Ocwen Financial Corporation
Q3 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to Ocwen Financial Third Quarter 2015 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for today’s conference, Mr. Steve Swett. You may begin.

[Steve Swett:]

Good afternoon, and thank you for joining us today for Ocwen’s third 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 and 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. Our business has been undergoing substantial change which has magnified such uncertainties. You should bear these factors in mind when considering such statements and should not place undue reliance on such statements. Forward-looking statements involve risks and uncertainties that could cause the company’s actual results to differ materially from the results discussed in these forward-looking statements. Our forward-looking statements speak only as of the date they are made and we disclaim any obligation to update or revise any forward-looking statement. In addition, the presentation and our comments contain references to non-GAAP financial measures, such as adjusted operating expense, normalized adjusted cash flow from operations, adjusted book value, available liquidity and the economic value to Ocwen MSRs. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition. We also believe that 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, our second quarter Form 10-Q and our third 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 morning everyone and thank you for joining us today. I will begin by reviewing Ocwen’s strategy, before updating you on some significant items since the second quarter earnings call. I will then turn the call over to Michael to provide additional details. There are three key elements to our current strategy. One, create growth; two, improve the cost structure; and three, continue to stabilize the company. The first element of our strategy is to create growth for the company. We’re focusing on a few critical areas to make this happen. First, we’ve been investing in our technology, processes and retail infrastructure to build out the capability required to significantly ramp up our residential mortgage origination volume and profitability. It is our aspiration to grow into a top 10 originator by leveraging technology, process excellence and innovative new products. We’re actively looking at the feasibility of offering additional products that meet the needs of homeowners that do not qualify for conventional conforming products that could be securitized. While there is no guarantee that we will be successful, we’re excited about the possibilities and are dedicating significant resources to the effort. On the conventional front, we believe that we have made great strides over the last year and are working towards continued expansion next year. As we mentioned before, we’re also in a pilot phase on two small commercial lending products, mainly providing secured floor plan lending to used car dealerships and providing financing to investors to buy and rent out single-family homes and apartments. We’re actively signing up new customers in select markets, building up pipelines and funding new loans. And so far, we are encouraged by the response. We expect to communicate more about these products pending the completion of the pilot and the formal launches of the businesses in the coming months. We believe that we can create value as a creator and generator of new assets with strong margins versus our historical transaction-based growth strategy. Second, we are actively focused on improving our cost structure to support our smaller servicing business. Since July, the team has been incredibly focused on improving the size of our cost base and we have made good progress. In our September investor presentation, we noted that examples of potential savings opportunities ranged from $238 million to $358 million and those only included the cost categories exclusively mentioned. As you can tell from our workforce reduction announcements and the 9% improvement in our adjusted operating expenses in the third quarter, we are making progress in line with our previously stated goals. Adjusted operating expense is a new metric that we are introducing and Michael will cover this in more detail a bit later. Third, since the beginning of the year, we have made great progress executing on our asset sales strategy and we are largely complete with our previously announced transaction. As a result of these sales and our continued cash generation capabilities, we have been able to significantly reduce leverage, paying down the senior secured term loans from almost $1.3 billion at the beginning of the year to roughly $475 million today. This puts us on track to achieve our target of 0.8 times corporate debt to equity ratio by year-end. Additionally, we recently amended the term loan to give us greater flexibility moving forward. Through it all, we remain focused on enhancing the customer experience and on the maturation of a comprehensive risk and compliance infrastructure. We continue to expand our leadership in providing sustainable home retention alternatives to struggling families as evidenced by our HAMP volumes and reductions in customer complaint volumes. Additionally, despite the 2014 testing results recently announced by the National Monitor which reflect legacy issues, we feel good about the progress we have made with our national mortgage settlement compliance and expect to continue to demonstrate progress. We also continue [on an ending] efforts to help families and strengthen communities because everyone at Ocwen cares. Working closely with our Community Advisory Council, a diverse group of national, regional and local non-profit housing counseling community development and civil rights organization, we are focused on a wide range of emerging issues and relevant policy matters impacting families and communities. At our last meeting in September, we discussed the challenges facing the industry and borrowers, including a continued need for loss mitigation counseling. As importantly, the Council expressed a need for sustainable origination product to help moderate income borrowers who continue to have difficulty accessing the mortgage credit market achieve the dream of home ownership. We continue our grassroots effort to work with national, regional and local non-profits in an effort to help borrowers in need of assistance. We continue to sponsor and participate in numerous events across the country where we work directly with homeowners struggling to find solutions to stay in their homes. One of our recent national efforts involves an initiative with the NAACP called Help and Hope for Homeowners. This initiative is designed to encourage struggling homeowners to seek loan modification assistance at strategically located borrower outreach events which are jointly hosted by Ocwen and the NAACP. We will hold four of these events in 2015. The third of that was recently held in Long Island, New York. More than 220 borrowers attended this event looking for solutions to make their mortgage payment more manageable so they could avoid foreclosure. We have another event scheduled in Maryland in Washington DC metropolitan area in November. We were also recently recognized by HomeFree-USA at their leadership and training conference in Portland, Oregon, where I accepted their Community Champion Award. I also encourage everyone to go to our new website ocwencares.com to find out more about the amazing difference our team is making. Finally, we continue to manage the key issues that have faced the company this year, including regulatory compliance and the Gibbs & Bruns investor claims. No additional RMBS deals have been terminated as a result of rating agency downgrade and the earlier uncertainties surrounding [HSAR, the NRC advanced] financing facility has been resolved. In our presentation, we have provided an update on the status of state regulatory exam. I commend our senior managers and the entire Ocwen team for their commitment to successfully working through the challenges facing the company and the industry this year. We’re all committed to remaining the leader in helping homeowners, while we expand our origination businesses and return Ocwen to profitability. Now, I will turn the call over to Michael.

[Michael Bourque:]

Thanks, Ron. I will begin my remarks on Slide 5 with an update on a few key items. In the third quarter, the company reported a pre-tax loss of $56 million and reported an earnings per share loss of $0.53. As we previously indicated, we’re in a period in which the revenue loss from the asset sales hits more quickly than our expense reductions. This is the biggest driver to our financial results in the quarter. Additionally, we were impacted by significant charges. We recorded a $23 million impairment of our GNMA MSRs, driven by the decline in interest rates in the quarter. We also reported this quarter $17 million in restructuring-like charges which covered expenses related to the Fiserv platform contract termination, severance, lease breakage cost and other items, which will reduce expense levels in the future. We incurred $11 million in charges to book reserves to cover legacy servicing claims; another $11 million for a mortgage-backed securities trustee operations review as well as legal and other settlements; and finally $8 million of expense incurred pursuant to our agreement with NRZ in connection with downgrades to our S&P servicer rankings. We also recognized $41 million in net asset sale gains in the quarter. Our cash generation was strong in the quarter, consistent with the trend all year. Excess cash during the third quarter and subsequent to quarter end was primarily used to reduce borrowings on servicing advanced facilities and warehouse lines. Despite the operating and net income loss, we generated almost $240 million of cash from operations in the quarter and ended September with $731 million of available liquidity. $229 million of that liquidity was used in October to pay down the term loan. Since July 1, we have brought the balance of the term loan down from $936 million to $477 million to date and we are on track to reduce leverage further in the fourth quarter. As we have said in the past, we continue to target a goal of approximately 0.8 times corporate debt to equity. And once we achieve this level, we believe we’ll be in a position to consider alternate uses for excess cash flow. With regard to our balance sheet and liquidity, I’d like to update you on several items. First, during the third quarter, we completed the refinancing of our $1.8 billion private label OMART facility into a $1.65 billion S&P rated servicing advance facility, comprised of $1.35 billion of variable rate funding notes held by three large money center banks and $300 million of near-term notes. The current all in interest rate on our new facility is about 3% and we are pleased with the execution. More recently in October, we executed an amendment to our senior secured term loan to, among other things, temporarily remove certain financial covenants through June 2017 and enhance our operating flexibility. With the refinancing of the OMART facility and the amendment to the senior secured term loan now in place, we have significantly increased our financial flexibility as we execute on de-levering and enter 2016 with significant liquidity and investment potential. We’ve also reached agreement with NRZ on the terms for the monthly payments the company will make related to the S&P downgrade of Ocwen servicer ratings. You might recall the payments were capped at $3 million per month up to $36 million overall. Our agreement with NRZ was to pay them roughly $8.5 million in total payments for the first 3.5 month period from the downgrade until October 2. We estimate future monthly payments will range from $1 million to $2 million per month between now and June 2016. The amount will vary based on the balance of advances being financed and changes in one month LIBOR. Moving on, I would like to provide an update on our MSR sales which are detailed on page 6 of our presentation. To date, we have sold MSRs related to $88 billion of UPB, generating $555 million of net proceeds and net gains of $98 million. There are about $113 million in proceeds related to performing MSR sales that we have closed, but are yet to collect all of the proceeds. And we are in the process of executing additional non-performing loan transactions with UPB of $1 billion. We expect these transactions to generate about $18 million in losses in the fourth quarter. However, they will help further simplify our operations and reduce our advance funding requirements. I will now cover our traditional earnings slides on pages 10 to 12 in the slide presentation. In the third quarter of 2015, Ocwen generated total revenue of $405 million, which was down 13% from the second quarter. Servicing and sub-servicing revenue was down 11% to $375 million as we continued to execute on our strategy to sell agency MSRs as well as normal prepayment activity and run-off. Lending revenue was also down compared to the second quarter, declining 25% to $30 million, primarily due to lower margins as channel mix shifted to include a higher percentage of correspondent loans and less direct lending as a result of lower HARP and FHA refinance opportunities from our existing portfolio. In the third quarter, total operating expenses were $388 million, an increase of about 10% compared to the second quarter. The change in total operating expenses was primarily driven by the following

[Operator:]

[Operator Instructions] And our first question comes from Bose George with KBW.

[Chas Tyson:]

Actually Chas Tyson on for Bose. I just was wondering about the non-conventional conforming product that you’re piloting and testing out, can you give some more color on what that product looks like and how you see that opportunity over the next couple of years, whether it’d be on a purchase or refi side?

[Ronald Faris:]

On the non-conventional products, just to be clear, that is not one that we’re yet piloting. It is one that we are spending significant resources on determining what consumers are looking for. Obviously we have a big book for non-agency type borrowers. So we have some insight into what kind of products work and what won’t work for them. So it’s too early for us to give any more detail, but we’re excited about the possibility there and to the extent that we feel that we can originate product and securitize it will into the pilot phase.

[Chas Tyson:]

Is it hard to get comfortable with the regulatory risk on that side of the lending equation or do you find that you’re able to structure a product that you think would be pretty compelling from a regulatory standpoint?

[Ronald Faris:]

I’m not going to get into any real detail there. Clearly, lenders have struggled with some of the regulations out there that increase the risks for originating loans that are not sold to Fannie, Freddie, and FHA. But again, as I said, we’re excited about what we’ve seen so far and what we think we can do and are hopeful that we can work around those issues. As I mentioned in my remarks, our Community Advisory Council has also expressed great interest in working with us to find products that will work for homeowners out there who are unable to get conventional credit today.

[Chas Tyson:]

And then on the expenses, 9% down quarter-over-quarter for the adjusted operating expenses that you noted. Is that a good run rate for us to think about going forward or should it be more than that or how do you think about it?

[Michael Bourque:]

We’re not going to comment on a run rate. I think our remarks were clear back in September when we published some examples of the cost categories that we were targeting as well as some expected ranges of expected savings in those key three or four different areas. The adjusted operating expenses is a view that we use internally to assess our progress there. And as you see more and more of the cost improvement actions come to fruition, we wouldn’t anticipate seeing that show up obviously in those results overtime. So it’s not meant to be a run rate that people should extrapolate, but rather an indicator that we are making progress on the efforts we launched in the summer.

[Chas Tyson:]

And then just last one, you had ending UPB of $288 billion. If you look at slide 11 and add up to the numbers on the right side, it’s $266 billion. Is that the number that we should be using after all the sales are completed ex obviously natural runoff of the portfolio?

[Michael Bourque:]

Yes, that’s meant to indicate when all the final sales – some of the sales may have closed, but are still being serviced by Ocwen today and so that is meant to reflect UPB once those final transfers have taken place with the previously announced asset sales.

[Chas Tyson:]

Should that be happening over the course of 4Q or 1Q or pretty near-term or...?

[Michael Bourque:]

We anticipate closing all those financial transactions before the end of the year. There is a chance some of the transfers may fall into the first quarter, but we’re not going to be more specific than that.

[Operator:]

And our next question comes from the line of Mike Grondahl with Piper Jaffray.

[Mike Grondahl:]

After you got this recent amendment on the SSTL, are there any other hurdles you have to move forward and make some of the investments that you’ve been talking about? And then maybe secondly, could you rank those investments in terms of importance and maybe dollars that you might allocate to them?

[Ronald Faris:]

Mike, first off, you have to keep in mind the term loan still have come covenant in it. So we’re always going to be mindful of making sure we operate within covenants and we are still working towards getting down to that 0.8 times debt to equity ratio that we’ve been targeting. But I think that the amendment did give us a lot more flexibility and room to start executing on our strategy to complete the cost reduction initiatives and to start to carry out some of these new business lines or products that we talked about on the origination side. At this point, since we haven’t formally launched some of the businesses, but are just in pilot phase, I think it’s premature for us to say how much capital or investments we’re going to be making in those. But we’re not looking to bulk up the balance sheet with assets. We’re looking for assets that we can generate profitably, securitize, potentially retain some of the risk, but then continue to recycle the capital. So we’re not looking to consume great deal of our capital with these new businesses, although it will take some capital to move them from pilot phase into the next phase when that occurs.

[Mike Grondahl:]

And then on slide 4 you talked about obtaining servicing acquisition consents, approximately when would you expect those? What quarter do you think those might fall in or what half year?

[Ronald Faris:]

Unfortunately, I think we don’t have enough information to be able to pinpoint it to a quarter, know that we are working hard and working productively with the various parties that we need to ultimately gain that approval. As I said before, though, I don’t want to overstate that opportunity. Even when we have those restrictions with it, right now I don’t see in the market place a lot of opportunities for the kind of servicing transfers that would interest Ocwen and that’s why we’re focusing more of our efforts on generating new assets on our own through our various origination channels.

[Mike Grondahl:]

And then maybe lastly, Ron, if you could comment on your confidence in profitability in 2016 and then any guess, even a rough range to some of the free cash flow you can generate.

[Ronald Faris:]

As you know, historically we’ve been pretty limited in any of our forward-looking statements and I think we’re going to return to that. So I’m not going to make any statements about expectations for next year either on profitability or cash flow.

[Operator:]

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

[Henry Coffey:]

In going through some of these expense items, some of them are clearly not ongoing or not core or whatever you want to call them. The fair value marks in GNMA, the restructuring costs, the gain, the legal settlement for $11 million, could you give us a sense of – is that an ongoing expense or was that a one-time settlement?

[Michael Bourque:]

Henry, one clarification and I think as we get through, you’ll see on page 17 there, in the prepared remarks we talked about $11 million of MBS trustee operating expenses as well as legal and other settlement. So it’s broken down into a couple of different buckets there. I think the legal settlement in the quarter was across a couple of different things for $6 million and we had an MBS operations review where we had to spend $5 million and that was something that we would view as an unusual item. That’s certainly something we haven’t seen before. So that’s what makes out the $11 million.

[Henry Coffey:]

That $5 million isn’t going to show up again, is it, or it’s just an ongoing expense?

[Michael Bourque:]

So it’s definitely in and of itself not an ongoing expense, although it was focused primarily related to one trustee and there are other trustees that could possibly request similar types of reviews. So it is a one-time non-recurring in and of itself, but there is a possibility that we could have other similar expenses in a future quarter.

[Henry Coffey:]

The RentRange acquisition by Altisource and your interest in doing financing into the single-family rental market, will you be able to work with RentRange and other affiliated Altisource companies to put that together?

[Ronald Faris:]

So nothing that we’ve announced or doing is really related to that or in conjunction with Altisource, so there’s really nothing further to comment there because it’s not – the two are not linked together.

[Henry Coffey:]

How are you going to be sourcing those loans?

[Ronald Faris:]

Ocwen, as a servicer, we have a large REO portfolio, so we have contacts with investors and others in the rental space. And I think that’s one of our biggest advantages that we have over others. Otherwise, we’ll be utilizing some of the proprietary marketing and technology that we have in our other lending channels to also reach out in that channel.

[Henry Coffey:]

And then were you talking about floor plans financing?

[Ronald Faris:]

Yes, on the auto side, that’s correct. That’s also in the pilot phase.

[Henry Coffey:]

That’s a whole new technology build out, isn’t it?

[Ronald Faris:]

So yes, first of all, it’s not a consumer business. It is a commercial business. Without getting into great detail, we have been working on this for quite a while, we’ve hired a very experienced management team to lead that effort. And again, I’ll stop there, but you’re correct, it is a new type of initiative, but fits with our desire to generate assets and ultimately be able to securitize and recycle the capital, service the asset, so I think it fits in with our business model.

[Henry Coffey:]

Can you put numbers on either of these opportunities?

[Ronald Faris:]

Not at this point, but we’re hoping that once we’re through the pilot phase and if we decide to, which we hopefully will, to move on with these businesses, hopefully then we can give more thoughts on the size of the market and where we think we can take our business.

[Henry Coffey:]

I know it’d be out of character for you to put too much on this, but the gap between what I’d call your ongoing operating expenses and your total expenses, even when we exclude the fair value adjustments, seems to be closing. Is that a fair assessment that that gap is narrowing and will continue to narrow?

[Ronald Faris:]

It’s definitely our objective to narrow that gap and that’s what the cost improvement initiative is all about. As we pointed out in the September presentation that we did, we highlighted some areas where we thought it would come from, some of that comes more automatically as the portfolio rolls off, others we have to take action items and you can see that we have been taking action items like the staff reductions that we’ve announced. So our objective is definitely to narrow that gap.

[Operator:]

And our next question comes from the line of Fred Small with Compass Point.

[Fred Small:]

Couple of questions actually, just first of all, on the NPL actions in the fourth quarter, I think you said it was about $1 billion and that there would be an $18 million hit. Is that right?

[Michael Bourque:]

That’s correct.

[Fred Small:]

And then how much will this reduce the advance funding requirements?

[Michael Bourque:]

We’re not providing that explicitly. Some of the reductions will have offsetting impacts in some of the financing arrangements that we have. The total transaction will be positive from freeing up additional cash flow though.

[Fred Small:]

So the assumption is just there are higher advances for those loans?

[Ronald Faris:]

Yes, there are advances. I mean, they’re agency loans, but they’re non-performing. There are advances against them. I think as we’ve highlighted earlier in the year, as we moved out Fannie Mae and non-performing loans we had no real advance financing against those. On our Freddie Mac non-performing loans, we do have financing against those. So the mix of Fannie and Freddie drive how much free cash flow becomes available. But as Michael said, without providing any more details, we do expect there to be some free cash flow and it will go, but the transactions themselves are cash flow positive.

[Fred Small:]

And so if I just look back, call it, pre-ResCap, when the portfolio was mostly non-agency, there was sort of a low to mid-20%s pre-tax margin on the servicing business. Obviously things have changed and the mix is different and there are higher regulatory costs, but can you guys get back to when we think about profitability at double digit pre-tax margin?

[Ronald Faris:]

Unfortunately, Fred, I think we’re not going to – keeping in line with what I said to Mike, we’re not going to speculate or provide forecast on future margins. We’ve tried to highlight the – give a sense as to the cost savings initiatives next year compared to this year and we’ll just guide you to utilize that information as best you can, but we’re not going to provide forecast on margins at this point.

[Michael Bourque:]

Fred, I think the other thing that you can look at, we try to get people a sense historically how 2012 might look before some of the acquisitions you mentioned, adjusting for some of the elements like monitors, risk and compliance and other cost elements that we take as almost permanent changes in the business. So I think that will be another data point you could try to use to triangulate what you’re thinking about the company and margins going forward. But as Ron said, we’re not going to be more specific than that.

[Fred Small:]

Just on the revenue, follow-up on that just on the revenue side, the revenue yield on UPB is going up, is that primarily or trending up just on average UPB, is that primarily just mix shift as some of the agency runs off [indiscernible] agency?

[Michael Bourque:]

Yes. I think that’s what people would expect just given the basis points of revenue you get on non-agency is generally higher than you get on agency.

[Fred Small:]

And if you had to think about the duration of the HAMP fee stream overall, how long does that last and what’s the decline rate?

[Michael Bourque:]

We’re not going to forecast. I think what we tell you obviously with the HAMP program you have initial fees that the company earns and then you also have success fees that are paid out periodically to the extent the modified borrower remains current. So it won’t be a cliff so to speak, but it will run down overtime. So I think you’ve seen HAMP mods were significant in the quarter still relative to the rest of the industry, but any declines from where we’ve been in the past, and so I think as you just look at that trend to make your own assumptions on how that plays out and understand we won’t have HAMP fees beyond the expiration of the program just because of the nature of some of those success fees.

[Fred Small:]

And then last one, if I look at slide 20 for the MSR valuation assumptions, the cost of service line on the PLS loans, these are the third-party assumptions, the third-party broker assumptions that you’re using there. I was just wondering if you could put or give a relative sense when you’re looking at the fair value assumptions there for the PLS, the $341 annually blended, where is that in your internal assumptions and the updated assumptions for the cost of service?

[Michael Bourque:]

That’s not anything we’ve updated recently, Fred. I think historically I think the last time we published on that was probably the second quarter of last year. I’d say the number is a bit higher just given some of the changes to risk and compliance over that period of time, but we haven’t given any specific estimates on our own internal assumption numbers since then.

[Fred Small:]

Is that numbers higher than what you published in 2Q 2014, but still lower assumption than what the third-party brokers using?

[Michael Bourque:]

Yes, just given the fact that you see such implied excess value from rolling in updated assumptions that would have to be true.

[Fred Small:]

That would be really helpful if you could in the future provide some detail on the assumptions you’re using for cost of service.

[Ronald Faris:]

Okay, we’ll take that. I thought I’d try, but thanks for that suggestion.

[Operator:]

[Operator Instructions] Our next question comes from the line of Michael Kaye with Citigroup.

[Michael Kaye:]

In that September presentation, you presented a pretty wide range of potential cuts, I think it was $238 million to $368 million. Can you talk a little bit about some of the key variables that could get you from the lower to the higher end? And what could really hinder you from hitting these high end operating expense cuts? Finally, do you need any reg approvals for these cuts?

[Ronald Faris:]

First off, we have plans in place and continue to seek out opportunities for cost reductions. We are striving for the high end and in fact don’t even want to limit it to the high end. I don’t think that I can say that there are any external approvals required to execute on our strategy. That being said, we’re ensuring that our risk management people and our compliance team are side by side with us to make sure that we’re evaluating the risk of the company, the risk of the consumer associated with any initiatives that we take to reduce cost. And I think as long as we continue to do that and are thoughtful about that, there shouldn’t be any limitations on our ability to execute on the plan that we have.

[Michael Kaye:]

Just one last clarification [indiscernible] numbers pretty quick, I think you said at the end $1 million to $2 million per month until June 2016, was that right?

[Michael Bourque:]

That’s right, Michael. And it’s going to depend on the actual advance balances funded under their lines as well as how the base rate LIBOR in their facility changes overtime. But that’s generally how we forecast it.

[Ronald Faris:]

I think the point is even though you have the maximum indemnification of $3 million a month, in the first 3.5 months we did not reach the maximum amount, but we expect that actually the future payments will be lower than what we had to pay in the first 3.5 months. But we’re trying to give you at least some sense as to what that might look like.

[Operator:]

And our next question comes from the line of Ken Bruce with Bank of America Merrill Lynch.

[Ken Bruce:]

I have a number of questions. Maybe you can give us an update as to some of the issues that have been essentially keeping the overall level of advances as high as they are. I think last year and in the beginning of this year we talked about the delay in follow-up docs, and that had been inhibiting a lot of the modifications and the like from taking place in foreclosures. Can you give us an update in terms of how that situation is today and how you’re thinking about that?

[Michael Bourque:]

Ken, I don’t exactly recall the comment that you just made there, but from all the data that I’ve seen, our foreclosure timelines are within the industry norms and generally a little bit better. So I wouldn’t say there is anything specific beyond just the changes that have occurred across the industry over the last number of years that have generally slowed down, moving loans through the foreclosure process. But other than that, I don’t think there is anything to highlight.

[Ken Bruce:]

Just maybe be a little bit precise in the question. In the change that required you to have all the trailing documents before you could pursue foreclosure that added some considerable delays to the entire timeline for the industry and I’m just trying to understand has that largely moved through and so everything is in a sense is operating in a timely fashion, there obviously are jurisdictional issues that may impact specific timing for certain states and the like, is there any further delays in terms of overall processing of foreclosures?

[Ronald Faris:]

You’re right that those companies like Ocwen that are subject to the national settlement as well as with some of the CFPB rules, the process for what you have to produce on the front end to initiate a foreclosure is more cumbersome and they are backed away, there was some maybe catch up involved in changing around processes and doing things to make sure everything was in place. Now, you still need to get all the documents, so that to the extent that there is added time on the front end to do that, it still extends it out from where it was originally. The rules now really don’t allow you to start foreclosure action until you’ve reached 120 days of delinquency, where prior to the CFPB rules that was more like 90 days. So there are some embedded things that have occurred. But I don’t think that we have any operational constraints or missing document constraints beyond just normal course activity that hinder our ability to move through the process the same that anybody else has. Ocwen always has the challenge that since we didn’t originate a lot of the loans, we may have to go out and track documents down from custodians and other places and it may take us – might be a little more difficult than an originator who originated everything on their own. But that’s always been part of our business and really no different than what it was years ago.

[Michael Bourque:]

Ken, the other thing I’d tell you is, I think you’ll see some of this when you go through the Q, but if you look at our advances just where we were a year ago, it’s come down by about 25%, some of that’s been accelerated on some of the non-performing asset sales, but more than half of that improvement going from, call it, $3.3 billion, $3.4 billion something like that to almost $1 billion less now is really just improvement in advances overtime. If you look at the cash generation this year, on a year-to-date basis, we’ve generated just under $800 million of CFOA. The biggest driver of that has been advanced recoveries. So we are collecting these advances and making improvements here as one might expect.

[Ken Bruce:]

And I guess I’m not asking the question to do so and compare you against any other firm, really what I’m looking at is the interest expense associated with those advances and trying to make sure that we understand what the progress needs to look like in terms of advance reductions in order to get the interest expense down overtime and obviously I understand you don’t want to give estimates or forecast profitability, but it’s not beyond you to understand that the interest expense line is a big driver of that, so I’m trying to appreciate how long this advances are going to be out there and that’s why I asked the question. I don’t know if there is any additional color.

[Ronald Faris:]

I think the best color would be just to take what Michael said. I don’t think advances are ever going to just fall off a cliff and go to zero. It’s going to continue to be a steady decline. So maybe the one challenge is in looking back this year is to try to tease out the asset sales that impacted that number. But it will be a gradual decline on an ongoing basis. I think that’s the best we can do for you right now.

[Ken Bruce:]

And then maybe to address the operating expense side of the equation and I recognize you’re giving a slide to help you with the adjusted number and some of the discussion points around trying to get those costs down. Could you review maybe just from a high level perspective where the big chunks of those expense savings are going to be coming from? And specifically I know you’ve made some announcements around headcount cuts, but I think that traditionally most of the expense has been essentially it’s been people. So maybe you can give us just a sense as to what the cadence of additional reductions may be?

[Michael Bourque:]

I think we’ve laid that out for folks back in September how we were thinking about the breakdown of the cost savings, both between the things that, as Ron mentioned, are likely to just occur because the business is different in 2016 than it was in 2015. And then beyond that, you have the items that require a little bit more management discussion and action. We talked about the employment reductions, the announcement earlier in September around 10% of the US workforce, obviously a difficult decision, but one that was important to address. There is also continued improvements in things like servicing performance where – whether it’s uncollectible advances or claim losses and other types of things, ongoing improvements that can be generated in that area. The other thing you get as you get potential savings and productivity from different technology investments that we’ve working through over the last year or two that should – that we would expect to pay dividends next year. And beyond that, it’s the blocking and tackling type things with consultants, outside counsel spend, third-party vendors, and the line. And then you will note as you go through some of the restructuring charges, we’ve terminated leases, we’ve changed some of the terms of leases, we looked at other assets that are being utilized as well and have made some decisions there. So we’re executing on the things that you might expect, Ken.

[Ken Bruce:]

I know that this is obviously a delicate conversation when it comes to people. If you looked at Ocwen pre-2013 you had a little under 1,000 people in the US and today you have something closer to 2,000. So should we be expecting anywhere close to, if you will, reversal of the business to look like it used to or is this fundamentally going to be a different business from the standpoint of what the cost structure is because of compliance, but also the, if you will, composition of the workforce has changed permanently?

[Michael Bourque:]

You need to look at it apples to apples. So in 2012 we didn’t have a lending business. Now, the lending business, whether it’s the origination folks or the additional resources we have there that’s roughly [indiscernible] 500 people or so in the US driving that business. Like we said on the prepared remarks have generated $37 million of pre-tax earnings so far this year, inclusive of their headcount cost in the US. So I think we’re not worried about those individuals. There have been increases in risk and compliance over the last two years, that’s correct. Some of those – as we commented in previous quarters, those functions have had a higher percentage of folks in the US just given the regulatory focus and the challenges of building up their capability required today. And so we’ve resourced that primarily here. And so we’ll continue to look at it, Ken. I don’t know that the business ever gets back to where it was, but we’re always going to make sure we’re balanced between meeting our obligations to our customers, meeting the various regulatory and compliance requirements and delivering for shareholders. So just thought that will be helpful for clarify.

[Operator:]

We now come to the end of the question-and-answer session. That concludes today’s conference call. You may all disconnect.

[Ronald Faris:]

Thank you.