Ocwen Financial Corporation
Q4 2012 Earnings Call Transcript

Published: 28 Feb 2013

[Operator:]

Good morning and welcome to the Ocwen Fourth Quarter Earnings Call. At this time all participants are in a listen-only mode. After presentations we will conduct a question-and-answer session. (Operator instructions). This conference is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the conference over to John Britti, Chief Financial Officer. Sir, you may begin.

[John Britti:]

Thank you. Good morning everyone and thank you for joining us today. As our operator said, my name is John Britti and I’m the Executive Vice President and Chief Financial Officer of Ocwen Financial Corporation. 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 under Events and presentations you will see the date and time for Ocwen financial fourth quarter 2012 earnings, click on this and register. When done, click on access event. As indicated on slide 2, our presentation may contain certain forward-looking statements pursuant to the Safe Harbor provisions on the federal security laws. These forward-looking statements may be identified as 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. Our presentation also contains references to normalized results and adjusted cash flow from operations, which are non-GAAP performance measures. We believe these non-GAAP performance measures may provide additional meaningful comparison between current results and results in prior periods. Non-GAAP performance 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 the Risks Disclosure statement in today’s earnings release as well as the Company’s filings with the Securities and Exchange Commission, including Ocwen’s 2011 Forms S3 and 10-K, and 2012 Forms 10-Q. If you would like to receive our news releases, SEC filings or other materials via email please contact Linda Ludwig at [e-mail]. Joining me for today’s presentation are Bill Erbey, Chairman of Ocwen, and Ron Faris, President and Chief Executive Officer of Ocwen. Now I will turn the call over to Bill Erbey. Bill?

[Bill Erbey:]

Thank you, John. Well, I want to spend most of my time discussing the Company’s future earnings potential and growth opportunities. It’s worth pausing to reflect upon the exceptional expansion Ocwen experienced in 2012. Some of the financial highlights of our fourth quarter and full year 2012 results are shown on slide 4. In the fourth quarter of 2012 Ocwen earned $62.5 million of net income or $0.47 per share on record setting revenues of $236.4 million. For the full year net income was $180.8 million or $1.37 per share. All these numbers are substantial increases over prior year results. Most notably EPS is up 84.5% year over year. Beyond these excellent results I want to spend my time on two areas. First I want to discuss the high quality of Ocwen's earnings as demonstrated by consistently high cash flows that exceed reported earnings and second I want to lay out why I believe that Ocwen has excellent prospects for earnings growth, not just over the short term but well into the future. Let's start by discussing the quality of our earnings as demonstrated by our strong cash flow. As you can see on slide 5, Ocwen generates adjusted operating cash flow well in excess of our reported earnings. John will provide more detail on how we calculate this later in the presentation. The best measure of success in business is cash and particularly the relationship between cash and earnings. A large portion of positive cash flow from operations in excess of earnings in the current period should turn into earnings in future periods. Conversely to the extent current period cash flow is less than current earnings or even negative, this represents a drag on future earnings. In 2012 Ocwen's adjusted cash flow from operations was $719 million. As a multiple of our market capitalization we're trading at only 6-7 times our annualized fourth quarter free cash flow. Very few companies in any industry trade at this low level. We generate high cash flow to earnings through a combination of conservative accounting and strong operations. The main reasons for our strong cash results are summarized on slide 6. From an operational perspective, we generate free cash flow as we resolve delinquent loans and recover servicing advances. The 15% to 25% of advances financed with equity are included in adjusted free cash flow. To the extent where it reduces advances faster than the decline in unpaid principle balance, future earnings increase as interest expense and operating costs decline. The remainder of the difference in operating cash flows either earnings being deferred to future periods, in other words operating cash flow exceeding earnings or earnings being accelerated into the current period, in other words operating cash flow less than earnings. We believe that the best measure of earnings is cash since it puts everyone on the same basis and eliminates the impact of differences in accounting policy. First, let’s cover those things that Ocwen does not do to create earnings without cash flow. One

[Ron Faris:]

Thank you, Bill. I will cover a few areas including more detail on our operating results, our integration plans for Homeward and ResCap and an update on our improvements to loss mitigation capabilities. Slide 11 shows our success in growing revenues, earnings and earnings per share over the past three years. Since 2010, we have experienced compound annual growth in revenue and net income of over 50%. Our earnings per share has grown even faster at a compound rate of over 90%. These rates of growth are a functions of our core competitive advantages in loss mitigation and low costs, combined with our industry leading capability to rapidly scale our operations while maintaining performance. Slide 12 shows our consistent performance in driving down delinquencies and advances on newly acquired business. Overall, delinquency on the portfolio at year end was essentially flat as continued improvements on the Litton, Chase, our New Saxon portfolios were offset by the boarding of the Homeward portfolio. Overall, the pace of improvement on these recently acquired portfolios has met or exceeded our expectations. Total modifications for the quarter, excluding Homeward were 19,009. Homeward contributed 4,917 modifications for a total of 23,926 for the company overall. The HAMP percentage continued to climb reaching 32.7% for the quarter, up from 29.3% in Q3 and 20.5% in Q2. The higher level of HAMP mods reflects the success of the HAMP 2 changes in qualifying more borrowers for the program. 77% of Ocwen modifications in the quarter included some principle reduction wit 27.5% of those mods being our shared appreciation modification. Our servicing integration for Homeward and ResCap is proceeding according to plan. We would expect to move all of Homeward's private label servicing to Ocwen's platform by the end of April. We are consolidating ResCap and Homeward operations in Dallas, and we will be closing down Homeward's Jacksonville operation. We are maintaining ResCap locations in Iowa, Pennsylvania and California. The eventual size of these operations depends on several factors particularly our success in acquiring new business. In addition to our ongoing integration and transition efforts which will result in ongoing cost reduction throughout the remainder of the year, we continue to focus on improving quality through technology improvements and our continued rollout of basic operating principles across the organization. It is important to recognize that in the business of servicing loans, quality and low cost are not in conflict, quite the opposite. It is difficult to reduce servicing costs without improving quality. Rework is expensive and we will continue to improve upon our industry leading position for both quality and cost. On slide 13, we have updated data showing Ocwen's performance, compared to others on loans in subprime private label securities. We have broken the PLS data into Ocwen and non-Ocwen portfolios. As you can see, Ocwen has maintained its performance gap versus the rest of the market by both modifying more loans and by having fewer modified loans that are delinquent. Ocwen has modified 54.2% of its portfolio, compared to only 48% for other subprime servicers. Getting more struggling borrowers modified is a critical component of our ability to drive down delinquencies. What is just as important as our ability to modify loans is the persistency of those modifications to remain current. Ocwen modifications that are 60 or more days delinquent are only 26.9%, compared to non-Ocwen servicer re-default rate of 37.9%. Note also the trend line is down as we bring more borrowers current. Our better performance is a direct function of our industry leading technology platform and the use of psychological principles that enable Ocwen to deliver modification programs that increase both borrower acceptance rates and adherence. This analysis is consistent with several third party studies that show Ocwen modifies more loans and has lower re-default rates. Our results are equally impressive when evaluating our success in getting loans to cash flow. Slide 14 shows the percentage of sub-prime borrowers that have made 10 or more payments in the past 12 months. As the chart shows, almost 73% of Ocwen borrowers made 10 or more payments compared to only about 65% for other servicers. This means more cash flow to investors and lower advance rates for Ocwen. Most importantly however it means that more families remain in their homes because of our efforts. At Ocwen, we take our jobs very seriously because we know that our success as a company is not just measured in dollars, rather it is best measured by the number of borrowers, we have help to keep their homes through a difficult time. In 2012, Ocwen and Homeward helped over 100,000 families to get sensible modifications then enabled those borrowers to work through their problems. We cannot help every borrower with the modification but we want to try in every case that it makes sense. Even for those where modification is not an option, Ocwen has enhanced its program of assisted short sales and cash for the relocation assistance to ease the transition for those borrowers that simply cannot afford to stay in their home. Ocwen has a history of innovation in mortgage servicing. Ocwen was one of the first companies to use statistical models to improve loss mitigation. We have led the market in use of psychological principals to improve interactions with borrowers. We also introduced the shared depreciation modification. We have a new program that will also lead the mortgage servicing industry and I am proud to publically announce. We call it Homeowner's One. As you can see on slide 15, this program aims at vastly improving the process of helping homeowners in distress. Homeowner's One will provide borrowers with greater transparency with the various options they have should they find themselves unable to make the mortgage payment. With greater clarity and more explicit assistance with short sales or relocation, we hope to ease the difficulties associated with delinquency. Borrowers will be better able to select the option that best fits their circumstances. Moreover, we will simplify the process by using a single package to cover the various options. This program should not speed up non foreclosure resolutions; it should increase non-foreclosure resolution rates above our already high standards. Ocwen has non-for closure resolution rates of 90+ delinquent loan of about 78%, but we hope to do even better. Ocwen’s proprietary platform and strong process management uniquely position to implement such a comprehensive approach for loss mitigation. I’d like to spend a few minutes to update you on the regulatory front. We support the new mortgage servicing and origination rules established by the CFPB and we welcome the guidance on mortgage servicing transfers. We continue to have productive discussions with the State Regulators, State’s Attorney General, and the CFPB on adopting standards similar to the National Mortgage Standards adopted by the big banks. Ocwen loan servicing and other servicers have also been asked to consider a proposal to contribute to a National Consumer Relief Fund. In light of our leadership in assisting struggling homeowners throughout the mortgage crisis, we do not believe such a contribution is necessary, but we are continuing to discuss an appropriate overall resolution with the regulators. We are also continuing to work closely with the various states on assisting homeowners affected by hurricane Sandy. We continue to cooperate with the New York State Department of Financial Services to ensure compliance with the Servicing Standards Agreement we signed in 2011. Finally with our acquisition of ResCap; we are now complying with the national monitoring process for the ResCap portfolio. As we have said before the ResCap as well as the Homeward acquisition strengthen our capabilities as a large national servicer, including enhanced expertise in Fannie Mae, Freddie Mac and Ginnie Mae servicing. Now I would like to turn the call over to John Britti. John?

[John Britti:]

Thank you Ron. Today on the call I will provide more detail on financials for the fourth quarter and full year 2012, summarize the impact of HLSS on our financials and discuss our liquidity in funding position. As you could see on slide 16, normalized pre-tax earnings for the fourth quarter were $83.3 million. There were three normalizing adjustments. Ocwen incurred $2.2 million of transaction expenses related to Homeward and ResCap. About $1.8 million of that was for professional services and the remainder are in servicing and originations. The second item was a $3.1 million loss we incurred on the sale of residual interest in securitization trust. This sale accelerated recognition of deferred tax assets and removed from our balance sheet approximately $50 million of securitization trust. The final adjustment was a $1.5 million termination fee associated with an advanced facility we terminated upon sale of Advances to HLSS. Both of these latter two items are components of other income or expense under the sub-component other net. I also want to briefly go over our effective tax rate in the fourth quarter that is largely related to our restructuring of Ocwen Mortgage Services Inc. The total effective tax rate was 14.6% in the quarter. As a result of restructuring however we took a one time write down on deferred tax assets that accounted for 6.5% points of the total. The remaining 8.1% is a reasonable estimate of the ongoing rate for the assets transferred. However, the overall future rate will vary depending upon the mix of domestic versus foreign assets and operations. At the end of December Ocwen’s liquidity position as measured by encumbered cash plus unused collateralized financing capacity was $220.1 million, all in cash on the balance sheet. Our adjusted cash flow from operations metrics shown on slide five is calculated starting with the cash flow from operations number in our consolidated statement of cash flows. From that we subtract the portion of advanced reduction that is match funded with debt. Next let me walk through at a high level of the effects of HLSS on our financials. When we sell assets to HLSS, typically the Advances represent roughly 80% of the asset sold. The Advances are treated as true sale under GAAP accounting while the MSRs sold are treated as a financing. That financing raises our interest expense. Keep in mind however that we also avoid interest expenses on the advances that we sold. In the fourth quarter of 2012, total interest expense pertaining to HLSS was $27.3 million but the real net increase to Ocwen of the HLSS financing however is only about $13.2 million as we would have otherwise incurred $14 million of interest on Advances and some operating expenses now covered by HLSS. Based on a large transaction we completed at the end of 2012 and assuming additional flow transactions this quarter, we anticipate Q1 2013 interest expense related to HLSS of about $44 million. The net cost is expected to be about $17 million with $27 million of advanced funding and operating expense. A couple of weeks ago, we raised $1.3 million in new senior secured term debt to close ResCap. The interest rate on this debt was a 375 over a LIBOR floor of 125. This is a 175 basis point lower than our previous debt placement. Even so the new term loan was highly oversubscribed, which is a tribute to our track record of success and consistently strong cash flow generation. These financing costs are lower than we had planned for when we priced Homeward and ResCap which provides added benefits to Ocwen shareholders. In addition the success of HLSS in raising new fund to purchase Ocwen assets makes it all but certain that we can execute additional large transactions was without raising new equity. Moreover, the increasing efficiency at HLSS in funding advances through the ABS market will continue to improve Ocwen’s execution on new sales through HLSS. We expect to utilize cash generated from our portfolio to fund growth. Beyond what we can fund with cash, we believe that between HLSS and additional debt capacity, we can deploy another $3.5 billion in capital without increasing new equity. This would represent almost a doubling of deployed capital. Over the near term, we would expect to pay down debt with access cash. This allows us to stay prepared for further growth. On the other hand, if we were to find that we generate far more cash than we can reinvest at attractive levels, we would buyback equity. Thank you. And now we’ll open it up for questions. Operator?

[Operator:]

(Operator Instruction). Our first question comes from Mr. George of KBW.

[Bose George:]

This is Bose George. Actually the first question, I think if you actually over this in your tax comment but is the 8% tax rate you had this quarter excluding the DTA write down a reasonable run rate for 2013?

[John Britti:]

We’re not forecasting a run rate for 2013 because it will vary depending on how much of operations are foreign versus domestic and how much and where are assets are located. But I would say to the extent that assets are in Ocwen mortgage services, that’s a good estimate of the run rate.

[Bose George:]

And then on the Ally subservicing piece, are you able to give us the average servicing fee for that or say if it’s comparable to the other subservicing stuff you’re doing?

[Ron Faris:]

I don’t know that we can actually reveal that but then keep in mind it is prime loans that are for the most part newly originated and performing. So, the subservicing fee is probably lower than what you would historically have seen for Ocwen sub servicing but consistent with similar type sub servicing for that product in the market.

[Bose George:]

Okay great and then actually that leads to the question on the returns on prime MSRs that are little more prime and to the extent that you guys are looking at this portfolio. Are the return characteristics different from the more traditional stuff you'll look at?

[John Britti:]

We do, we maintain our hurdle rates on new business. So we expect to get a return on capital which is commensurate with what we have expected in the past, but you get there a different way.

[Bose George:]

But the returns are comparable, or they beat your hurdle rates but they're lower than the other distress servicing?

[John Britti:]

They meet our hurdle rates; they tend to be a little lower than what we can achieve on subprime.

[Bose George:]

Then this one last sort of industry questions. With the early, the HAMP modifications are going to hit their five year window like the early, first HAMP modifications, and so they'll start resetting up in rates. So do you think the industry could see higher re-default rates as that happens?

[John Britti:]

I think the answer is yes, but I want to clarify something at Ocwen. I don’t remember exactly at what point but at a certain point in the HAMP program, we eliminated on our HAMP mods the step-up feature. So although some of the initial ones that were done do have that step-up feature, the majority of our HAMP modifications do not include that step up feature and therefore although I think the industry in general may experience some issues with that as you alluded to, that should be much less on our portfolio.

[Operator:]

Our next question is from Hugh Miller of Sidoti.

[Hugh Miller:]

Just had a couple of housekeeping questions to start with so; one being, can you give us the weighted average of unpaid balance during the quarter just given that the Homeward transaction obviously would skew things a bit on the end of period.

[John Britti:]

Well given we've only had it for a few days, it's about a $127 billion on the legacy portfolio. So I'd say it's only a tad higher now.

[Hugh Miller:]

Can you also just give us a sense of in this particular quarter that the mix between the voluntary and involuntary prepayments, how that's compared to historical norms?

[John Britti:]

I think if you look at involuntary prepayments for the quarter, it was between 3% and 4%. If you look in the true pay offs. If you look at our 10K, when we will break it down, but we tend to include principal reductions as part of the voluntary pre-pays. So I think we are breaking that out in the current 10-K so you will be able to understand a little bit better but no longer our pre-payments are very low.

[Hugh Miller:]

And as we think about that kind component and the potential for you announcing kind of rise in the 10 year rate and mortgage rates starting to head back up, what type of increase has to happen historically for you guys to see kind of a slower rate of pre-pays from those types of consumers?

[Bill Erbey:]

I think on our existing book, I am not sure, particularly that’s the private label book; I don’t think we think that rising interest rates will move the debt needle much at all but there are people that are prepaying in our portfolio are prepaying because of some sort of life event or whatever, which is unrelated to interest rates. So I don’t see that as a driver on the bulk of our legacy portfolio.

[John Britti:]

The only other thing I might say is if interest rates are rising, generally speaking you would expect that that’s happening in an environment where economy is improving and home prices are probably also improving. So, it’s likely that that would actually have a positive effect on pre-payments for us because again most of our pre-payments are involuntary.

[Hugh Miller:]

Sure - sure. And I guess that segues into a question is to about, if we get to a scenario where we are seeing kind of rising home prices and then lower unemployment, how does that play into your willingness to kind of offer modifications in the extent to which you will offer those and then thinking about kind of the terms of the operating cost associated with those items? Does it really play a factor at all in kind of the level to which you are willing to kind of modify a loan and the amount that you necessarily have to?

[John Britti:]

It’s may be a little bit a complicated question but to the extent that, in the net present value model, you are assuming out in the future property values will increase; that could actually help some borrowers that may fail the NPV test today to actually not fail it and therefore you will be able to get a modification today that they might not have been eligible for otherwise. I think as John indicated, we would probably think more in terms of the economy as a whole improving, property values are improving, less borrowers are likely to go into defaults. We would have left new delinquent loans and those that are delinquent probably have a higher probability of getting them resolved through a modification or some other means.

[Hugh Miller:]

Or naturally, which would just be much lower cost for you guys?

[Bill Erbey:]

Yes, absolutely, Blair.

[Hugh Miller:]

And the last question I had was just with regards to seeing the rise in prepayment speeds in this particular quarter. I was wondering if you could just provide some color as to what kind of was fostering that increase.

[Ron Faris:]

I think there was a mode of subject involuntary pre-pays because we usually run even lower than the three to four we were this quarter, and then the other piece I think is the principle reduction modifications is having a fairly sizable influence on our overall prepayment rate. Again that will settle down though presumably as these modifications mature.

[Operator:]

Our next question is from Brad Ball of Evercore.

[Brad Ball:]

Just a point of clarification, the $470 billion pro forma UPB, that includes the Ally $123 billion. Has that book been awarded or are you still bidding on that book?

[Ron Faris:]

As part of the acquisition of ResCap, we inherited the subservicing of that portfolio. So in the numbers today, it’s a subservicing book. Yes, we can't really comment in detail on that transaction except to say that it is for sale and we are definitely interested in acquiring it, but beyond that we can't really say anymore.

[Brad Ball:]

But you will be acquiring it on a subservicing basis?

[Ron Faris:]

No, no, the mortgage servicing rights themselves are for sale. So if we were to acquire the MSRs, then we would be putting out capital to acquire the MSRs but we would be getting a much higher servicing fee than we are under the subservicing arrangement.

[Brad Ball:]

I see, and in the meantime you are subservicing it because of the acquisition of ResCap.

[Ron Faris:]

Correct.

[Brad Ball:]

And then just reconciling the $250 billion pipeline with the $350 billion that you talked about last quarter, is it just the deals that have been announced since then that have reduced that or are there other pluses and minuses, and is that $250 billion still predominantly nonperforming or subprime?

[John Britti:]

It is predominantly nonprime and I think your assessment; the fall out is largely a function of deals that you have seen trade in the marketplace.

[Bill Erbey:]

It excludes the Ally transaction; otherwise the Ally transaction is on top of the 250. It would be 370 on a comfortable basis for last quarter.

[Brad Ball:]

John, could you give me a percentage of what amount is non-prime?

[John Britti:]

Yes, the vast majority of non-prime. As we talked about and I can't remember the last quarter-to-quarter before but we never put the Ally portfolio in our pipeline because we think that would be misleading potentially.

[Brad Ball:]

That's right, that's right and then just shifting to Homeward originations, you mentioned $800 million mostly correspondent originations per month and that you are looking to recapture more. Could you give us a sense as to how quickly the retail recaptured capability would ramp? Do you think you will have an opportunity to capitalize on HARP while it’s still in place?

[Ron Faris:]

No, I do think that we are going to necessarily provide a projection but it is reasonable to say that we are ramping up those capabilities quickly. We also have been able to partner with certain lenders One members and others in the industry to facilitate HARP pre-financed and have started to generated some modest income from that. So I think we are in a process of starting to benefit from HARP and will continue to see that grow as the year develops, both from our internal capabilities and our ability to partner with strategic players.

[John Britti:]

Keep in mind our HARPable portfolio has grown substantially, particularly with the acquisition of the ResCap portfolio. We didn’t have that much of a HARP eligible population prior to that.

[Operator:]

Our next question is from Kevin Barker of Compass Point.

[Kevin Barker:]

Could you talk about the MPL transaction $3.3 billion servicing portfolio? Was that one time in nature or was that part of a longer extended flow program that have in place right now?

[John Britti:]

Are you talking about the transaction without the Altisource Asset Management?

[Kevin Barker:]

No, the $1.3 billion of nonperforming servicing portfolios.

[John Britti:]

I think we have talked about that in the past, large banks are interested in outsourcing non-performing loan servicing and we have decided to develop it but the flow basis and on a bulk basis and we would expect that business to continue to grow.

[Kevin Barker:]

What I mean is that - was that $3.3 billion in all flow or was that a onetime transaction.

[John Britti:]

No. In the series of transactions.

[Ron Faris:]

So, it’s starting, nearly starting going back to June of last year we started to have our flow of nonperforming loans under special servicing or subservicing contract start to flow in and that was the portion that came in through the fourth quarter.

[John Britti:]

Right, that may tend to come in pieces. I can’t remember exactly whether that was two or three chunks but we don’t get them generally in one big slot.

[Kevin Barker:]

Okay. And then the Altisource residential transaction, the $121 million, could you give us a little color on the details surrounding that and how that played out?

[Ron Faris:]

Sure. So, there were certain business lines that were part of the Homeward acquisition that fit better with all Altisource’s business model and we entered into some discussions with them to see if they wanted to acquire those businesses from us and came into terms and sold that to them. So, generally there would be similar businesses to what they do today and which are not businesses that Ocwen is in but they were part of the acquisition and therefore we thought it was in our best interest to sell those businesses and assets to them.

[Kevin Barker:]

So, you physically own the 121 million of nonperforming assets. Were they loans that you physically owned or can you explain how that played out in the transaction?

[John Britti:]

I think you are referring to the nonperforming loans?

[Kevin Barker:]

Yes.

[John Britti:]

Yes. See we had purchased these non-performing loans; we retained the servicing and then sold them off. I think it was on February 12th it was announced but I’m not sure what specifically is your question?

[Kevin Barker:]

I’m just wondering, you’re business of servicing the loans, not actually owning them and putting them on your balance sheet?

[John Britti:]

I think long term it's more likely that we’ll see Altisource Asset Management as a source of business for us. We would hope and expect that they would grow quickly and generate additional servicing opportunities for us. They may also present co-investment opportunities for us.

[Operator:]

Our next question is from Henry Coffey of Sterne Agee.

[Henry Coffey:]

Couple of questions; first the business is changing, you've got private label, master servicing, sub servicing, agency servicing. Could you give us either now or in your future filings kind of a more of a detailed breakdown of the mix as it evolves and the related fees? Maybe you can even give us a sense of that today.

[John Britti:]

I think you'll get some of that in our filing but I think on the last quarter's earnings call we provided revenues across the various portfolios.

[Henry Coffey:]

I mean the business is changing; it would be a helpful data point to have. The next question really has to do with Ally. Obviously you can't talk price but you're going to have direct experience with a very quality portfolio. Ally has valued that about 80 basis points. Under the assumption that you are able to acquire that portfolio, integrate it and find a suitable funding vehicle such as some sort of reit like structure or something, how would that impact your taste for more acquisitions of that sort?

[Ron Faris:]

I think you've maybe hit the nail on the head with, I think what we are looking to see if we can develop an effective funding vehicle for newly originated prime MSRs and to the extent that we're successful in doing that, we think that does expand our ability to acquire portfolios of that nature, particularly now that we have more operating expertise in that area than we had previously, both on Fannie Mae, Freddie Mac, and Ginnie Mae servicing.

[Henry Coffey:]

Could you walk up one day and be a big six servicer or can do a PHH or U.S. Bank Corp or even look at acquiring assets like that?

[Bill Erbey:]

As Ron said, the extend that we are able to develop our funding vehicle for the prime MSRs, I think you will see us expand more into that market. So I don’t see anything that would impede us from doing that when that vehicle gets started, if and when that vehicle gets established.

[Operator:]

Our next question comes from Doug Kass of Seabreeze Partners.

[Doug Kass:]

Bill, I found your opening remarks very, very informative and unique and provided a good prospective on a value of Ocwen shares. I have two questions; the un-paying balance is one of the questions. The second question was Bill, given the sharp ramp up with new business; can you tell us where the workforce was at the end of the quarter that was just reported compare to where was 12 months ago and give us some sense as to where it will be at yearend?

[Bill Erbey:]

Ron and John, correct me if I‘m wrong but our workforce at the end of the year was probably flat with what it was at the beginning of the year, if not slightly down.

[John Britti:]

Yes, that’s right, if you are talking about the legacy Ocwen, yes. With the acquisition of Homeward, we obviously added people.

[Doug Kass:]

And yearend 2013 projected?

[Bill Erbey:]

I am not sure we are prepared at this point to comment on our headcount expectation. A lot of it will be driven off of various acquisition opportunities that we have. So although we would expect to make significant improvements in our cost structure and there will be areas where we are able to find efficiencies and consolidation, particularly in some of the staff-type functions, we actually would hope that our growth is going to continue and so as we are becoming efficient in lowering headcount, there will be reasons to be growing it as well due to acquisition opportunities.

[Doug Kass:]

Okay, one last thing if you don’t mind. Assuming interest rates are flat in the next nine to 12 months, is there any room more in reducing cost of capital for the company?

[Bill Erbey:]

Well cost of capital are the components, I think we will continue to be work very hard and I think will be successful at reducing our advances, reducing delinquencies and as a result reducing Advances. So the interest expense will come down over that period of time. Our cost of capital I think will continue to, our implicit cost of capital with HLSS, because of the decline in interest rates in terms of financing RMBS future portfolios will be down with regard to that, and we will look in the prime space and some of the other spaces we have with this new vehicle to try to effectively reduce our cost of capital for carrying those positions. So we have some structural changes I think we can put in place. Unless we get a lot more new business, we will pay it off, a major portion of our senior secured term loan, which will in fact raise our effective cost of capital because we will be substantially de-levered over the period. So a lot of it would relate to how much new business we get. Obviously to the extent new business grows rapidly, the SSTL will be refreshed and be a little bit higher over that period since we are substantially under-levered compared to the other players in the industry.

[Operator:]

Our next question comes from Mike Randall of Piper Jaffray.

[Mike Randall:]

I would just like to get Bill and Ron’s maybe thoughts on this. Your $250 billion pipeline, is it reasonable to assume that 50% or greater of that could get announced and decided over the next six months?

[Bill Erbey:]

I will wait for Ron to answer that.

[Ron Faris:]

Yes, that’s reasonable.

[Mike Randall:]

Would you take the over or the under on that, Ron?

[Ron Faris:]

What we have tried to do when we give a pipeline number is to make sure that they are transactions that are active and there is dialog. They are obviously in different stages. Some can be towards the end of negotiations or bidding, and some can be more towards the earlier parts, but I think over a six month timeframe, which is I think what you said, I think you would look at the over on that.

[Mike Randall:]

Okay, and then as you're sitting with the various sellers, what are the two primary wishes or desires that they have?

[Bill Erbey:]

Well I don't think you can give have that discussion without saying price is always important to them. So whether it’s a low sub servicing fee or a higher MSR price, whatever is going on in the market that's still is a large driver. What we have talked about in the past, we continue to see banks of various sizes looking to re-focus their business model and focus on the core, their core customer and if they can find opportunities to shed non-core servicing customers, they seem very open and willing to do that. So those are usually kind of the things that are going on in those discussions.

[Mike Randall:]

Okay and then one last question. Just on the last call, we talked a little bit about the potential for some co issue business, on the origination and servicing side that you guys were thinking about or looking at. How was that progressing?

[Ron Faris:]

I think it’s a component of our overall strategy of acquiring MSR's in the prime space to the extent that we can fund them efficiently and we can get them at attractive levels, we are looking to acquire, either through small bulk bids or co issue arrangements servicing as well.

[Operator:]

Our next question is from David Haas of Moore Capital

[David Haas:]

Just a couple of questions, first on the prime MSR; really around strategy and structure. And so just quickly, with that structure assuming will be outside HLSS but who would manage that process? Who would manage the assets?

[Bill Erbey:]

We just assume not comment on that yet until we are ready to come to market with it, if we might.

[David Haas:]

I guess the follow-up would be are there any hurdles potentially to, what are the hurdles for setting something like that up?

[Bill Erbey:]

You can always set it up. What we’re trying to do is to come up with a vehicle that will substantially reduce the capital cost that's currently present in the market. So it’s all a matter of degree. How much effort and time do you want to dedicate to coming up with structures that are in fact and improvements over what’s the current technology in the market and each one of those independently sets up a series of requirements that you have meet, whether they be structuring from a tax efficient perspective, from a security, from standpoint of the security interest that the instrument will have compared to others, what percentage you’re able to get within that vehicle and also what kind of approvals do you need to move those assets around from the various agencies that are required. So, there is a whole series of issues that are differentiated by the structure that you pick. So, what is it, something like best is the, you don’t want to give a better just to get best but I think we have huge flow diagrams on what different structures we can do and what those options are. So I think we’re coming closer to a view is to exactly how we wish to structure that product. But it’s an important part of our, hopefully I’ll be an important part of our strategy going forward. Ocwen wants to continue to maintain its capital light position. We don’t believe our shareholders want us to be taking risks in terms of assets that can have movements in the value with regard to them, nor do as a large shareholder do I want to take those risk those on our balance sheet. So, we get that solved, I think you’ll see us be a very affective competitor. The acquisition of ResCap was a great acquisition because they’re probably one of the highest regarded prime servicers out there in the marketplace. So, we very much like have that quality within our operation and as a result they are also lower cost in prime space that we are. And again quality and cost are not in conflict at all. So we’re happy with the platform, we need to come up with more affective capital vehicle that gets that investment to the appropriate parties in the market.

[David Haas:]

And so just not ask the same question twice, but you had mentioned with respect to Altisource Asset Management potential co-investment opportunities. Is the prime MSR sort of amongst that menu of co-investments or were you referring to something else?

[Bill Erbey:]

I wouldn’t put a whole lot of weight on that. First of all Altisource Asset Management may have a vehicle underneath to do something but it won’t be investing itself in it. We are looking at other asset management vehicles once we have the residential one fully ramped, we will be, I shouldn't really spend that much time on Altisource and Ocwen's not really looking to make substantial co-investments with other parties.

[David Haas -Moore Capital:]

Understood, okay and just last quick question, and this is really more of an Ocwen question, but in the transfer of assets out to Altisource, ASPS, they were able to help you pay for one of the transactions that you recently did. When you look across your pipeline of $250 billion which is largely sort of PLS, do you have any insight into the structures within that pipeline? In other words are there the businesses similar to that which Altisource bought from you, so that they could potentially help you purchase or transact on the pipeline, pay for it substantially?

[Bill Erbey:]

I wouldn’t say that the two transactions that we did were unique but they certainly are the exception rather than the rule. It doesn’t mean it won't occur again in transactions but it’s not something that occurs on every single, what would necessarily occur on every single transaction but it likely will occur on one or two others.

[Operator:]

Our next question is from Kenneth Bruce of Bank of America Merrill Lynch

[Kenneth Bruce:]

My first comment is just as a comment. You pointed out Bill in your remarks that you've got a lot of cash that comes back to you, fairly high quality problem just in that your cash and capital turns over as quickly as it does and I guess the real challenge is just identifying high return investments to prolong that earnings trajectory and hence you know our freakish obsession with the pipeline, and I really appreciate the discussion you've given around what the longer term opportunities will be, I think that’s important for investors to understand and as the mix of the business changes, we’ll look forward to seeing some enhanced disclosure just so we can think through that. I think it's going to be important for us to understand how that return-on-capital to a degree, that's coming from different components is ultimately represented in the P&L. So I look forward to that. But one clarifying point, we have on slide 8 trillion dollar opportunity and I'm wondering if that is specific to Ocwen or if you just think that's a total portfolio of distressed servicing will be $1 trillion?

[Bill Erbey:]

How we arrive at that is to look out in the market and say today it is about $1.1 trillion of seriously delinquent loans in OREO and just make the heroic assumption that a portfolio that’s distressed will have 25% delinquent within it. So that would lead to about little over a $4 billion market potential and with lack of any forward-looking statements, we believe that may be a quarter of that or more will actually trade. So that’s how we get to the trillion. It’s across the industry. It could be more it could be less. You really a very much being, it’s a crystal ballish when you come to numbers of that size and what that means for the transformation of the industry.

[Kenneth Bruce:]

I understand. I just want to make sure, I wasn’t misinterpreting the numbers. So that’s helpful to know. And then as you describe the opportunity that’s probably going to arrive at some point in non-agency or non-qualified mortgage market, do you see Ocwen participating in that as an originator and issuer in the securitization side and that Ocwen will retain the servicing or do you see yourself more as a counterparty to others transactions as that market develops?

[Bill Erbey:]

Certainly we see ourselves as a servicer in that space. A lot of our growth over time has been being the servicer for people who are originating loans. We certainly first of all are trying to think about ways to try to stimulate that market because we think there is real need over time. The homeownership is falling about 1.5% a year, primarily because only 35% of the population can actually afford a new mortgage, which is pretty much we believe at an all-time low. That’s not say, we would ever condone, because I was very negative about the subprime lending from ’04 on because it just made no sense what was occurring. I think in a prudent way, if you come back and can provide mortgages to people that can responsibly handle those mortgages, I think that makes a lot of sense to try to participate within that market. We have to be careful though, I had whole gain on sell and as John always reminds me if you have it, the auditors require you actually to book it or write it up to those levels. So I think we are going to have to think about how we do that, so we keep our balance sheet relatively foreseen.

[Kenneth Bruce:]

Understood. And it may be premature for this, but can you describe at all what the P&L or balance sheet impact for Homeowner’s One will be realizing it probably small at first, but just to understand how that may differ from any other modification or other type of program?

[Ron Faris:]

I think it’s difficult to make any projections. The intent is, what we are hoping to be able to do is in particular help those borrowers that may not today be eligible for modification, transition faster and more effectively than going all the way through the foreclosure process, so through short sales and other means. Hopefully with the single package concept to, there may be even borrowers who today could be eligible for modifications, but for whatever reason or not engaging to the level that they should, and therefore maybe missing some opportunity. So that’s why I think there should be some pickup on the modification side as well. But it gets really difficult to project anything but ultimately we think it will help us. When you look at from our side accelerate reduction in delinquencies, reduction in advances, and lower operating cost on a go-forward basis.

[Bill Erbey:]

Right, Ron I think it’s two. We have a metric that we tried to do for our first call resolution. Because Van Vlack said, your cost structure, a large portion of the cost is really associated with people you don’t solve their problem in the first time you have them on the phone and it’s quite a substantial concentration of your calls are on a very small portion of your population. To the extent that we are able to offer everything right up-front to them and give them a complete package, I think we increased customer satisfaction significantly. We dropped foreclosures and we also hopefully, significantly it reduce foreclosures and at the same time reduce our operating costs.

[Kenneth Bruce:]

And last question, this whole Ginnie Mae opportunity I think is poorly understood by the market. Can you maybe frame that up for us just so we better understand that?

[Ron Faris:]

There is definitely a lack of, when you say that Ginnie Mae opportunity, I just want to make sure I understand what you are asking?

[Kenneth Bruce:]

Sure, I guess, looking at some of the national statistics, I think FHA delinquencies are 16% - 17% and I think that area is going to potentially be an area where somebody with your particular skill set can really take advantage of that market so to speak and just looking for that to be framed out, so we understand what that looks like.

[Bill Erbey:]

Okay and it is a little bit difficult to say that’s, one of those opportunities, when you step back makes a lot of sense to go forward in the marketplace but it maybe one that takes time to develop because there is just approvals and structural issues involved that will have to be dealt with. But I think with the acquisition of ResCap and the Ginnie Mae expertise that we picked up, combined with Ocwen’s historical loss mitigation expertise, it is a great combination of systems and talents and processes that could have a meaningful impact on what is a difficult market right now. But again it is going to be matter of how transactions gets structured in order to enable those delinquent loan to move from the existing servicer to another; whether it is through sub servicing or some other mechanism. No, that I think will still take a little bit of time to develop but I do think it is a very meaningful opportunity.

[Operator:]

Our next question is from Ryan Zacharia of GM.

[Ryan Zacharia:]

So I think following back on someone else's question, the Resi transaction where the loans were actually purchased from Ocwen Loan Servicing and I think someone just wanted to know Ocwen like bought non-performing loans and what the structure was and how that happened?

[Bill Erbey:]

Ryan I will take the question. One of the clients we would like to have long term really is Altisource Residential. We had extra cash at that point in time and we were able to earn a very nice return on that cash during that period of time with respect to that, so that whenever Resi wanted to try to acquire assets we were able to basically sell those to them.

[Ron Faris:]

Bill I think we can also say too that the seller of that product was also somebody that we’re looking to develop a bigger relationship on the servicing side and it was the good opportunity to execute a transaction and further that relationship.

[Ryan Zacharia:]

Okay, but in the future is it complicated that Resi will purchase directly or is Ocwen still going to be a conduit?

[Bill Erbey:]

Resi will purchase directly.

[Ryan Zacharia:]

And then just following up on the pipeline, I just want to make sure that I heard you correct Bill. So last quarter was 350 but that included Ally $120 billion. This quarter is $250 billion but it excludes the Ally $120 billion. So net-net, the pipeline actually grew $20 billion even though both are traded and that was $300 billion.

[John Britti:]

Actually, I think last quarter, we said that it did not include.

[Ryan Zacharia:]

You said, it didn’t include ResCap. I’m talking about the Ally.

[John Britti:]

No, it didn’t include the Ally. We said last quarter it didn’t include Ally as well. The Ally portfolio was not in the $350 million and it’s not in $250 million either.

[Ryan Zacharia:]

So the pipeline did shrink by 100 billion.

[John Britti:]

That’s right.

[Ryan Zacharia:]

And that is I guess when do to the portion of the both that you thought was relevant for you guys?

[John Britti:]

Correct.

[Ryan Zacharia:]

And then just on the tax rate. So, the 8.1% is that a result of 100% of the businesses in Q4 being within the Virgin Islands?

[John Britti:]

No, it’s a function of a substantial portion of the assets being owned by Ocwen Mortgage Services.

[Ryan Zacharia:]

So, is it always timing differences? Assuming you stop growing and you integrate the platforms that you’ve purchased now, will you tax rate always migrate down to some level like this?

[John Britti:]

We’re not making specific forecasts about our future tax rate but I think it’s fair to say to the extent that the assets would be in Ocwen Mortgage Services Inc., we think that that’s a good estimate of the future tax rate.

[Ryan Zacharia:]

And the only reason they wouldn’t be in Ocwen Mortgage Services Inc. is because you just bought them and haven’t transferred them? I’m just trying to get a sense for what created the volatility.

[John Britti:]

For the extent we’ve operating companies that are U.S. based.

[Ryan Zacharia:]

And then just a question, final question, if HLSS starts trading kind of inside of your senior secured term loan from a yield perspective, how on a go forward basis does Ocwen start to benefit from that. If basically the effective cost of capital the market is saying is less than the 8% that it originally came out at, do you start negotiating more favorable deals for Ocwen?

[Ron Faris:]

Well keep in mind that the HLSS is a combination of both SSTL and equity and we were obviously interested in becoming non capital intensive than having transaction. So at some point one needs to take into account that relationship, but overall your blended cost of capital would still be much higher than that.

[Operator:]

Our next question is from DeForest Hinman of Walthausen and Company

[DeForest Hinman:]

I had an accounting question. You had mentioned that you dislike gain on sale, but now you guys are disclosing a separate line item on the balance sheet for mortgage servicing rights at fair value. So are we going to see gain on sales going forward because of the Homeward and the ResCap transactions and if we are, where's that going to show up in the income statement?

[John Britti:]

We are going to have to book gain on sale for the origination related business, and it'll show up, we'll actually breakout the lending business probably on a go forward basis with separate segments so you can understand that.

[Operator:]

Our next question is from Chris (inaudible) of Millennium.

[Unidentified Analyst:]

Could you let us know the gain on sale of the homeward correspondent business that occurred in the fourth quarter, the on sale margin?

[John Britti:]

Well not very much affected our earnings because we only owned the company for four days.

[Unidentified Analyst:]

Right and what were they earning, so we can just kind of look at revenue number, that later origination number and try to estimate a revenue number.

[John Britti:]

I don't have that number handy.

[Unidentified Analyst:]

And off the pipeline, did you breakdown what percentage is agency versus private label.

[John Britti:]

We did not.

[Unidentified Analyst:]

Would you be willing to do that?

[John Britti:]

Well I think to the extent that we've thought about it, it doesn't matter what a loan looks like at birth. It matters what it looks like today. When we look at our pipeline since we would describe our pipeline as largely non-prime, it’s really more about a function of delinquency of the underlying loans. So highly delinquent GSE pools are as much of interest to us and make up a chunk to the pipeline but they are very similar to subprime pools in terms of their economics of the transactions.

[Unidentified Analyst:]

So you purchased the MSR cheaper because the base servicing fee is lower?

[John Britti:]

Right, or you subservice the underlying non-performing loans. Either ways that’s the opportunity, same for Ocwen.

[Operator:]

And at this time there are no other questions.

[John Britti:]

Thank you very much.

[Bill Erbey:]

Thank you very much. have a great day.

[Ron Faris:]

Thank you.

[Operator:]

This does conclude today’s conference call. You may disconnect your phones at this time.