Ocwen Financial Corporation
Q1 2008 Earnings Call Transcript

Published: 22 May 2008

[Operator:]

Welcome to the Ocwen first quarter 2008 Earnings Call. (Operator Instructions) Now, we will turn the meeting over to Mr. David Gunter, Executive Vice President, CFO and Treasurer. Sir, you may begin.

[David Gunter:]

Thank you. Good morning, everyone, and thank you for joining us today. Before we begin, I want to remind you that a slide presentation is available to accompany our remarks. To access the slides, log on to our website at www.ocwen.com, select Shareholder Relations, then Calendar of Events, then 'click here to listen to conference call', then under conference call, 'first quarter 2008 earnings', select 'click here to listen and view slides'. Each viewer will be able to control the progression of the slides during the presentation. To move the slides ahead, please click on the gray button pointing to the right. As indicated on slide 2, our presentation may contain certain forward-looking statements that are made pursuant to the Safe Harbor provisions of the federal securities laws. These forward-looking statements may be identified by a reference to a future period or by use of forward-looking terminology. They may involve risks and uncertainties that could cause the company's actual results to differ materially from the results discussed in the forward-looking statements. For an elaboration of the factors that may cause such a difference, please refer to the risk disclosure statement in today's earnings release as well as the company's filings with the Securities and Exchange Commission, including Ocwen's 2007 Form 10-K. If you would like to receive our news releases, SEC filings and other materials via email, please contact Linda Ludwig at [e-mail]. As indicated on slide 3, joining me for today's presentation are Bill Erbey, Chairman and CEO of Ocwen; Ron Faris, President of Ocwen Assets Management; and Bill Shepro, Senior Vice President in charge of Ocwen Solutions. And now, we will turn the call over to Bill Erbey. Bill?

[Bill Erbey:]

Thank you, Dave, and thanks to all of you for attending Ocwen's first quarter conference call. We have come through one of the most challenging periods in the history of Ocwen. Beginning in August of last year, we faced an increasing demand for financing to support advanced balances that coincided with liquidity providers rationing credit to anyone associated with the mortgage market. It mattered little that our collateral is top of the waterfall and superior to AAA rated securities. Both our servicing operations and finance departments responded by developing and successfully executing plans to reduce the level of delinquencies in our servicing book of business and by corollary advances and by identifying and closing new sources of financing. As shown on slide 4, delinquencies for the first quarter have fallen by 6,304 loans at REO, which is equivalent to 4.6% of delinquencies as of December 31st. Advances lag the change in delinquencies. Advances grew by only $30.5 million in the first quarter as compared to $281.9 million in the fourth quarter of last year. This performance is in marked contrast to other servicers that demonstrates the market-leading advantage that Ocwen has in loss mitigation. The finance department responded in time by closing on April 18th, 2008, a $300 million advance financing, demonstrating our continued ability to expand and diversify our funding sources. Since August 2007, we've expanded advance financing eight times in a nine-month period, representing $1 billion in financing capacity. Furthermore, we continue to maintain a full pipeline of financing opportunities. While we must continue to focus on reducing delinquencies and advances and expanding and diversify our financing relationships, we've begun to turn our attention to capitalizing to fund the significant opportunities that are available in servicing for the limited number of players that are able to expand their operations. Ocwen is the low cost provider and leads the industry in reducing delinquencies and losses. Furthermore, our process and technology infrastructure affords unparalleled scalability. We are currently pursuing several transactions that would add significantly to our servicing platform. Simultaneous with the above servicing initiative, the company is focused on creating value with its outsourcing operation, which we refer to as Ocwen Solutions. Ocwen Solutions is its own line of business comprised of three segments. Mortgage Services is our fee-based loan processing business. This primarily includes the fee-based businesses that were previously recorded within the Residential Origination Services segment. Financial Services is our unsecured collections and customer service business, previously reported under the Ocwen Recovery Group segment. And Technology Products is our proprietary technology products and management business. The Technology Products segment also includes Ocwen's equity interest in Bankruptcy Management Solutions or BMS. The Technology Products businesses were previously recorded within the Residential Servicing and Residential Origination Services segment as well as within Corporate. Ocwen Solutions is led by Bill Shepro. Later in the call, Bill will outline the business model for Ocwen Solutions. Ocwen Solutions is well positioned for the current economic environment, is non-capital intensive and has exhibited strong growth and free cash flow. Since Ocwen does not and will not present non-GAAP information, it's difficult to demonstrate the value equation for Ocwen Solutions as the comps trade on after-tax earnings adjusted for the non-cash items such as amortization of intangibles. We will provide, however, by segment total income from operations and key non-cash line items on slides 6 and 7 to assist investors in running their own cash flow models. As a result, in our earnings release Form 8-K, in our first quarter 2008 Form 10-Q, we are presenting our new structure which divides Ocwen into two lines of business, Ocwen Asset Management and Ocwen Solutions. Ron Faris and Bill Shepro will discuss the results of these segments with you, but first I want to revise you with an update on the following topics. First, during the first quarter, we produced record revenues and income from operations. Second, despite expenditures related to the "go private" transaction and unrealized losses related to auction rate securities, we were profitable in the quarter. As I mentioned above, three, we reduced the number of delinquencies during the first quarter through our advanced management programs and expanded financing. And finally, we increased our cash reserves. Slide 8 demonstrates our record setting revenue performance of $128.3 million for the first quarter, which is a year-over-year improvement of 12% and a sequential improvement of 4% over the fourth quarter of 2007. Our revenue growth was driven by unsecured collections, process management fees and valuation services. These favorable trends offset decreases in float interest income and servicing fees that resulted from contracting unpaid principal balances. Slide 9 shows that our operating expenses increased by $5 million or 6% over the first quarter of 2007. This increase reflects additional operating expenses from our Nationwide Credit Inc., or NCI acquisition of June 2007 and expenses of $9.5 million for breakup in professional fees occurred during the former "go private" transaction. Otherwise, our operating expenses continue to be well controlled with all major categories flat or declining, both year-over-year and sequentially when excluding the impact of the "go private" transaction. Slide 10 reveals the dynamic growth in our operations as total income from operations of $36.7 million exceeds first quarter 2007 by 29% and fourth quarter 2007 by 12%. This continuing improvement is driven by topline growth. Slide 11 shows that the other income expense net section of our income statement compares unfavorably to the first quarter 2007 due to unrealized losses on auction rate securities, higher interest expense on advanced financings and reductions in interest income received on whole loans and residual security. Dave will cover these items in detail later. Slide 12 shows that our pre-tax profit for the first quarter is $9.4 million inclusive of breakup fees and expenses of $9.5 million from the "go private" transaction and $8.9 million in unrealized losses on our holdings of auction rate securities. If one were to normalize first quarter pre-tax profit for the impact of those items, we would have had the highest quarterly pre-tax operating income quarter in Ocwen history. This demonstrates the resiliency of our business model and the strength of our operations. Due to the positive results of our operations and due to our continued commitment to maximize the efficiency of our financing arrangement, our cash on balance sheet has strengthened to $174.7 million as of March 31st, 2008. I am very proud of the accomplishments of our management team over the past six months during one of the most challenging times in the history of the mortgage industry. We have not only survived, but laid the groundwork for some very exciting opportunities to create shareholder value. So that you can better understand the health of our business, I would now like to turn the call over to our President, Ron Faris for a discussion of the segments comprising the Ocwen Asset Management line of business. Ron?

[Ron Faris:]

Thank you, Bill. My remarks today will cover the Ocwen Asset Management business including servicing, loans and residuals, and asset management vehicles. We have driven 53% year-over-year growth and 42.1% sequential growth in our total income from operations in the servicing business. The hallmark of our company is our ability to control costs regardless of the economic and industry forces. In a comparison of the first quarter of 2008 versus the same quarter one year ago, our revenues declined by 5.6% as fewer originations have been available in the marketplace. However, our operating expenses have decreased by 33%, almost six times as quickly as revenue and thus have driven our 53% year-over-year growth in total income from operations. While our total income expense net has grown by 124.6% due primarily to interest expense on advances, our income from continuing operations before taxes has grown by 14% year-over-year. Our sequential performance from the fourth quarter of 2007 to the first quarter of 2008 is even stronger. Our revenues have grown 6.6% due to process management fees and servicing fees, while our operating expenses have decreased by 15.9%. As a result, our total income from operations has improved sequentially by 42.1% and our income from continuing operations before taxes has improved by 74.7%. We will now step through the slides in order to provide you with the details. As shown on slide 13, the total Ocwen Asset Management business generated $16.3 million in pre-tax income for the first quarter of 2008. This is a slight improvement over the first quarter 2007 income of $16.2 million, but it's a 14.8% increase over the 2007 quarterly average of $14.2 million. 2008 first quarter revenues for Ocwen Asset Management were $86.6 million, a 5.5% decrease over the 2007 first quarter revenues of $91.6 million, but a slight increase over the 2007 quarterly average revenue of $86.4 million and 2006 quarterly average revenue of $85.6 million. For the first quarter 2008, servicing and sub-servicing fees decreased by $9.2 million or 10.3%, while process management fees increased by $3.5 million, a 132.5% improvement over the 2007 first quarter fees. The decrease in servicing and sub-servicing fees is primarily the result of lower float income, the decrease in the average balance of loans serviced and rising delinquencies. On the expense side, operating expense for 2008 first quarter was $46.9 million, a 28.2% decrease as compared to the 2007 first quarter expense of $65.3 million. Considering the fact that the average number of loans serviced in the first quarter of 2008 decreased by 12.5% over the first quarter of 2007, we are very pleased with the continued progress we've made in controlling our costs, which results in a lower cost per unit to service. Amortization of servicing rights totaled $13.8 million for the first quarter of 2008, which represents a decrease of 57% from the first quarter 2007 amount of $32.1 million. This decrease is the result of slower actual and projected prepayments fees and a 2.6% decrease in the average balance of mortgage servicing rights carried in the first quarter of 2008 compared to the first quarter of 2007. Slide 14 illustrates the servicing portion of Ocwen Asset Management business. Servicing achieved pre-tax income of $21.6 million for the first quarter of 2008. This represents a 14.3% increase from the first quarter of 2007 income of $18.9 million. This increase is due to the net result of a $15.5 million or 53% increase in income from operations, offset by increased interest expense of $11.7 million, primarily relating to advanced financings as a result of the increase in advanced balances. Pre-tax income for the first quarter 2008 also shows an increase of 32.5% as compared to income of $16.3 million for 2007 quarterly average, and a 4.8% increase against the 2006 quarterly average income of $20.6 million. Slide 15 shows that prepayments have remained essentially flat at 23% for the first quarter of 2008 as compared to 21% for the fourth quarter of 2007. Turning to slide 16, delinquencies have been increasing over the past year. This is a result of an increase in the average age of our portfolio by 10 months and the increase in the number and level of ARM resets and negative home price appreciation amongst other factors. For the first quarter 2008, non-performing loans only grew by 0.7% as compared to 3.3% in the fourth quarter 2007 and 2.4% in the third quarter 2007. This is a result of our effective loss mitigation processes which involve aggressive loan modifications combined with efficient foreclosure and REO resolution practices. Slower prepayment speeds have led to lower average float balances, and in turn, lower float income. Slide 17 shows our average float balance of $408.7 million for the first quarter of 2008, which represents a 53.5% decrease from $878.9 million for the first quarter of 2007. Since float income is a component of our servicing and sub-servicing fees revenue line item, lower float balances and float income result in revenue growth being less than the growth in our servicing portfolio. Increasing delinquencies and slower prepayments fees have combined to significantly increase our servicing advance balances throughout 2007 as shown on slide 18. This slide demonstrates the growth in advances using quarter-end balances in the loan servicing segment. Our first quarter 2008 ending average balance has only grown by $31.3 million as compared to an increase of $282.4 million growth in fourth quarter 2007 and $219.0 million in the third quarter 2007. As advanced growth rates slow, we are able to resume our purchase of mortgage servicing rights. As demonstrated on slide 19, loan servicing unpaid principal balance decreased to an average of $50.9 billion for the first quarter of 2008, a 5.2% decrease from the first quarter 2007 average balance of $53.7 billion and a 6.4% decrease from the fourth quarter 2007 average balance of $54.4 billion. The unpaid principal balance has dropped by $3.7 billion from the average of the previous three quarters as we made minimal additions to the portfolio due to low origination volume. We have been purposely conservative in acquiring new mortgage servicing rights to protect the liquidity of our balance sheet. As of March 31st, 2008, we were the servicer for 395,000 loans as compared to 427,000 loans at December 31st, 2007. Our first quarter 2008 mortgage servicing rights balance of $181.8 million represents a 5.3% decrease from the fourth quarter 2007 balance of $191.9 million. This change is a net result of purchases of $3.6 million of mortgage servicing rights and the amortization of $13.8 million during the first quarter of 2008. As previously discussed, amortization is slowed to reflect decreasing prepayment fees as we expect our in-servicing income over a longer period of time. Slide 20 demonstrates pre-tax income of our loans and residuals portion of our Asset Management business. First quarter 2008 pre-tax loss of $3.6 million was a 33.3% increase over the first quarter 2007 loss of $2.7 million. This pre-tax loss increase is a result of higher loan charge-off of $1.8 million. The performance of our existing asset management vehicles is seen on slide 21. First quarter of 2008 shows a pre-tax loss of $1.6 million as compared to a loss of $0.1 million for the first quarter of 2007. The first quarter 2008 results were composed of a loss in Ocwen structured investments of $446,500 and $846,200 in Ocwen non-performing loans. These losses are largely the result of charges to close the financing facility that was no longer useful in the current environment in Ocwen structured investments in valuation-related unrealized losses on loans and REO in Ocwen's non-performing loans. Thank you. I'd now like to turn the call over to Bill Shepro.

[Bill Shepro:]

Thank you, Ron. My remarks today will cover the first quarter results for Ocwen Solutions. Ocwen Solutions can best be described as a knowledge process outsourcer that's similar to Ocwen's Residential Loan Servicing business, manages highly skilled job functions, primarily from low cost global platforms. Ocwen Solutions is able to effectively migrate jobs for low cost global platforms by deploying integrated technology solutions that include workflow management, integrated voice and applications management, scripting engines, decisioning models and the use of artificial intelligence. Through these tools, Ocwen strives to reduce variability in our performance, which provides overall quality for our customers and increases our margins. Core to our strategy is the focus on selling output or solutions as opposed to fees. This positions Ocwen Solutions to generate higher revenue per employee as we become more efficient. As a result of the non-capital intensive nature of Ocwen Solutions businesses, Ocwen Solutions generates meaningful cash flow for Ocwen. Ocwen Solutions delivers its product and services through three business segments

[David Gunter:]

Thank you, Bill Shepro. I would like to focus on three areas

[Operator:]

(Operator Instructions) Our first question comes from Bob Napoli. You may ask your question. Please state your company name.

[Bob Napoli:]

Piper Jaffray. And good morning and congratulations. I think it looks like a lot of questions, but the numbers look pretty good to us. A question first of all on delinquencies and advances. And I think you guys did mention at some point, but clearly there is some seasonal benefit that you get in the first quarter. And I just would like to hear your view on where you see advances going. And I know you gave us on your slide here a big reduction in the delinquent loans, I think, on page 4 in the month of April. But I was hoping if you could give a little more color on where you see delinquencies and advances going over the next several quarters?

[Bill Erbey:]

First of all, Bob, start with the last question, which relates to where do you see advances going. We can't give a forward-looking statement, but we'll give you the mechanics of what occurs. Advances are a lagged effect of delinquencies. As delinquencies begin to rise, you have more and more delinquencies going in the early part of the bucket, and those have very nominal advances against them since the loan is only one month delinquent. It has one month of P&I. As the advances begin to turn down by their very nature, the average age of a delinquency is older. It has many more months of delinquency. It may affect even the REO, et cetera, and has much higher advances associated with it. So, you saw that on the way up where advances lag behind the increase in delinquencies. And on the way down, you are going to see advances lag behind the decline in delinquencies with regard to that. So, you've seen a very nominal increase in advances in the first quarter, and that's really reflective of slide 4 where you've seen quite a dramatic decrease in the delinquencies in our book of business. With respect to the seasonal effect, yes, there is definitely a seasonal effect in delinquencies whether it would be in mortgages or credit cards or auto. The level of activity that occurred in the servicing group to create that change, I think very, very little of that would be described as seasonal effects. I mean our best information is that almost every other servicer in sub-prime land has continued to see an increasing rise in delinquencies over that period in spite of the seasonal effect. So, I think that really relates to the operational strength of Ron's operation in terms of being able to reduce delinquencies. We are not forecasting any change in that trend with respect to delinquency, the numbers of loans that are delinquent.

[Bob Napoli:]

Okay. Let me ask a question on the quarter. I am trying to get a handle on what the recurring earnings were if you look at it that way in the quarter. Obviously, the deal fees, the $9 million there is not a recurring item. The auction rate security, mark-to-market I would guess that the valuations have probably stabilized even more so today than maybe they were at March 31st. So, probably not in other item there. On the flip side, BMS is probably a non-recurring gain. If you took out those three items, do you get to a level of income that you guys would review as kind of a core ongoing level of income for the company as trying to put it in a way that it's not forward-looking, but kind of the core operating earnings power of the company? Is that how you would view it?

[David Gunter:]

Hi Bob, it's Dave. I think you've identified the three items that one would think about as possibly not repeating in the next quarter. So, I think you're in a good place with your thoughts.

[Bob Napoli:]

And the one big change, and I'll let other people ask questions, but I have more questions. The prepayment speed was actually up from the fourth quarter and down a little bit year-over-year. So it looked to us previously like you were amortizing way too much previously, but that's a big change in the amortization expense quarter-over-quarter. I was just hoping you could give us some color on why that big change and why now?

[David Gunter:]

Again, this is Dave. You want think about in the typical quarter when we are measuring amortization expense that it can fluctuate inside the quarter. So, it would be hard for you take Q4 and Q1 and compare them in a constant fashion. But you should just think overall that the trend that as the prepaid fees have remained relatively low and as we are not as frequently adding newly securitized deals, then you can expect amortization to get pretty low. If you were in an environment where you were going to add a significant newly originated securitization, then you would expect amortization expense on that pool to be very heavy early in the life, very low late in the life, because the amortization expense would roughly match the shape of your cash flow on that pool of your cash profit over time.

[Bob Napoli:]

Okay. So, as your pool has aged, you are getting to the life in the pool where the amortization rates -- I mean the amortization rate essentially assumes that like a three-year life on the remaining portfolio, three year average life?

[Bill Erbey:]

One of things that happens, Bob, is that you take a look at our amortization. Our amortization is conducted more on industry average cost. So, we've amortized quite a bit already. And the way the amortization works is, looks at your expenses, so a little bit of it assumes higher expenses later in the life and less amortization. And obviously, if our costs are lower than the industry cost, we would have more profit.

[Bob Napoli:]

Right. Thank you.

[Operator:]

Thank you. Our next question comes from Michael Levitt. You may ask your question and please state your company name.

[Michael Levitt:]

Hi, Michael Levitt from Chesapeake. My question relates to the new reporting segments. I assume the change was made to allow for a potential separation of the company. And my question is, firstly, is this something the board is considering? And if so, how soon do you think the separation might be achieved? Thank you.

[David Gunter:]

Hi, it's Dave Gunter, and I'll take that question. We thought about our segment reporting in terms of FAS 131. And so, as we report our segments, we look at Bill Erbey as the chief operating decision maker. And so what you see simply here is that as we look at the piece parts of our business, we have different growth prospects and different economic characteristics. And so, we are required by the literature to report to the Street the same way that we view the company. So, the way that we look internally at our management structure and the way we look internally at our reports, allows us to think about segments. And so, we actually have six reporting segments if you look closely, three that center around our servicing and three that center around business process outsourcing. So, here our intent is simply to provide transparency to the shareholder.

[Michael Levitt:]

Got you. And stepping back and thinking a bit more strategically, could the two main operating segments operate independently, if you could maybe discuss the pros and cons associated with that?

[David Gunter:]

That is an interesting strategic question, but not a commitment that we've made here, and I'm not even sure how to address it.

[Michael Levitt:]

Is it something that is being discussed or debated internally?

[David Gunter:]

Well, again our segment reporting simply mirrors that you have two people as direct reports, reporting to Ron Faris and Bill Shepro that you've heard today. And so, as you study the literature, we're required to think about those lines of business because that's now how we manage the business. There is nothing to preclude such an idea of operating the two independently as you suggest, but have no commitment here to do that at this time.

[Michael Levitt:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Rick Shane. You may ask your question, but please state your company name.

[Rick Shane:]

Thanks guys. Rick Shane from Jefferies & Company. First of all, I do want to credit you guys for getting the additional advance line. That's clearly been one of our concerns, and it's a good step forward. You guys point out the delinquency trends in terms of the number of loans that are delinquent. We're not really used to looking it at that way. Can you help us sort of relate this back to sort of more traditional metrics in terms of dollars delinquent or delinquency rates? What were the trends there?

[David Gunter:]

Well, this is Dave. I'll help you. The way that I've thought about delinquencies in our bank's covenant reporting as we look at our 90-day-plus delinquencies, it's that for the period January, February, March, April. Our delinquencies in that time period based as a percentage, let's say, in the same band in between call it around 21%. So, on a percentage basis, the way I measure for bank covenants hasn't changed very much. I think we also have a slide for you in here where you can simply see a percentage split of the performing against the non-performing.

[Rick Shane:]

Okay. Because the number I'm looking at in the press release says that the non-performing loans in the REO service as a percentage of total is 21.8% from 19.8% or from 19.6%. That suggests to me that the non-performers went from about $10.3 billion to about $10.8 billion, which would suggest that even if the number of loans that were delinquent went down, the dollar balance went up and so the average delinquency size went up?

[David Gunter:]

That is correct. I mean if you think about it, going back a couple of years ago, most of your delinquencies were coming out of places like Michigan, Ohio where balances were lower. Now, your delinquencies are coming out of places like California, Nevada, and Florida where the balances are higher. So, as Bill mentioned previously, there is sort of a lag in how things work. So, we're seeing the units come down. Some of those units that are coming down are junior lien loans as well as some of the REO or whatever coming out of some of those states that I mentioned, Ohio and places like that, and you have delinquencies coming into the picture from California, Florida, et cetera. And those then over time will start to work their way off.

[Rick Shane:]

Okay. So, based on the seasoning trend you are looking at, we could continue to see this divergence in terms of lower number of loans, but actually higher delinquency rates and higher dollar values of delinquencies?

[David Gunter:]

No, the dollar values have been coming down. Certainly through April, they're down.

[Rick Shane:]

April versus March?

[David Gunter:]

No, April versus the end of last year, the dollar balance of the UPB that's delinquent.

[Rick Shane:]

Okay. The way I'm calculating, I am --.

[Bill Shepro:]

The first quarter as we reported, the 90-plus rate is up. The percentage rate is up. Keep in mind the portfolio shrunk some, so it all depends on how you look at it, whether you look at it absolute amounts of delinquent loan or percentage delinquent loans. I mean you can see, as we showed, the pretty significant decline in units in April which is a pretty positive trend.

[Rick Shane:]

Okay.

[Bill Erbey:]

I you look at slide 4, Rick, you've reduced more loans in April than you did in January, February, March in combined. So, the numbers you're looking at are March 31st numbers. Actually, I don't have the exact number on the top of my head, but I believe delinquency as a percentage of UPB in April is down versus the end of last year. And certainly, the dollar amounts of UPB that are delinquent are down as of the end of April.

[Rick Shane:]

Got it. Okay. Thank you. That helps. When we look at the servicing advances during the quarter, they increased roughly $30 million. The match-funded borrowings increased roughly two times that. What's going on there? Is it just you're taking a higher advance rate and why would you do that at this point?

[David Gunter:]

Rick, it's Dave, and I'll explain it like this. Think about us as having not one financing facility but quite a few now. And so, the work that we've done is to maximize our use of those financing facilities. So, we've looked at each one of our pooling and servicing agreements, and they measure in the hundreds, and we've taken the characteristics of those and compared them to each of our financing facilities and moved PSAs so that we optimize the advance rate and optimized the number of PSAs and optimized the amount of total advances that we've been able to finance. So, we simply by doing better optimizational work inside our advance facilities group have matched up our PSAs in such a way as to simply be able to pull more financing against more static pool of advances. And so, part of our increase in cash is due to operations and part of the increase in cash is due to better use of our advance financing lines.

[Rick Shane:]

Okay. And Dave, I apologize, PSAs?

[David Gunter:]

I am sorry pooling and servicing agreements.

[Rick Shane:]

Okay, thank you. Last question. I know there are others waiting. The auction rate securities and investment financing that are on the balance sheet, I am not sure I understood the discussion there. Did you actually have an interest in these securities during the fourth quarter and previously and this was just all off balance sheet and now is being brought on balance sheet because of the losses so that you have to show it or were these new investments that you made in the first quarter? I am perplexed.

[David Gunter:]

You'll find in Form 10-K a paragraph that discusses the auction rate securities. And so the issue here is, these funds were off balance sheet, but because we use the JP Morgan investment line as an aggregation tool, we have the right with each contract or PSA to take the interest income and the cash belongs to somebody else. And so rather than pooling with 1,000 accounts to make independent and small investment decisions, JPMorgan provides us a line of credit which aggregates roughly 1,000 accounts, which are both P&I and T&I. And because the auction rate securities did not clear, we could not pay that line off at the end of the quarter as is our normal custom. And therefore, that debt, if it would exist at the end of the quarter and gets pulled on, it's a liability on to the balance sheet. The assets which are the underlying auction rate securities you find on the asset side. So, it's exactly as you said, pulled on into the consolidation for the first time in this first quarter.

[Rick Shane:]

Okay. That makes sense. But what I guess I don't understand then is why do you have those assets, what's the business reason for having those. I am assuming that there is some positive earnings impact that goes through. How does that go through the P&L. It's not anything we've been tracking previously?

[David Gunter:]

It's your basis for the float interest income which is the component of the first revenue line item called servicing and sub-servicing revenue.

[Rick Shane:]

And so what's the business purpose for having the facility? How does it provide liquidity for you guys? I am just confused by it.

[Bill Erbey:]

It's not liquidity. Let's start back at the beginning again. You have float balances and there is certain that requires investments for float balances. One of the easiest ways to deal with that since there are thousands of accounts is to basically go to, and most servicers do this, you go to a bank and you put all the deposits within that bank and then they basically provide you with an investment line that's backed up by those deposits and rather back up by the AAA rated collateral that you use. So, it generates your float income. And operationally, it doesn't make you crazy everyday by losing basically large sums of money amongst 500 different PSAs and the 1,000 or more accounts.

[Rick Shane:]

Got it. So, this is essentially one of the investment alternatives that the indenture allows you to put float balances into before you pay them off?

[Bill Erbey:]

You put them into a deposit in a federally insured deposit or institutions and they give you a line against which traditionally people would invest, CP and auction rates and AAA rated, government-guaranteed auction rate prefers and other AAA rated assets with regard to that.

[Rick Shane:]

Got it. That's a very helpful answer, guys. Thank you very much.

[Operator:]

Thanks. The next question comes from Doug Kass. You may ask your question. Please state your company name.

[Doug Kass:]

Doug Kass, Seabreeze Partners. If you've answered this question, I apologize. I just came on the line. The first question, two-part; firstly, delinquencies were down 4.6%. Can you express to me what effect seasonality had on that figure and what effect the aging of the portfolio had on the figure? And I'm new to the company. So if this is a stupid question, please tell me. Your fee-based revenues or process management fees were up dramatically in the quarter. Can you explain that as well?

[Bill Erbey:]

We answered the question on seasonality. First of all, the aging of the portfolio would indicate that your delinquencies, everything else being equal, if we hadn't basically adaptive to the situation, your delinquencies would be up, because the portfolio is aged. There is less new product coming on the book, so on average 10 months older. The issue with respect to seasonality, yes, there is definitely a first quarter seasonality. However, if you compare this performance to, I think, any other servicer out there, the best information we have is delinquencies are all up and they're up significantly. Seasonality would come nowhere close to explaining the impact of reducing these many delinquent loans in the first four months of the year.

[David Gunter:]

Your other question was related to revenue, you'll remember as you've been reading, we acquired Nationwide Credit in June of 2007. And so, the revenue line item that you see there is the place where, along with the loan servicing business, we also have our fee for recovery services from NCI. So, it's a contribution to that increase in revenue.

[Doug Kass:]

Thank you so much.

[Operator:]

Thank you. Our next question comes from John Hecht. You may ask your question and please state your company name.

[John Hecht:]

JMP Securities. Thanks for taking my questions. Most of my questions have been asked. Your servicing operating expenses went down from $53 million last quarter to $42 million this quarter. Obviously, somewhere around $4 million of that was [a reduction] in amortization cost. Can you guys tell us where the other cost savings are and where you're getting some more efficiencies out of this business?

[David Gunter:]

John, it's Dave. If you take a line item review once you see our 10-Q when it's released today, you'll be able to see that we've been more efficient with our compensation and benefits. And yes, you were right, part of it is in the amortization of servicing rights. But then all across the board, we're either flat or down with the exception only of professional services, which is the line item where you would find the cost and expenses related to our former "go private" transaction. So, it's roughly across the board, but comp and benefits was a piece of it as well.

[John Hecht:]

Okay. So, there is a $7 million quarterly savings excluding the amortization effect this quarter in that segment. I mean is that an apples-to-apples comparison of what your ongoing efficiencies are right now?

[David Gunter:]

We are efficient with operating expenses. So, I think you have the right characterization.

[John Hecht:]

Okay.

[Bill Erbey:]

And then just also, let me just keep in mind that in terms of loss mitigation, Ron has increased his loss mitigation personnel by 67%. So, that's quite savings and other efficiencies through technology and global resources to be able to absorb that 69%, as I corrected I apologize. The 69% increase in our loss mitigation personnel to be able to drive those delinquencies and at the same time to be able to reduce operating cost.

[John Hecht:]

Okay. Thanks very much. And then last question I guess is a little bit of follow-up on the auction rate securities. I understand those were related to your float balances and why you are bringing them on balance sheet. I guess can you give us little information about how the investment line, the liability it gives that asset works? Is there any terms we should be aware of with respect to that or is the vendor effectively said, given the current environment, we'll just get even advance rate against these for as long as it takes to get these assets moving again?

[Bill Erbey:]

It is exactly the latter.

[John Hecht:]

If you take the assets divided by the liabilities, is that the advance rate we should expect going forward on this you have to keep in on the balance sheet?

[Bill Erbey:]

No, you'll see as you read inside our Q when we release it today that we did put up collateral in the first quarter against the securities.

[John Hecht:]

Okay. Thank you very much.

[David Gunter:]

Just to be clear, that is a term loan that is due at the end of June, but that's --.

[John Hecht:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from Steven Tannenbaum. You may ask you question and please state your company name.

[Steven Tannenbaum:]

Greenwood Investment. Bill, you mentioned capitalizing on opportunities regarding MSRs. Can you talk about that a little bit, the nature and size of those opportunities and whether you'll have to continue growing advance lines or what kind of financing might be out there and just give us a little bit more color on that?

[Bill Erbey:]

Yes, it's difficult for us to talk about specifics. But I mean if one were to survey the landscape of servicing shops out there, there are a substantial number of them that are either currently on the market or one would believe would be available over the period of time. So, we certainly are taking a look at that. I think that David's operation, he has done a great job in terms of raising additional liquidity for us. I think that many of the lenders view us as a survivor in the industry. I think there is liquidity available to take on fairly substantial size portfolios if those were to become available.

[Steven Tannenbaum:]

Okay, great. And second question, I think maybe for Dave. Dave, could you talk a little bit about the late charges? And what we might see or what we've already seen in the first quarter, my belief has always been that the late charges would play a role in offsetting the high advance cost of 2007. Have we already seen that? And did the more aggressive modifications and foreclosure activity result in increased, decreased, late fees? Can you just help us with that a little bit?

[David Gunter:]

At the present time, thinking about the first quarter 2008, our late fee cash flow, if you will, has been roughly steady with the fourth quarter of 2007. The last late fee numbers that we issued were in the 10-K. And at that time, we revealed that year 2005 late fees were approximately $35 million. In 2006, they were roughly $38 million. And then last year 2007, they were just under $40 million. I think like you do, I think that we can look for some increase in late fees, but for the first quarter, it's roughly been steady with the fourth.

[Steven Tannenbaum:]

If we were increasing and more aggressively modifying loans, how does that affect late fees?

[Ron Faris:]

This is Ron. To the extent of loans it goes delinquent, it rolls through foreclosure at REO, it does not actually benefit us from a late fee standpoint, because in those cases, you will never recover those late fees. We only book them when they're paid. So, I think that loan modifications in and of themselves don't create late fees, but they may create more opportunities down the road as opposed to letting a loan flow all the way through foreclosure and leave the book of business. By modifying the loan, not only do we extend the fee that we get on the servicing rights, but inherently there will be some of those borrowers that will be late periodically on their loans, but not late to where they go back into a full default, but late where they're hopefully pay late fees. So, I think the modification program over time helps extend our servicing fee based on a number of fronts, including late fees.

[Bill Erbey:]

But we don't run the business to generate late fees that. It's clearly far more important for us from the economic model to get people current than it is basically to worry about collecting late fees. We have simply zero metrics that would be involved in looking at late fees. We're not trying to be nearly [monetary] institution. We just happen to think that there are far more important drivers to the bottomline such as the business units being able to basically get those loans back current and re-performing. So, that's clearly not a driver of our business model.

[Steven Tannenbaum:]

Okay. Thank you.

[Operator:]

Thanks. Our next question comes from David Schuster. You may ask your question and please state your company name.

[David Schuster:]

Hi, it's David Schuster from Brown Advisory. Two quick ones. First one, what was the pricing on the advance line?

[David Gunter:]

We're going to release Form 10-Q today, and it would simply let you go back into the notes section there and also in management discussion & analysis.

[David Schuster:]

Okay.

[David Gunter:]

And you can see the spreads over LIBOR.

[David Schuster:]

Second question just relates to four stakes in the partnerships that you have that have been set up to invest in distressed assets. Can you just spend a minute telling me a little bit about where they are in terms of investing their capital and they invested at all in the process of raising additional capital to take advantage of other opportunities?

[David Gunter:]

On the two vehicles that we have created so far, each of them have invested roughly half of their capital so far. And at this point, neither of them actually have any leverage or the leverage is minimal. So, there is still room to continue to drive down additional capital as we make additional investment. And to the extent there is any leverage available, it will be a little bit of time before we would seek to raise additional capital for those two vehicles, barring any sort of one time large transaction that might occur, but that is not necessarily on the horizon. And then to the extent we look to do any other asset management vehicles, then we would go out and look to raise additional capital for those, for new types of vehicles.

[David Schuster:]

Right. Thanks a lot.

[Operator:]

Thank you. And we have a question from Bob Napoli. You may ask your question and please state your company name.

[Bob Napoli:]

Piper Jaffray. Thank you. The NCI business which broke even this quarter was profitable before amortization. Obviously, delinquencies have gone way up, and so placements have to the potential to go up significantly in that business. And your model, which is quite interesting in shifting, maybe dramatically reducing the cost base and moving a big portion of the collections from the US to India, you maybe give a little bit of update on that business and the potential for that business. And it seems like something that should have the potential to be something that's going to add a lot to earnings as we move through '08 and into '09?

[David Gunter:]

It's just speaking generically, what you're seeing in the industry is charge-offs are increasing quite dramatically as a result of the current economic conditions. And what you are doing is collecting a little bit less money, but you're getting a lot more placements. So, in a good economic environment, you collect more money, but less placements. And in a bad economic environment, you're collecting less money, but you're getting a lot more in placements. And what we're seeing at least in the first quarter is that both in number and in the average balance of the accounts coming in or dollar amount, replacements are rising quite dramatically, although we are collecting, as is the rest of the industry, a little bit less on those placements. And we expect that the placement trends will continue.

[Bill Shepro:]

The one thing I think the big opportunity here besides global is really reducing variability. You'll see that in our mission statement. It's what we do in the servicing business by using the models and the scripting engine is to make all of our collectors successful, very little variability between the best and the worst in our mortgage business. Three-quarters of the people are severely delinquent in their homes. And NCI, in addition to global, we have a significant opportunity to apply that same basic technology to reduce very wide variability. Even though we're one of the best collectors out there, there is a large room for improvement. If one were to look at the 75% of our collectors that are at the bottom of the barrel versus the 25% that are at the top, it's the 75 in the bottom we can move to the top 25%, which is still large variability compared to our servicing business. They would have collected about 30 --.

[David Gunter:]

20-25.

[Bill Shepro:]

$25 billion more in collections. Our big opportunity there is NCI has one of every collection system and dialer on the planet. We are working very quickly and hopefully by the end of the year to be able to get on a unified collection platform and then be able to roll out next year basically our scripting engines to reduce variability, which will also enable us to move our workforce far more rapidly than we've been able to do so far this year. So, there is a lot of wood to chop there. But I think that we're the top name collector for most firms. I think we have improved significantly upon that. And what's nice about secured collection business unlike the servicing business is if you do a better job, because it's continuously fee-based, you get paid for it.

[Bob Napoli:]

Okay. That's helpful. The deal that didn't happen, I mean what is kind of the outlook? Does Ocwen want to attract investment dollars? Does Ocwen want to go private? What does the company want to do from here?

[Bill Erbey:]

Well, we will continue to look at a variety of different options that will create shareholder value with regard to it. So, we will continue to view our options out there in the marketplace to see how we can create value for all the shareholders of the company.

[Bob Napoli:]

Can you say why that deal didn't happen?

[Bill Erbey:]

I am thinking. I'm quite speculated. Excuse me. There is no mutual agreement with respect to price or conditionality.

[Bob Napoli:]

Okay. Just last question. The tax rate, Dave, were you suggesting that 30.5% is kind of the right tax rate outside of this quarter?

[David Gunter:]

We have a chance to get that low, but you will also note in our discussion that we talked about having better than 2 points first quarter this year and first quarter last year based on some international activity in that range for the year, so we can have variability quarter-by-quarter.

[Bob Napoli:]

Approximately, what is the cash tax rate?

[David Gunter:]

Approximately 24% this year.

[Bob Napoli:]

Right, thank you.

[Operator:]

Thank you. At this time I am showing no further questions.

[Bill Erbey:]

Thank you very much, everyone. Have a pleasant day. Good bye.

[Operator:]

Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.