to provide them information in a timely manner and in a form requested. We're committed to meeting these requirements as soon as we can, but it is again too early to predict when that might be. We continue to work closely with other state regulators and have provided an update to recent exam activity in our investor presentation. We are not aware of any licensing issues that would have a material financial impact on us and we are not aware of nor anticipating any material fines or penalties from our state regulators. Moving on to other items of interest, as mentioned in our last update, we believe we have strong defences against the notices of non-performance claims made by the Gibbs & Bruns investors. Other RMBS investors have been vocal and speaking out in support of Ocwen. Now, we know that the standstill period announced previously has expired. The master servicers and trustees are continuing their analysis of the erroneous claim and the Gibbs & Bruns investors have taken no additional actions. We continue to believe, especially after all this scrutiny that the claims have no basis. To the extent that there any future or additional claims by these investors, we intend to continue to defend ourselves vigorously. We were pleased in the quarter the positive movement from two of the rating agencies. On June 15, Moody's confirmed our servicer ratings and removed the ratings from review for possible downgrade. They also upgraded our corporate rating to B2 with a stable outlook. On June 24 [indiscernible] servicer rating and revised our servicer rating outlook to positive. Both agencies noted the capability of our servicing teams and also the progress and stabilization of our corporate governance in compliance of the structure and internal controls. Unfortunately on June 19, S&P noting a similar set of facts as well as the impact of regulator and investor scrutiny elected to reduce the number of our servicer ratings to below average with stable outlook. The S&P servicer rating action potentially triggered the ability of new residential link or NRZ to claim up to $3 million a month capped to $36 million total. If the downgrade of Ocwen servicer rating triggers an increase in NRZ's cost of funding or reduction in NRZ's overall rate of return with respect to two of NRZ's servicing advanced ability we know the S&P downgrade lowered the advance rate in certain of NRZ's servicing advance facilities. NRZ has told us that its cost of funding and the rate of return have been adversely affected as a result of the downgrade. The overall impact on Ocwen has not yet been determined, but it's capped under our agreement as 3 million per month and 36 million in total. We accrued $300,000 at June 30 in connection with this agreement. In line with the language within our agreement, we're collectively seeking alternative ways to remedy any impact the advance rate change may have had on NRZ. Finally if the S&P rating is restored to average and NRZ's advance rates revert to prior levels, its ability to claim up to 3 million per month will cease. As we continue to execute our plan, further demonstrate our compliance system is effective and continue to provide strong servicing results as we always have, we believe that our servicer ratings should improve to levels similar to other large servicers. Our relationship with NRZ continues to strengthen and they have been a great partner so far, improving our servicer rating is important to us and to NRZ. We believe that it is the best interest of all parties for the NRZ-related servicing contract to remain with Ocwen long-term. Improving our servicer ratings should also help both Ocwen and NRZ reduce advanced financing cost. A final point related to servicer ratings is that to date, we are not aware of any additional servicing contracts being terminated by RMBS investors beyond the four previously disclosed in the first quarter of the year. As indicated in our press release today, we have also launched a cost improvement initiative. There are two slides in our investor presentation that provide more detail on this, and you can see by the results in the quarter, we are starting to see the decline in our revenues from the asset sale execution. Unfortunately, it is not possible to right size the cost structure while you are still servicing the loans. So there will be a lag between when the revenue is invested and when we can actually adjust our cost base. Michael Bourque is leading our efforts to improve our cost structure, targeting a reduction of at least $150 million over the next year. Before providing more specifics, I want to make clear that we plan to deliver on this initiative while still executing our plans for our risk and compliance infrastructure. We also remain focused and committed to making ongoing enhancements to our servicing operations and technology platforms which we believe will ensure we continue to enhance the borrower experience while continuing to deliver best in class loss mitigation results. We get asked a question a lot from investors about our ability to get back to our historical margin levels. Given some of the changes in the industry, we don't believe those margins are achievable given today's landscape. However, we do believe we can move in that direction. On Page 14 in our investor presentation, we laid it out, looking at the Company excluding our lending business. As we look at margins, we set 2012 as our benchmark with an operating margin of 57%. If we try to assess how close we could come to achieving those levels today, we need to adjust for structural changes in the business since then. There are four adjustments noted. First, we need to adjust our revenue down for two factors. First, to adjust for the lower revenue associated with agency servicing as that is a higher percentage of our business today than it was previously. The second factor impacting revenue is the level of deferred servicing fees that existed in 2012. They were much higher than one could expect today given how delinquent our servicing portfolios were then. So, we adjust to something more appropriate for today's book. The next two adjustments are made to reflect the higher spending on our risk and compliance infrastructure as well as to reflect the cost of our regulatory monitors. Finally, we make a fourth adjustment to reflect the mix of onshore/offshore labour associated with servicing agency MSRs. Making adjustment these adjustments brings a 57% margin down to about 43%. You'll note that we are focused somewhere between -- we are forecasting somewhere between 20% to 30% operating margin for 2015, well below what one would consider a reasonable target given the benchmarking I just described. This represents an opportunity for the Company and we expect to close a portion of that gap in the coming year by executing on our improvement plan. As we think about the savings opportunity, we're focusing on five areas to achieve our goals, our servicing operations, our technology spend, our other operating costs, our capital structure and our growing originations business. Michael will go into more detail on this shortly as well as provide an overview on how we expect our cost structure to change over the coming year. In addition, we have always believed that investments in quality, service and compliance ultimately results in reduced operating costs over the long term. We believe that the investments we have and will make in those areas will ultimately further improve operating costs. Before turning the call over to Michael, I want to make two additional points. First, the second half of 2015 will be challenging from an income perspective. We have additional sales of nonperforming GSE MSRs that will result in large-cap losses, although they will have positive cash flow to the Company. HARP business is starting to decline. We will potentially have some amount of higher expense related to NRZ and the S&P downgrade, and as I already mentioned, the timing of cost reductions, we are working on lag the reduction in revenue associated with asset sales. We also anticipate higher interest expense of advances following the refinance of the Freddie Mac advance facility and the anticipated refinance of the [indiscernible] facility. Overall assuming we're able to execute on our remaining anticipated performing GSE MSR sales, we should remain profitable for the full year. Finally we continue to make progress on improving our origination capabilities. We are excited about the future of both our forward and reverse mortgage origination businesses. Our reverse mortgage portfolio for example has build up an estimated $58 million in anticipated future gains as future draws occur on existing loans over the next five years. Now let me turn the call over to Michael.

[Michael Bourque:]

Thanks Ron. I'll begin with a review of our financial results for the second quarter, discuss the progress on our MSR sales, address our liquidity and recent refinancing activity, quickly review MSRs and our book value of equity analysis, and close with a discussion on cost improvements. Before I begin on the financials, I would note that pages 17 to 20 of the investor presentation on our website, cover our traditional financial earning slides. In the second quarter of 2015, Ocwen was profitable and we continue to generate positive cash flow from operating activities. Ocwen generated total revenue of $463 million which was down 9% from the first quarter due to a 10% reduction in servicing revenue to $423 million, as we executed on our initiatives to sell some of our agency MSRs. Lending revenue was $39 million, up 4% compared to the first quarter of 2015. Total operating expenses for the Company were $352 million. Included in the operating expenses was a $16 million Ginnie Mae MSR impairment reversal benefit resulting from the increase in interest rates in the quarter. This means, we've almost completely recovered the $18 million charge from the first quarter of the year. We also saw amortization at our MSR fair value mark to market impacts come down in the quarter. Amortization was $32 million, down $7 million from the first quarter of 2015, and our MSR fair value mark was $15 million down $18 million against the prior period. These benefits were partially offset by a $7 million increase in adviser costs, which were $15 million in the quarter and higher legal and consulting spending which was up $7 million against the first quarter. Within the second quarter, we incurred a total of $6 million of monitoring expenses, I would note that we expect this number to rise in the third quarter as the new California auditor ramps up its engagement. Total other expense in the second quarter was $98 million, which was up 10% from the first quarter primarily due to amortization related to the commitment fees on the backup Freddie Mac servicing advance and [indiscernible] facilities we secured as part of our efforts to secure our unqualified audit opinion. In total, net income was $10 million or $0.08 per diluted share. Cash flow from operating activities or CFOA was $210 million, bringing the year-to-date total to $535 million. Looking into our business segments in more detail, I will start with the servicing business. We generated total servicing revenue of $423 million, including direct servicing revenue of $286 million and subservicing revenue of $28 million. These including half fees, late fees and other fees totaled $98 million in the quarter, which was up slightly from the first quarter. Gains and other revenue decreased 56% to $11 million. The reduction in our servicing revenue was driven by 3 factors. Asset sales, which was about $20 million of the decline, prepayments and runoffs which accounted for another $17 million and the elimination of the [indiscernible] data fee which accounted for another $10 million reduction. Operating expenses were lower due to reversals of certain interest rate related demand impairments and lower amortization and fair value changes as previously mentioned. In the quarter, we generated $75 million of gains relating to our performing MSR sales, which was offset by a $45 million loss incurred on our nonperforming loan transaction. We ended the quarter with total residential UPB of $322 billion, of which 87% was performing and 13% was nonperforming. Pro forma, adjusting for announced MSR sales, our UPB would be about $276 billion. The average CPR for the portfolio was 16%, with 19% in the prime segment and 12% in the nonprime segment. The increase in CPR over the last quarter particularly in the prime space was a result of the 16 basis point lower average mortgage rates in the first quarter versus the fourth quarter last year. Finally, during the quarter, we completed about 23,200 modifications about half of which were half mods. Moving on to the lending business, we generated $39 million in total revenue and pre-tax income of $14 million. Compared to the first quarter of 2015, our revenue was up 4% and pre-tax income was down 10% due to higher origination costs. We saw continued momentum in originations in the quarter, with total funding volumes of $1.3 billion. Within our platform, we saw significant gains in funding within the correspondent segment up 37%. The reverse segment up 28% and the wholesale segment up 13%. HARP accounted for 23% of our fundings in the quarter which was down from the prior quarter. We continue to build out our origination platform to drive higher volumes of new loans, which over time should provide some offset to the reduction in our UPB that comes naturally from prepayments and runoff. Let me now provide an update on our MSR sales which are detailed on Page 12 of our presentation. To date, we have sold MSRs related to $66 billion of UPB, generating $358 million of proceeds and net gains of $57 million. We are in the process of executing additional transactions on MSRs with UPB of $25 billion, which we expect to generate $245 million of net proceeds and another $20 million of net gains. Aggregating completed and pending transactions together, we expect to generate $746 million in aggregate proceeds from our performing MSR sales, generating gains of $157 million. On our nonperforming MSR transactions, we expect to receive cash of $233 million which reflects a payment from Ocwen of $142 million offset by the recovery of advances funded with corporate cash of $375 million. We expect to generate a net GAAP loss of $80 million in connection with our nonperforming MSR sales. As we note on Page 23 of the investor presentation, consistent with our most recent communication, we still anticipate using majority of the cash generated from these transactions to reduce our corporate leverage by paying down the senior secured term loan, reducing our corporate debt to equity ratio down to approximately 0.8 times 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 with continued strong operational performance will also eventually help improve our corporate and servicer ratings which will further stabilize the Company. Next, I'll discuss our liquidity. Cash generation has been a consistent strength for Ocwen over the long-term. In the second quarter, the Company generated $210 million of CFOA, bringing the year-to-date total to $535 million. We ended the quarter with $320 million in cash up almost $200 million compared to where we started the year. Additionally in the quarter, we began using excess cash on hand to reduce our borrowings on our servicer advanced facilities and our origination warehouse lines. At the end of the quarter, we had reduced our borrowings on those lines by $170 million, saving $3 million in annualized interest expense. Putting that available liquidity together with our $320 million in cash, we ended the quarter with $490 million in total available cash and liquidity. As we move forward into the balance of 2015, we anticipate continuing to generate liquidity from our operations as well as from our MSR sale strategy. Additionally, the cost reduction initiatives that Ron referenced earlier are intended to improve our margins and our ability to drive positive cash flow from a smaller MSR portfolio. At this time, we still anticipate using excess liquidity to reduce our corporate debt, once we achieve our goal of getting to approximately 0.8 times corporate debt to equity, we wil consider other uses such as potentially repurchasing stock. On Pages 24 and 25 of our investor presentation, we include information about our servicing advance origination warehouse facilities. We continue to make progress on refinancing all of our 2015 maturities. The Freddie Mac servicing advance facility was refinanced into a facility called OFAF and was upsized from $400 million to $450 million. We issued $225 million of investment grade rated term notes out of the facility, Ocwen's first transaction utilizing the structure and received an 8 point improvement in our advance rate. The all in interest rate on the full $450 million facility is around 2.3%, based on last week's interest rates. Although this is higher than where the prior facility was, we are pleased with the execution and the outcome frankly is better than both we and the markets were forecasting for us earlier this year. Our largest servicing advance facility OMART was the focus of much attention during the process of issuing our 10-K earlier this year. You may recall this is a $1.8 billion private label servicing advance facility with an October amortization date. We are pleased to say that we are in the advanced stages of the refinancing process. We are targeting a smaller facility size, $1.65 billion and expect the refinancing to close in August. Executing on refinancing these two facilities, we'll continue our progress to materially improve and extend the available liquidity sources that support our business. We're also working to the process of extending our origination warehouse facilities. Multiple facilities have pending maturities and all are on track to be extended and or replaced by an alternate facility. Regarding our MSR economics and the adjusted book value of our equity, we have updated the slides we presented in our first quarter investor presentation after positive feedback about their inclusion last time. I will not walk through them in detail, but note that the methodology, analysis and conclusions are all consistent with what we have previously discussed, mainly that we believe there is considerable additional value in our MSRs and other assets that did not appear on our balance sheet given our accounting elections and how these assets are valued. We present these pages as a tool to assist the investment community and making an apples to apples comparison with some of our peers as well as to give people a sense for what the book value of our equity would be using an alternate view, which management has deemed to be useful for its own purposes. I would note that this is not intended to be a substitute for GAAP based analysis or evaluation estimate for the Company. To convert this into evaluation, one would need to make numerous other adjustments. Two of the largest of which would be an amount representing the present value of our fixed costs, not included in the MSR valuation as well as an amount for the value of our lending business. Moving on to our cost improvement initiative, as Ron mentioned, we are focusing on five areas to achieve our margin improvement goals. Servicing operations, technology spend, other operating costs, the capital structure and our growing originations business. Regarding the servicing operations, some of the cost improvements will come from volume related changes in our operational staff, as well as from continued productivity and operational improvement initiatives. As we look at our technology costs, we have been working through insourcing and/or direct sourcing some noncore and non-real servicing related technology spending. We're also looking at ways to simplify our infrastructure and renegotiate existing contracts. The third area of opportunity is around our other costs, led by our professional services spending. Across the Company, we've seen increases in these areas whether it was the strategic advisors we engaged in the first part of the year or the consultants that are helping us execute our MSR sales. We're in the process of reviewing every engagement, identifying those that are mission-critical and seeking alternatives and price reductions for everything else. We are also reviewing the other areas one might expect, facilities, travel et cetera. The last two areas of improvement opportunity are a bit different, but are potential areas where adjustments could enhance our profitability in different ways. As our liquidity continues to improve and our deleveraging continues, we may have the opportunity to enhance our capital structure in ways that may reduce interest costs and/or enhance our shareholder returns. We also don't anticipate having to execute any of the commitment letters and/or backup lines for our financing facilities like we had to do in the first part of this year, working through our 10-K filing. I recognize this won't help improve operating margins, but it's still a meaningful opportunity at the pre-tax income level. Finally, we have carved out spending increases in our lending business as that business continues to grow. For the time being we anticipate being able to fund those increases out of the profits of the business, but we will be diligent in ensuring we aren't exceeding cost increases too far in advance of expected revenue increases. We expect to update you on our progress in all these areas next time we speak. I would note just as Ron did, that notwithstanding these cost improvement programs, we are strongly committed to executing our plans for maintaining and improving our risk and compliance infrastructure. We remain focused on and committed to making ongoing enhancements to our servicing operations and technology platforms, which we believe will ensure we continue to enhance the borrower experience while delivering best-in-class loss mitigation results. If we need to sacrifice the speed or the magnitude of our cost improvement objectives to ensure we protect the gains we have made in those areas, we will do so. With that, I will now open it up for questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Ken Bruce with Bank of America. Your line is open. Please go ahead.

[Ken Bruce:]

Thank you. Good afternoon, good evening gentlemen. Thank you for all the details. I think it's going to take a little while to digest them, but maybe we can kind of get to the heart of a lot of the questions that I get or I think we get specifically around the profitability of the servicing entity. When you look at the cost structure today, OpEx is running, call it $350 million and if you annualize that, you know, that's a $1.5 billion and you're talking about taking $150 million from that and I guess the question that falls out is, when you do that do you have a chance of being profitable in the servicing entity given the direction of revenues?

[Ronald Faris:]

So, first off our ultimate objective will be to hopefully even exceed that on just that amount that we've laid out there for all of you. We do at this point believe that we'll be profitable next year. The servicing business has other advantages to it. It does feed some of the profits in the origination business. So, it's an important business and one that we're going to continue to focus on to get it back to somewhere near where it was before.

[Ken Bruce:]

From an operating margin perspective, I take it that that's what you're referring to?

[Ronald Faris:]

Yes.

[Ken Bruce:]

Okay, and in the context of potential for growing the portfolio, you mentioned you're looking to see if you can get some approval for acquiring assets, what would you expect the likely timing around any decision on that to be? Is that something that, it could be in 2015 or is that really just something that you've asked and now you just have to wait?

[Ronald Faris:]

So, I don't think it's so much that we have to ask as much as there are certain things that we need to work through, both with New York and with California, and we're committed to working through those as quickly as possible, but as I said in the prepared remarks, at this point, we can't really estimate for you when that might be.

[Ken Bruce:]

Okay, and maybe just lastly, I'll let some others to ask questions. I'm sure there's many. In terms of the cash flows from operations in the second quarter, a lot of that looks like it was reductions in advances and I assume that those related to, at least partly on sales. Can you give us an update in terms of how the collections on advances are proceeding if you can give us some information around that that would be very helpful?

[Ronald Faris:]

Yeah so on the cash flows, can the reductions in advances that hit the operating cash flow line are not related to the asset sale transactions. So those you'll see in other sections of the statement, relating to investing activities, the reductions in advances that you see are largely just from activities related to I guess two things. Number one, we noted the increaser in the advanced rate in the OFAF facility that we executed. Those are -- that was basically moving from corporate funded advances to or corporate cash funded advances to match funded advances and so there's movement there, but then, we also executed transaction and moved some other advances in the quarter bringing those down further. So, it's really a recovery, I think you'll see what you got to the queue, we -- at the end of the last quarter, we were north of $900 million in corporate advances, funded with corporate cash and I think we ended just below 600 million in the second quarter. So, that's the biggest driver of the operating cash flow, so.

[Ken Bruce:]

Okay, great. Well thank you for that and again, all the information you provided in the deck and I'll let the next person ask. Thanks.

[Ronald Faris:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Kevin Barker with Compass Point, your line is open. Please go ahead.

[Kevin Barker:]

Thank you. Could you help us understand what base expense you're using in order to measure the $150 million cost saving initiative? Should we use the operating expenses from this quarter and then assume that that will flow through over time?

[Michael Bourque:]

So Kevin, the way you can think about it, is if you annualize the first half run rate of 2015 and go from there, that's kind of the most current information and reflects this structure that we're really starting from. I mean, that's probably most appropriate, but as we roll forward I would say, we were careful to say, we're targeting at least $150 million kind of echoing some of what Ken was poking at previously and this is going to have to be a sustained effort here over time to deliver profitability and margins as we mentioned.

[Kevin Barker:]

Okay, and when we think about the $150 million is that separate from declines in expenses that you would expect from lower delinquency rates or even a smaller servicing portfolio or is it just absolutely how -- the expenses you expect to come down?

[Michael Bourque:]

Yeah so, we're thinking about it as -- we have a cost number today and we know -- we're thinking in absolute dollars is what I would tell you, so frankly it all matters, and so, we're looking at all of the things you would expect, the volume related changes, things like amortization and staffing levels and some of the other resource changes as you adjust your delinquent agency book, but then also more of the kind of structural base costs like changes as well, and so everything is in play.

[Kevin Barker:]

Okay, and then your interest expense ticked up this quarter, and I know you've had quite a bit of refinances, various debt facilities, and also you're paying down some of your facilities. Could you help us get an idea of like what the run rate interest expense will be like over the next few quarters, given the payoffs that are expected from the MSR sales and the renegotiation of the debt?

[Michael Bourque:]

Yeah so, maybe I'll start with the quarter to quarter variants and you'll see some of this in the queue. We did have to execute that kind of backup, backstop facilities if you will in the quarter, first for the facility that we just replaced, the Freddie Mac OFAF facility. There was a 1 point commitment fee on that that we had in place and took in the quarter. We also had a small backup fee we had to pay for our OMART facility, that drives most of the variants you had a reduction in your term loan interest as that balance came down, but given some of the delays and the timing of the execution of OFAF we actually paid a higher interest rate out of the gate so we could get some term notes issued. I've got hung up in the timing around the S&P downgrade. So going forward, you're right the term loan de-levering will help reduce interest expense. The OFAF interest expense is at the rate we indicated in the prepared remarks around 2.3% and you know, we would anticipate that we -- we're optimistic that we'll have good execution on our OMART facility and refinancing, I think, we hope to be inside of what we talked about with OFAF, but until that's done, we can't talk too much more about it.

[Kevin Barker:]

Would your interest expense savings be separate from your cost saving initiative?

[Michael Bourque:]

Yeah the cost savings initiatives we talked about is everything through your operating costs, and we're looking at the interest -- potential interest saving of those additional enhancements to profitability and returns.

[Kevin Barker:]

And then, you mentioned the $80 million loss in nonperforming MSR sales. How much of that has already been reflected in your income statement this quarter and how much will be reflected going forward?

[Michael Bourque:]

Yeah, so you can see the breakdown on Page 12. We took $45 million in the second quarter and there's another $35 million to go in the second half of the year.

[Kevin Barker:]

Okay, all right. I'll get back in line. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Mike Grondahl with Piper Jaffray. Your line is open, please go ahead.

[Michael Grondahl:]

Yeah, thanks guys, the $150 million in the cost saves, how did you come up with that number? Is that sort of the stuff you can get your arms around in 6 to 9 months or I know it's a starting point, but can you kind of just help us, how do you end up with that number?

[Michael Bourque:]

Look it's -- I mean, it's a little bit of a -- Ron walked through the benchmark in which was something important for us to understand in terms of what might, entitlement be if you ever could get back to what was a very high-performing, high returning business, relative to where we ended last year, you know, I don't think this is a quick 6 to 9 months and you're done type effort Mike. I think it's going to be something more sustained over time and so we're looking at it as something, it's at least $150 million that we're forecasting in the near term to what this Company on the right path the long term success and that balances making the necessary tough decisions today with some of the investments and another gains that we need to add in other parts of the business to protect our risk and compliance infrastructure, but also to see growth and so I think it's more of a multiyear evolution here, but we're starting now in earnest and the least $150 million as we're talking about it is between now and the end of next year.

[Michael Grondahl:]

Okay, and with the NRZ potential $3 million a month, when will you come to resolution on that? Any thoughts?

[Ronald Faris:]

Well, I would -- it's difficult to say I would suspect that during this quarter we will come to some resolution with that, on that which could include us coming up with some ways to -- with them to mitigate, the impact that they've had because of the downgrade. So I would think that it would be something that when we talk next, we'll be able to provide full clarity on.

[Michael Grondahl:]

Okay, and then just lastly any more thoughts on any other asset sales or is this $90 billion agency and some of the nonperforming stuff? Are you kind of stopping it there?

[Ronald Faris:]

So Mike, as we talked in our last call, what we really focused on in the second quarter was on execution. The sales that we had announced and we have still a way to go in the third quarter to continue with that and make sure that we effectively execute on the sale and the transfers and so I would say at this point, pretty much the same thing we said last quarter. We're not targeting any additional sales at this point in time. However, we're going to continue to evaluate our portfolio and evaluate our view, you know on the margin of the portfolio and we may decide to do more sales at a later date, but right now, that is not our focus, so you could see, we did not execute really anything new in the second quarter.

[Michael Grondahl:]

Got it, okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Henry Coffey with Sterne Agee. Your line is open. Please go ahead.

[Henry Coffey:]

Yeah, good afternoon everyone and thanks for taking my call. I was looking at the servicing and origination segment, frankly the numbers were very much in line with what we're expecting. Then I looked over at corporate and there's some fairly large variance items there. I think I've identified them from your expense roll forward, but your corporate expense was about $16.7 million in the first quarter and then it jumped to about $41 million. Maybe you can tell me where the $24 million came from. Is that on Slide 20? Do I just look at the $24 million or so of positive expense trends, that's where I'm going to find it or --?

[Michael Bourque:]

Yeah, I mean, it's going to be a mix of a lot of the things on the bottom part of the page, all flow through there, Henry. So maybe start there and then if you want to, I'd be happy to follow up with you next week.

[Henry Coffey:]

Right. So, in simple terms that's where most of those expenses landed in corporate.

[Michael Bourque:]

That's right.

[Henry Coffey:]

Then just in your book value analysis you include the expected loss from the sale of nonperforming servicing but not the light potential gain if you closed the deal with NSM is that correct?

[Michael Bourque:]

I'm sorry. Can you say that again?

[Henry Coffey:]

Just in your book value analysis I noticed that you are including the expected loss from the sale of nonperforming servicing of $0.43?

[Michael Bourque:]

Yup.

[Henry Coffey:]

But you're not including the -- like potential gain if you close the remainder of the deal with Nationstar? Is that accurate?

[Michael Bourque:]

Well, we've reflected the way we've done it and you can see there is a table in the back, for the fair value increase you see which is the first bar on the left, 39, we put the agency MSRs basically at the purchased price and so we kind of gain there is already reflected in the fair value column. I think the 43 adjustment is additional sort of compensatory fee and other things that we have to adjust for when we -- yeah, I mean it's basically difference between what's not already reflected in the MSR value and the overall final negotiated price, so that's right.

[Henry Coffey:]

Then just in terms of understanding the $150 million expense reduction, how much of that are you going to attribute to change in volume, because there should be some shrinking volumes and how much of that do you think is going to be attributable to improve efficiencies on a variety of fronts?

[Michael Bourque:]

I don't think it's probably the right time to go into that level of detail Henry. I think as we execute on the plans and get further along we'll help illustrate some of the splits here for everybody. I think the reality is it's going be -- there are going to be volume related savings. There are going to be productivity type things that we're targeting and there's just going to be kind of structural base and fixed type cost savings that we're going to go after. So putting a number on it or a percentage on right now, I think is premature.

[Henry Coffey:]

Great fellows, and thank you very much and we'll talk once your Q comes up.

[Michael Bourque:]

Great.

[Operator:]

Thank you. Our next question comes from the line of Bose George with KBW. Your line is open, please go ahead.

[Bose George:]

Hey guys, good afternoon. Actually the first thing, I just wanted to clarify the benefit from the MSR impairment and the fair value mark on the MSR. Again, I'm looking at Page 20, is it basically that 18 and the 34? I just wanted to make sure what the contribution was from the write up of the MSR.

[Michael Bourque:]

Sure, so the -- let me just get the Page running, sorry, so the $34 million related to Ginnie Mae, you'll recall last quarter we booked an $18 million impairment charge. So, that was a negative 8. That was a bad guy if you will in the first quarter that because rates reversed we released essentially you could think about us releasing $16 million of impairment reserve. So your quarter to quarter swing was $34 million there, and then on the fair value change, you had your first quarter fair value impact was I think $33 million across both your agency and non-agency book, and in the second quarter, it was only $15 million. So, that's the $18 million difference.

[Bose George:]

Okay, so the positive marks on collectively was $31 million, the $16 million and $15 million.

[Michael Bourque:]

Yeah now keep in mind you know -- about roughly $13 million of that non-agency mark is going to be offset in your interest expense given how we have the dynamic with HLSS or now NRZ, so that all doesn't show up in the bottom line.

[Ronald Faris:]

Bose, let me try to make sure we're not confusing anyone. The favorable interest rate environment that occurred during the second quarter for us did not have a very big impact. It did allow us to recover most of the impairment on the Ginnie Mae book. We don't actually book the Ginnie Mae book to -- mark to market, but because last quarter it actually went -- the fair value was below book value, we had to take the impairment, but we were able to recapture most of that. Other than that, the rise in interest rate only impacted our P&L by maybe another $1 million or so, because we have virtually nothing that's mark to market that's interest rate sensitive.

[Bose George:]

Okay great. Thanks that's helpful. Then just in terms of your comment about being profitable for the year, so that includes all the sort of the gains and losses on the sale, so the back of the year as well right?

[Ronald Faris:]

Yes.

[Bose George:]

Great, okay that's all I had. Thanks very much.

[Ronald Faris:]

Thanks Bose.

[Operator:]

Our next question is a follow up from the line of Kevin Barker with Compass Point. Your line is open, please go ahead.

[Kevin Barker:]

Thank you. Could you discuss some of the things that you talk about vendor and third party cuts, could you just detail some of those cuts and does any of that include trimming some of your relationships with Altisource?

[Michael Bourque:]

So, maybe I'll take the first part of your question first. As we think about different cuts, examples as we mentioned in the script, we've had strategic advisors helping us through the first part of the year and we would expect, now that the Company has significantly stabilized, that would go away and they are a vendor and that would be a vendor cut. As I mentioned, we have different consultants helping us around some of the execution of the MSR sales. That will change. We've had different groups helping us accelerate some of the changes around our risk and compliance infrastructure and those will mature and eventually move on. I think those are some examples, Kevin where you'll see an impact. I think you'll also see an impact, we would hope certainly from moving some of the delinquent servicing, but also around areas of legal spending both off the portfolio, but then also, just around the Company as things have stabilized and we've moved past some of the challenges from last year. We would expect those to run down and that element of professional services, we're going to try to work down. As it relates to our technology platform, we've mentioned we are looking at potentially insourcing kind of what I'd say non-real servicing, non-kind of strategic elements of the technology footprint that we use, and trying to get cost savings that way. As it specifically relates to Altisource they're obviously a critically important partner, strategic partner for us, but that said, we are looking at everything and we'll have to continue to evaluate the relationship here, but we're very much committed to the partnership and continuing to move forward together.

[Kevin Barker:]

Altisource has obviously been a very big portion of your overall business and an important partner. Is there something where you can maybe trim some of the technology that is being outsourced to Altisource or is there something where you would look at the whole platform?

[Michael Bourque:]

So, I think the way to think about it is, there's two aspects to kind of our technology spend with Altisource. One is, largely around the -- just the infrastructure. The hardware, maintaining PCs, all of that kind of thing, and then you have the actual real servicing system and its related systems that there's fees that are more on a kind of a per loan fee, and as the portfolio comes down, that per loan fee that we pay on the -- real servicing technology will come down for us. What we're also focussed on is looking at that infrastructure piece and seeing if there's ways for us to take some of that work in-house and allow us to do it more cost effectively than having a third party vendor do it for us.

[Kevin Barker:]

Would that be around the servicing or would that be around the origination pipeline?

[Michael Bourque:]

It would really be around all of it, but again, its things like hardware, PCs, its infrastructure type of things that we're talking about and then we would really be looking to take some of what they do for us in house and really incorporated servicing, originations it's the whole thing, because it's the infrastructure. It's not specific to the software for the servicing business. That will stay in place.

[Kevin Barker:]

Okay, okay, and then you're shutting down the ResCap system in the third quarter, is that right?

[Michael Bourque:]

We haven't put a timeline on it, Kevin, but we do anticipate exiting that system.

[Ronald Faris:]

Yeah, I mean, we moved all of the loans off of it last October, but there are certain sort of in this regulatory environment, it's important that we have continued access to certain pieces of the information for some period of time. So, until we're comfortable that we can basically flick the switch off and have all the information available to us elsewhere to make sure we can meet all of our regulator requirement, we need to keep in going, but we do think that a point will come, hopefully this year where we can flip that switch and turn that off and that will result in sort of an upfront payment but a long term savings over what we would pay if we just let the contract run out.

[Kevin Barker:]

Okay, all right. Thank you for taking my question.

[Operator:]

Thank you. Our next question comes from the line of Michael Kaye with Citigroup. Your line is open, please go ahead.

[Michael Kaye:]

Hi. Just looking ahead, it sounds like you're at least starting the process within New York and California potentially do some MSR acquisitions. Just when that happens eventually do you anticipate co-partnering with NRZ on a financing for those deals?

[Michael Bourque:]

I don't think we've gotten that far, but we definitely do consider NRZ as a partner that if we were acquiring MSR, that they would be definitely one of the first financiers that we would go to, to possibly partner with them in some way either on the related advances or even on the MSRs, similar to how we historically did it with HLSS.

[Michael Kaye:]

Then, just related to the SMP downgrade, is that going to have any impact with your relationship with the GSEs, specifically, you're going to be a Fannie and Freddie servicer.

[Michael Bourque:]

At this point in time, we don't believe so. We continue to operate as usual with the GSEs.

[Michael Kaye:]

Okay. Thank you.

[Operator:]

Thank you. Our next question is from the line of Matt Liebowitz with Nomura. Your line is open. Please go ahead.

[Matt Liebowitz:]

Hey guys, I think most of my questions have been answered, but I was just hoping, I know you briefly mentioned you look at share repurchases at some point in the future. Can you just maybe expand a little bit about that or how you're thinking more generally about the potential to return some cash to shareholders?

[Ronald Faris:]

So Matt, we are generating a lot of cash. We expect to continue to generate a lot of cash, both from the remaining sales that we've announced plus from normal operations, as Michael said in his prepared remarks, once we get down to the target we've set for our self, point a time, where we're going to definitely step back and re-evaluate the capital structure and what we then do with cash that we continue to generate and as Michael said, one potential use that we highlighted would be the potential to start repurchasing shares again, but we're not committing to anything at this point in time.

[Matt Liebowitz:]

Okay, yeah understood. Then I guess, on the interest expense line, have you guys contemplated potentially doing anything on the unsecured paper that you have outstanding, I mean, it makes up a decent chunk of your interest expense, do you think there's any opportunity to reduce some cost savings via that route?

[Michael Bourque:]

So, there are some complications there and it may be too difficult to go into all that here. I would say that it is easier for us to pay down the term loan because they're sort of a more of a natural ability to pay that down some requirements with the asset sales and then sort of, it's easier to prepay that, but we'll evaluate everything once we have the bucket of cash that's sort of left over after what's required to be paid down, from the asset sales to the term loan, we'll make decisions as to how we allocate the rest of it. So, we're not ruling that out, but we're not at that point yet where we're ready to make that decision.

[Matt Liebowitz:]

Okay great. That's it for me. Thanks for your answers.

[Operator:]

Thank you. Our next question is a follow up from the line of Bose George with KBW. Your line is open. Please go ahead.

[Bose George:]

Thanks, just had a quick follow up on the MSR fair value mark. On Page 41, that $47 million that you guys show for the market rate increase, that's not shown in the book value right? That's a gain that you'll recognize as those MSRs are sold. Is that right?

[Michael Bourque:]

Yes, yeah because the agency MSRs are carried at lower cost to market. They're not at fair value.

[Bose George:]

Okay, great thanks.

[Operator:]

Thank you. Our next question is a follow up from the line of Henry Coffey with Sterne Agee. Your line is open, please go ahead.

[Henry Coffey:]

Same kind of detailed question. If I understand it correctly, the fair value write up on your MSRs was about $33 million, $34 million and then of course down, negative -- it was a negative charge and the Ginnie Mae was a fair value right up about $33 million or $34 million. They're offsetting.

[Michael Bourque:]

The Ginnie Mae in the quarter was a discrete $16 million, Henry. The $34 million is the impact walking from the first quarter to the second quarter.

[Ronald Faris:]

I think the way top look at the rising interest rates and the impact it had on our income statement form a fair value standpoint, what was really the $16 million that we picked back up on the Ginnie Mae impairment, and I think maybe just another few million dollars related to the agency MSRs that we do carry at fair value, but we don't carry all. We carry a small amount at fair value. So, most of the benefit to the extent there is any was not reflected in our income statement as it might be in some of our competitors.

[Henry Coffey:]

Then, I know with the non-agency book, which you now are holding at fair value, you also have that sort of offsetting liability. Can you tell us how that played out?

[Michael Bourque:]

Yeah, so the asset, Henry changed by $18 million in the quarter and the liability offset that change by $13 million. So, we still have some of the OneWest non-agency book [indiscernible] so, it's not subject to the offsetting liability. So you'll have -- you generally will have a higher change in your asset than your liability.

[Henry Coffey:]

So, you had a positive charge in $18 million and a negative charge of $13 million?

[Michael Bourque:]

No, the other way. The other way around.

[Henry Coffey:]

You had a negative charge of $18 million and then a positive write up of $13 million?

[Michael Bourque:]

Yeah. A positive offset.

[Henry Coffey:]

Then besides these two items, the only real extraordinary item or unusual item was the gain on the sale of servicing.

[Michael Bourque:]

That's correct.

[Henry Coffey:]

Great. Thank you very much.

[Michael Bourque:]

You're welcome.

[Operator:]

Thank you. That does conclude today's Q&A portion of the call. I would like to thank everyone for attending Ocwen's second quarter 2015 earnings call. This concludes today's program, you may all disconnect. Everyone have a great day.