Ocwen Financial Corporation
Q4 2013 Earnings Call Transcript

Published: 28 Feb 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Ocwen Financial Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I will now turn the call over to your host, Mr. John Britti, EVP and CFO. Please go ahead.

[John V. Britti:]

Thank you, operator. Good morning, everyone, and thank you for joining us today. My name is John Britti, and I'm 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 the Ocwen Financial Fourth Quarter 2013 Earnings. Click on this link. When done, click on Access Event. As indicated on Slide 2, our presentation contains forward-looking statements made pursuant to the Safe Harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by using forward-looking terminology. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. 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 non-GAAP financial measures such as normalized results and adjusted cash flow from operations. We believe these non-GAAP financial measures may provide additional meaningful comparisons between current results and results in prior periods. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the company's reported results under accounting principles generally accepted in the United States. For an elaboration of the factors I just discussed, please refer to today's earnings release, as well as the Company's filings with the Securities and Exchange Commission, including Ocwen's 2012 Form 10-K and 2013 quarterly 10-Qs. Note that we expect to file our 2013 Form 10-K by Monday. If you would like to receive our news releases, SEC filings and other materials, please email Linda Ludwig at [e-mail]. Joining me today for the presentation are Bill Erbey, our Chairman; and Ron Faris, President and Chief Executive Officer. Now I will turn it over to Bill Erbey. Bill?

[William Charles Erbey:]

Thank you, John. Good morning, and thank you for joining today's call. This morning, I'd like to cover 3 broad areas in my prepared remarks

[Ronald M. Faris:]

Thank you, Bill. This morning I will cover 3 topics in my prepared remarks

[John V. Britti:]

Thank you, Ron. Today I'll cover 3 areas. First, I'll review the fourth quarter and full year 2013 results in more detail; second, I will discuss our funding activity in the quarter; third, I will provide some perspective on MSR pricing in the market. First, let's start with a review of our normalized results on Slide 14. Normalized pretax earnings for the fourth quarter 2013 were $166.9 million, which is a 13.5% increase over the third quarter of 2013 and more than double normalized pretax earnings for the fourth quarter of 2012. Over 90% of the normalization is for transition-related expenses. As we noted last quarter, we expect these costs to remain elevated through midyear as we ramp down the legacy ResCap platform. The settlement legal expense normalization relates largely to a true-up on reserves for the national settlement. Lastly, we backed out some trailing revenues on discontinued operations. While we carry most of our MSRs at lower of cost or market, we have a small fair value portfolio that came from Homeward that we did not normalize. It does cause some volatility quarter-to-quarter. The $7.8 billion portfolio generated a $90 million gain in the fourth quarter versus a loss in the third quarter of about $0.2 million. This writeup was not driven so much by change in rates. Rather, it was a function of market information from client MSR bids that were above where we've been carrying the asset. Unlike the third quarter, the Ginnie Mae portfolio generated more stable gains on modifications that were consistent with our second quarter results. Moreover, we saw a modest decline in claim-related losses with Ginnie Mae. On Slide 15, we show adjusted cash flow from operations relative to earnings. Adjusted cash flow from operations is slightly negative for the first time in many quarters driven by a few reasons. First, as noted last quarter, we sold most of our servicing advances to -- or we had sold most of our servicing advances to HLSS, including a very large transaction in July and a smaller one in October. With few seasoned advances on the books, we were unable to benefit from the typical advance reductions we would expect as our programs drive down delinquencies. Note that advance sales to HLSS flow through the investing cash flow. Just the same, these sales accelerate cash onto our balance sheet that would have later come in as operating cash flows. Second, there's a seasonal impact in the fourth quarter from tax assessments that tends to drive up escrow advances near year end. Third, ramping up our origination activity consumes cash. We believe these issues are short term in nature, and we expect our adjusted cash flow from operations to return to positive levels in the first half of the year. In particular, the large advances relating to OneWest should begin to drop as our loss mitigation efforts reduce delinquencies. As with previous transfers, we are confident that homeowners and investors will benefit from Ocwen's modification program. So we'll next go over the impact of HLSS on our financials. On October 25, Ocwen sold rights to receive servicing fees on $9.9 billion of UPB and net servicing advances of $271.1 million, for total proceeds of $299.8 million. Through the fourth quarter of 2013, we have sold rights to receive servicing fees on about $202 billion of UPB to HLSS. We have also sold the related advances on about -- of about $7.1 billion to HLSS. These sales free up capital that funded growth without issuing additional common equity. This has proven to be efficient funding for Ocwen. In the fourth quarter of 2013, interest expense pertaining to HLSS was $77.2 million. After considering the advance financing cost that Ocwen would have borne absent the asset sale to HLSS, the net increase in Ocwen's interest expense is about $32.3 million, which represents a cost of capital of approximately 6.3%, taking into account accelerated deferred assets -- tax assets. The total MSRs on Ocwen's balance sheet where we have sold HLSS the rights to receive servicing fees amounts to $180 billion of UPB as of December 31, 2013. In the first quarter of 2014 we expect interest expense pertaining to HLSS of between $75 million and $77 million. As noted by Bill earlier, yesterday, we closed our first notes under our new OASIS program in a private placement. OASIS is an agency MSR financing program whereby the company issues notes backed by individual closed-end pools of agency MSRs that are owned by the company. These MSRs constitute the reference pools. Noteholders of this first OASIS issuance will be entitled to receive monthly payments from the company in the amount equal to 21 basis points per annum on the principal balance of the reference pool. The notes have a 14-year stated maturity, with final payment based on the ending principal balance of the reference pool. The average servicing fee for the reference pool at the closing date was 31 basis points. Through the OASIS program, the company achieved long term match funded financing that mitigates our exposure to prepayment volatility. As Bill noted earlier, we are very excited about this program and its importance to the future of our lending business. Turning to our stock repurchase program, we believe our balance sheet is strong, with significant flexibility and ample access to multiple sources of capital. As a result, we believe we have substantial funding capacity for new investments and stock repurchases. Let me update you on our share repurchase activities in the fourth quarter of 2013. We purchased 1.1 million shares at an average price of $53.34 per share, for a total value of $60 million. And as Bill said, we will continue to be a buyer of our own stock. Lastly, regarding MSR pricing. Let me briefly address concerns I've heard regarding MSR pricing in the market and how it will affect Ocwen going forward. Non-prime and nonperforming assets have not seen anything like the change in valuation that we've seen in prime MSRs. That's because there are fewer capable buyers of such MSRs and the change in the interest rate environment is far less relevant to the pricing of non-prime MSRs. Nonetheless, we've seen prices on non-prime MSRs go up over the last few years, but the rise has been consistent with the fall in funding cost that have occurred over the same period, especially on advance financing. As a result, we still see pricing that should provide Ocwen mid-teens pretax returns on capital and target returns on equity of 25%. Many observers seem to fundamentally underestimate the value of non-prime private label MSRs. One problem is that they take initial margins that they see in a forecast for a non-prime deal and they project them forward. As we have shown in the past, margins rise on our nonperforming transactions over time. If we were to complete, for example, a non-prime MSR acquisition later this year, it would likely have only minor impact on our financials in 2014, with profits largely coming in 2015 and beyond. This occurs for several reasons. We invest heavily in operating expenses to work deals early in their life cycle. Moreover, funding costs are at their highest when we board new deals. As loans cure, ongoing operating expenses and funding costs generally decline faster than the runoff in the portfolio, raising overall margins and profitability. Revenues also rise as we recover deferred servicing fees. Based on historical experience, these recoveries increase over the first several months after boarding, and they remain elevated as a percentage of UPB for up to 3 years before they start to fall off. The next mistake I see is with capital. A very large component of our initial investment is equity and advances. As noted earlier, advances fall as delinquencies decline, which has generally enabled us to quickly recover a sizable portion of our initial investment. Overall, we believe that those who poorly estimate non-prime MSR value start with our lowest operating margin and divide it by maximum investment, and then suggest that the returns are low. We believe that more seasoned analysts better understand how we make money, and they seem to better appreciate the time profile of our earnings on non-prime MSRs. Let's end by summarizing a few key points. I'd like to first say we are committed to working closely with all regulatory bodies, including the New York DFS to understand and address concerns that may arise from time to time. We believe Ocwen has an exemplary record of working closely with not-for-profit community groups in helping families keep their homes through sensible loan modification. We believe that we have sizable opportunities to invest in both our core servicing and lending businesses and in adjacent markets at solid returns for our shareholders. Our strong balance sheet positions us to fund this investment and return cash to shareholders through a stock repurchase program. Before I will open it up to questions, I will remind you that we will likely be limited in what we can discuss regarding some topics. Thank you. I would now open it up for questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Henry Coffey with Stern Agee.

[Henry J. Coffey:]

Just -- I didn't hear everything perfectly. In terms of your agreement with the CFPB, I know that there were 49 AGs that had signed on to the original settlement, including the State of New York. And you indicated that, that same team agreed to your current settlement with them.

[Ronald M. Faris:]

So maybe just to clarify, Henry, so the national settlement that we signed in December, which was approved in federal court yesterday, covers -- the CFPB covers 49 of the state attorneys general and it includes state regulatory bodies. What it excludes is the New York Department of Financial Services and the Oklahoma Attorney General and state regulatory body. So that's what it covers.

[Henry J. Coffey:]

So that means the New York Attorney General signed off on it, but DFS did not?

[Ronald M. Faris:]

Yes.

[Henry J. Coffey:]

Secondly, I know that you obviously are limited into what you can say, but can you give us any specific loan data on exactly what you've done in New York over the years in terms of foreclosures and loan modifications, maybe just to give us a sense of what you've done inside that state?

[Ronald M. Faris:]

I think our performance there, as far as loan modifications and principal reductions and assisting families, is consistent with what we've done across the rest of the country and sort of consistent with the information that I've provided in the prepared remarks. The State of New York, because of some of the nuances of the state, has seen lower completed foreclosures than many other states. And that's not just for Ocwen, but that's across the industry. So the number of foreclosures is relatively low compared to the level of loan modifications and other borrower assistance that we've provided.

[Henry J. Coffey:]

Great. And then just one last question. On OASIS, is that sort of an open-ended funding or do you have to go back to market every time you want to sell MSRs?

[John V. Britti:]

No, it would be a new issue each time.

[Operator:]

Our next question comes from Mike Grondahl with Piper Jaffrey.

[Michael J. Grondahl:]

The first one is really, could you highlight the benefits again from OASIS? And maybe also include how much in prime MSRs are left on the balance sheet, where are they valued? And if they were able to be pushed through or sold into the next OASIS deal, what would the market value of those be?

[John V. Britti:]

Well, let me first say, we've got about -- and you'll see this in our 10-K when it comes out. But we've got about -- I think it's $280 million -- $280 billion, excuse me, of Freddie and Fannie MSRs and then another $45 billion or $46 billion of Ginnie Mae. I think the best way to think about value would be this. As we put in that one chart, we have about $836 million of fair value room based on broker marks. And just to put it in perspective, the broker mark on the deal we just did was probably as much as 0.5 turn light compared to where it's pricing in the market today. So there is -- so even that broker mark we think is probably an understatement of the actual value in our prime portfolio.

[Michael J. Grondahl:]

Got you. So I think what you're saying is, if the rest of these prime MSRs you could push through OASIS or sell into OASIS, is there somewhere around $1 billion of value that you could free up?

[John V. Britti:]

So I'd note that we also -- I mean, on this transaction, I think -- which would be a good estimate, I think we can't -- we effectively financed, in this case, about 2/3 of the IO. So I mean, I think that you'd want to apply that to it as well, but I think that your starting point is a good estimate.

[William Charles Erbey:]

Yes, each pool, Henry -- Mike, I'm sorry, each pool has slightly different characteristics with regard to them. So that's why we hesitated to extrapolate the, I'd say, 65 basis points or 74 basis points over the entire UPB until we've had a chance to really go through and understand how the pricing the dynamics will work. Because they will work quite differently for a seasoned portfolio versus one that is, in fact, newly originated. We would expect new originations, based on color we've received, to trade more like with like a 6 multiple, which is substantially in excess of what we have historically been willing to price into prepayments. So it will vary considerably across the board. And as we get more information as to the variability, we'll try to give you more color on that. But it's a huge change in our business model, where we no longer have to worry about -- we try to eliminate basically liquidity risk, duration risk, interest rate risk. Now we can eliminate prepayment risk. So we could just really focus on operation -- operational risk as our primary business aspect.

[John V. Britti:]

And one other thing I might add, Mike, is the -- that fair value improvement in our portfolio, about 3/4 of it resides in -- is with Freddie and Fannie MSRs.

[Michael J. Grondahl:]

Okay. Okay. And then just maybe one other question. There's been -- some of the media news has talked about subprime lending. And I just want to verify. You guys are not doing any subprime lending today?

[William Charles Erbey:]

No. No, we're not. As a matter of fact, if you read the underlying Moody's report, there is quite a bit of variance between what that article said and what the actual Moody's report said. So I think it's more illustrative for people just to read the basic Moody's report as opposed to the newspaper article.

[Michael J. Grondahl:]

Sure. One more quickly. The prepay speed for the nonprime, obviously at 11% was very, very low. Did you guys say you expect that to trend down from 11% or sort of be stable for a while? What were your -- what was your the language you used there?

[John V. Britti:]

Well, I don't know that we put a forecast in on CPR at all, Mike. But I do say, I wouldn't think that it would continue to trend down from there substantially.

[Operator:]

Our next question comes from Bose George with KBW.

[Bose T. George:]

So just to follow up on that CPR question. I mean, looking at Slide 11, it's a little too hard to tell, but is the drop being driven by involuntary prepayments and then the voluntary and amortization is staying stable?

[John V. Britti:]

Yes, so then in there, I think the voluntary has even come down a bit or it came down a bit in the second quarter -- the fourth quarter.

[William Charles Erbey:]

The more current we get the portfolio, the more the involuntary prepayments will decline.

[Bose T. George:]

Okay. Great. And then switching to prime servicing, how would you characterize the returns in prime servicing relative to that 25% ROE you noted for distressed?

[William Charles Erbey:]

We'll have to give you a calculation on it. Obviously, the cost, the capital cost in prime servicing shifted dramatically yesterday with the OASIS transaction. So we'll have to think of a -- maybe a more thoughtful way of responding to that. But you substantially drop the effective cost of capital on prime servicing with that trade.

[Bose T. George:]

Yes, that definitely make sense. And, actually, switching to the regulatory stuff, has the behavior of any potential sellers in terms of negotiations with you, has anything changed based on what's happening on the regulatory front?

[Ronald M. Faris:]

I think as we said, I don't think we're going to discuss pipeline. And we have never historically discussed sort of individual transactions. So I think we're just going to pass on that.

[Operator:]

Our next question comes from Kenneth Bruce with Bank of America Merrill Lynch.

[Kenneth Bruce:]

I have a few questions. I'll try to keep them somewhat short. I guess when you look at -- first of all, thank you for correcting some of the misinformation that seems to be in the market. I think that is important to do at this point. Secondly, I guess when you look at servicing, special servicing in particular, I guess, at the moment are nonbanks servicers. There is obviously a lot of scrutiny. It feels like we're going to a 0 defect type policy similar to what we saw on the origination side. And I'm wondering what is it that you think that Ocwen needs to demonstrate to the various constituents that they're effectively doing what they're supposed to be doing. And if you will kind of clear some of the misinformation as it relates to what regulators are suggesting the problems are at Ocwen?

[Ronald M. Faris:]

So first off, I'll just maybe just kind of talk about the historical record a little bit. There's a number of areas like, for example, the HAMP program, as well as the national settlement that related to the GMAC business, where we've been subject to the same types of oversight and review. And in the case of the national monitor on the ResCap portfolio, as the large banks and the information out there about the performance is public and has been positive. As we sign up for the national settlement, we'll be expanding that national monitoring process across our entire portfolio. And we'll be the only nonbank servicer out there that is subject to that and is basically on a comparable footing with the large banks. That being said, as we said in our prepared remarks, we've committed a lot of resources over the past year to enhancing our compliance management system. We'll continue to do that bigger this year. We'll continue to work to get to that 0 defect rate from a customer service experience standpoint. It's, I think, because of that service that we've had historically is one of the reasons we've been able to accomplish such good results in the modification area, just the overall loss mitigation for loan investors in general. I mean, we're going to continue on that. But there's no doubt that the environment, particularly with implementation of the CFPB rule here recently, it's a different regulatory environment than it was a number of years ago. And I think we're as well positioned as others in the nonbank space or we're better positioned than others to over time demonstrate how well we do service loans and be a leader in the industry. But we'll have to continue to commit management time and resources to that, and we're going to do that.

[Kenneth Bruce:]

Okay. And I recognize you're not going to discuss pipeline, and that's understandable. But do you -- just given kind of the nature of what's in the market today, do you think that there has been a change in the rationale for sellers, bank sellers, in particular, to move forward with divesting of these assets? I mean, it's been kind of suggested that they are somehow -- this is a skirting around of regulatory -- of regulation, new regulations. You've kind of already said that, that's not the case. But do you think that there's any change to the rationale for banks to sell?

[William Charles Erbey:]

I don't think they're -- I mean, if anything, the more difficult the environment becomes, the less attractive it becomes. I would think that more people would be looking to do that in general. There may be impediments to them doing it, but the product we service is a very difficult to service product by and large. And it's not something that, I think, many institutions really want to deal with it.

[Kenneth Bruce:]

I guess understandably at this point. And I guess to maybe tackle one of the other gorillas in the room, the push for regulators to be more consumer friendly, not only just in terms of service, but obviously trying to prevent foreclosure wherever possible, obviously puts you in a little bit of a -- puts you in tension or I should say there's tension in the relationship between all the stakeholders here, consumer, Ocwen and investors. And obviously, there has been some suggestion that you may be the focus of a lawsuit. I mean, do you see that this is -- basically, you're just constantly going to be in a rock and a hard place trying to effectively balance the -- balance the interest of all parties here?

[William Charles Erbey:]

We don't think they're at conflict at all. I mean, I think you certainly see a different heightened sense of -- around the process than the industry. But to our -- from our way of thinking is, the better the job we do, the more homeowners keep their homes, and that's -- we've been a leader in the industry for doing that. As Ron said, over 300,000 families we've helped over the past few years. I think in terms of when we -- the better we are -- actually, we become more efficient. If you look at our operations, when you have a loans -- when you have a client that's not dealt with efficiently and effective on the front end, it essentially creates an enormous ripple effect through your organization. So were not pushing back. If we can -- our goal is to be as effective as we possibly can in dealing with our customers because we think it helps the homeowner. We think it helps basically the investor because we generate more cash for the investor -- the RMBS investor, I should say. And we actually benefited from it. So we truly do try to look at this as a win-win situation and are working in that spirit.

[Kenneth Bruce:]

Okay. And then enough with that. I guess just looking at the quarter, the mortgage banking, the gain on sale, in particular, was very strong relative to what we were expecting. Can you decompose that? Was that driven by the -- I know you kind of touched on this, but was it driven by the mix of the pipeline that is driving the higher margin? At least the way that we're measuring it, it looks like margins were up. I know you said kind of it was the other way around, but something is moving the needle here, and just I'm just trying to understand what that this.

[John V. Britti:]

It's the mix of HARP loans in the quarter was much higher. That was up substantially and so margins on the individual product components were either flat or down, but the mix improved. We make that much higher margin on our retail mix than we do on Correspondent One [ph].

[Ronald M. Faris:]

At the beginning of the quarter, we had higher expectations for where the margin would be. I think that's what we were referencing to in saying that margins were down. They are down across the industry. They were lower than we had expected at the beginning of the quarter. But as John mentioned, because the mix of HARP refinances through our direct and partner channels was better than it was in prior quarters, that's what drove the improvement for us.

[Kenneth Bruce:]

Got it. And maybe lastly, the information on OASIS is very encouraging. The next obvious question is, is how fast do you think that you can scale up your mortgage banking operations and if you have any plans to do so?

[Ronald M. Faris:]

I mean, we've worked the past year to really develop a lot of capabilities there. If you look at our correspondent channel, we've already proven that we can do more volume than we're doing now, but that we we're doing more volume earlier in the year. That volume declined as kind of the market conditions shifted and as we sort of made sure that we were more conservative and comfortable with the business until we were able to get something like OASIS off the ground. So I think we're in a pretty good position to take advantage of the fact that we now have a clearer picture as to what pricing is going to be in the market and what our capital cost is going to be because of the Oasis transaction. It brings us much closer to being able to compete competitively in the marketplace with the bank players.

[William Charles Erbey:]

I think, too, there's still -- I mean, there's still a few more things we want to put in place before we significantly expand that business. I mean, we tend to take a far more process-driven and technology-driven approach to the business. So I wouldn't expect you to see large increases in volumes much before the -- really, the latter part of this year because we still -- we have some work -- I think we have some more infrastructure to put in place to expand.

[Operator:]

Our next question comes from Daniel Furtado with Jefferies.

[Daniel Furtado:]

Just a follow-up on that last response, Bill. In terms of things that you can see [ph] ducks in a row on the technology side for the origination business, is there anything in particular or specific -- I mean, I assume that it has bent toward the non-QM business, but do you have any kind of insight you can give us into what you need to line up there before getting a little more aggressive?

[William Charles Erbey:]

Well, I think it will be an approach over time. I mean, there are companies like -- the firm, I think, who does the best job in the world is somebody like Quicken. I mean a very, very strong solid technology infrastructure to provide a high-quality product. We think we have a lot of capabilities in the servicing space that can actually be ported over to the origination space. For example, things such as our psychology and the dialogue engines to help maintain quality control over what gets said to the borrower. We're in the process of developing today some very sophisticated underwriting engines to make sure there's absolute compliance with the underwriting. So it will be -- it's a process. It's not something that is a -- you flip a switch on. You develop that over time.

[Daniel Furtado:]

Understood. And then my last question is on the OASIS [indiscernible] [Technical Difficulty]

[Ronald M. Faris:]

Unfortunately, you're breaking up. We're not able to hear your question.

[Daniel Furtado:]

When you issue a new series, is there true sales transfer there for unlocking some this -- I guess you would have a mark to market on the portion of the assets that are sold?

[John V. Britti:]

It's a true financing. It's not a sale. So there is no markup. But what it does is, because the liability then will move -- essentially the liability will go down to the extent that the loans prepay faster it gives -- it mitigates the risk of prepayment.

[Daniel Furtado:]

Understood. So I guess one of the things I was thinking potentially the deal would do would be allow you to repurchase more shares by unlocking those mark to markets, but that's an incorrect assumption, I assume?

[William Charles Erbey:]

We have a choice once a year to go to mark to market. Certainly, OASIS, by basically matching the value on the asset and the liability, so eliminating prepayment risk would enable us to go to that kind -- would enable us to go to that mark to market should we choose to do so.

[Operator:]

Our next question comes from Craig Perry with Panning Capital.

[Craig William Perry:]

John, I was just wondering, flipping all the way to the back of the presentation, I know that you swapped methodology in providing essentially forecast cash flows over the next 20 years, discount at 10%, between sort of Scenario 1, 2 and 3. And sort of prior to that, you did a cume cash flow forecast over the next 10 years. One of the comments that you made in your prepared remarks were that some of the "mistakes" you've seen in terms of how people have tried to interpret your sort of cash flow analysis or kind of run down analysis is taking margins and leaving them static. I was wondering if you could provide a little bit of -- sort of more granularity, on this call or at a later date, as to sort of some of the assumptions or details behind the slide. So one thing in particular, maybe it will just be helpful for us to understand absent guidance, although this slide, I guess, sort of functions as guidance is, for instance, over the next 2 to 3 years, how much cash flow do you actually expect to generate, if we thought about the shape of that cash flow? And as well, maybe, I just want to confirm the way to think about this slide is sort of in Scenario 1, where it's at sort of $7 billion and what would essentially be a runoff scenario. That's $7 billion to the equity sort of net of repayment of all corporate borrowings or debt. So I know it's a long-winded question, but if you could flesh out any of that, I think it will be helpful to us and to the marketplace.

[John V. Britti:]

Craig, a rather short answer maybe to your long question. We're not going to provide additional guidance, at least not right now, much as I appreciate your question. And I think we will certainly take it under advisement for the future. I think it is what it says it is, which is, it represents adjusted cash flow from operations. I think as we talked about in scenarios, it does involve paying down our debt, but I think it's best to -- we believe it's a proxy for, but it's not the same as some kind of free cash flow analysis.

[Craig William Perry:]

Sorry, so what do you think the purpose of providing it is, if it is not effectively a free cash flow analysis available to the equity?

[John V. Britti:]

Because we do think it's a good proxy. The problem is, it's not a -- I mean, we're not really trying to run the -- I mean, even in the baseline scenario, we do reinvest cash at a 5% rate, so it's not a pure liquidation analysis.

[Craig William Perry:]

I mean, I guess I've just sort of seen pure liquidation analyses, like, attempted by the sell-side, and the numbers are essentially half of what is even your lowest case scenario here. And I'm just trying to match maybe your prepared remarks with you sort of -- I'm not asking you to respond in particularly to the sell-side, but just help us understand where you think the delta is. Because on the one hand, we're essentially saying, if you just ran the thing off, which no one really expects that to happen, I mean, I guess maybe some people will expect that to happen, there's $7 billion give or take allowing for a whole bunch of assumptions available for the equity holder. On the other hand, when we see sort of the sell-side attempt that, they call up a number that's half as harsh. So obviously, there's a disconnect going on somewhere, and I'm just trying to sense where you think the disconnect is?

[William Charles Erbey:]

Craig, I think it's a good question. Let us -- we'll get you a bit more detailed analysis coming back. But one of the big differences is, is that the -- when you see what are -- the value is, say, for a nonprime MSR, it uses a very high discount rate in terms of that. It makes assumptions about CPRs that are a lot different than what we are actually experiencing. So we give you a number that is a third-party mark, but if you were to run that out, let's suppose they discount at 16% or 18%. It's a higher discount rate. And that actually makes a difference over a long period of time. So we'll get that back to you. So the difference really is, is what -- one of the biggest differences is the discount rate used on those cash flows as opposed to what we used here.

[Craig William Perry:]

Right, of course. Right, I mean, obviously a 10% versus an 18% discount rate is going to make a big difference. But I actually just meant more versus the sell-side, who's supposed to be responsible for understanding and modeling out your cash flows, coming up with a runoff number that's half of the number that's your low case, when your CPRs are below the number you have here. Seemingly, there's a disconnect. So I'm just trying to get a sense for how do we bridge that gap.

[William Charles Erbey:]

There is, and we'll try to come back with a little more thoughtful way of trying to reconcile it. The range even on the liquidating value is pretty -- is quite wide. I mean, even to most of the different sell-side analysts, it's quite large, that gap. This number, if you were to look at the actual cash flows themselves and just comparing the difference between that 18% and a 10% cash flow over 10 or 20 years makes an enormous difference in value.

[Craig William Perry:]

Of course, of course. Look, any additional color you can provide around this, I think, will be extremely helpful to us and to the marketplace. So actually to help us to think about it and [indiscernible] provide.

[Operator:]

Our next question comes from Brad Ball with Evercore.

[Bradley G. Ball:]

I have a couple of follow-up questions on the regulatory environment. Could you talk about how you have in the past addressed the question of potential conflicts among affiliated companies in your prior SEC filings or with regulators in the past, could you just discuss how that's been addressed?

[William Charles Erbey:]

Yes, I'd refer you to just look at all of our SEC filings. I mean, I think that they are -- we've been very complete and open about what those relationships are. So you're welcome -- even on all the spins, you'll see all of the contracts are disclosed in that nature. So whenever we take, say, spin one company out of another, you have a complete contract package to look at and evaluate. So the way we've dealt with it is to have full disclosure.

[Bradley G. Ball:]

So yes, so in -- when, for example, when Altisource was spun out from Ocwen, the filings that you provided to the SEC included full disclosures about affiliated arrangements, agreements among the companies and so on?

[William Charles Erbey:]

Yes. They're exist. They're an important element of investors' decisions to be reached. And we provided those contracts and those relationships in our filings. Keep in mind, when you have a spin, it's the same investors are on both -- if you have an investor that own 1% of Ocwen and they got 1% of Altisource, no matter how you break that relationship up, they still own 1% of both.

[Bradley G. Ball:]

And the boards of each of the affiliated companies are independent?

[William Charles Erbey:]

Yes. Obviously, I'm the only person that's on all boards.

[Bradley G. Ball:]

You're the only overlapping member. Yes.

[William Charles Erbey:]

There are more independent directors on every board than nonindependent.

[Bradley G. Ball:]

Great. With respect to the Chief Risk Officer that was mentioned in the DFS letter yesterday at both Altisource and at Ocwen, how has that situation been remedied?

[Ronald M. Faris:]

Well, I don't think we're going to comment on anything related to DFS, but I think we're not going to comment any further than what's been out there.

[Bradley G. Ball:]

Okay. That's fair. And are you currently undergoing an examination by the DFS or by any other regulator? Do they have examiners in-house?

[Ronald M. Faris:]

Well, it's public knowledge that Ocwen, I think it was a little over a year ago, signed an agreement with the Department of Financial Services to have a monitor in place, and that monitor is in place at Ocwen. We have various state exams that go on all the time. So there are state examiners from different states at one time or another in our offices. So I'm not going to get into specifics, but that's an ongoing thing that we always have.

[Bradley G. Ball:]

Great. And those ongoing exams presumably would check things like potential conflict of interest. They check things like compliance with the servicing standards. They would check to make sure that customers, borrowers are not being mistreated, et cetera?

[Ronald M. Faris:]

Well, I don't -- we're not going to comment on the specifics of any of the exams.

[Operator:]

And our final question comes from Kevin Barker with Compass Point.

[Kevin Barker:]

Could you stop servicing in the State of New York if you wanted to? And would Lawsky have regulatory purview if you were to move out of the State of New York?

[William Charles Erbey:]

We would prefer not to answer that question if we could [ph], Kevin, thank you.

[Kevin Barker:]

Okay. I understand. And have you had any actual conversations with investors concerning some of the conflicts of interest that was brought up related to the Gibbs & Bruns potential suit? Or how do you view some of that noise that's coming from that potential suit?

[Ronald M. Faris:]

We don't comment on rumors out there about potential items. So there's really nothing to comment on there.

[Kevin Barker:]

Okay. And then it's more about -- I mean, you've satisfied a lot of the servicing settlement via looking at each loan as NPV positive for both the MBS and the consumer from the investor. So if I look at that, is there any other protections you've put in place to ensure that both the investor is both taken care of and your best interests are aligned in the servicing settlement along with the borrower?

[Ronald M. Faris:]

Yes. We have controls in place and have been servicing and will continue to service in accordance with the servicing agreements for each individual pool of loans that we service. So each RMBS transaction has a separate servicing agreement, and we service in accordance with those agreements. I don't think anyone would dispute that helping consumers through this process is important. It is good for the economy as a whole, for communities and -- but we are constrained in what we can do for the consumer by the servicing contracts, which require that we service in the best interest of the investors and that means -- in most cases, what that means is that any sort of resolution you enter into has to be net present value positive for the investor. So I mean, that's a generalization because we're talking about thousands of servicing agreements. But we service in accordance with those agreements. And our resolutions, whether it's a modification, short sale, deed in lieu, are net present value positive for the investor.

[William Charles Erbey:]

If you look at the Moody's report it shows that we generate more cash flow than any other servicer on private label securitizations. And on the prime side, you're really very much constrained by what the agencies tell you what you have to do, the rules the agencies have. So in subprime, we generate more cash flow to the trust. And the general criteria is, are you maximizing for the trust as a whole, not for individual tranches of investors. I think it shows, the data shows that we lead in modifications and keeping more people in their homes. I think that also the data shows from independent third parties that we generate more cash flow to the REMIC Trust than any other servicer out there. And the reason that makes sense is, if you look at the very [ph] numbers, i.e., the percentage loss that you have on a foreclosure today on most subprime pools, it's somewhere between 70% to 80% loss. So it's almost -- in the vast majority of cases, a modification is net present value positive. In some cases you can't give modifications because the contract says that you can't do x within the contract. And we comply with all of those. I can say unequivocally, I think -- unequivocally, that we are not changing our servicing practices as a result of the national settlement. We believe that, nor -- in the contract it's explicit that we don't have to do that because we believe that our servicing practices will enable us to achieve our promised results that we had under that agreement.

[Kevin Barker:]

Okay. And then shifting back to some of the comments you made about the share repurchase program. You bought back 1.1 million shares during the fourth quarter. You mentioned that you would buy back the amount of your previous quarter's earnings. But you did open the door there for, it could be more or less in any given quarter. Could you just explain your strategy behind that and why you would -- would you actually buy back more than your earnings in the previous quarter?

[William Charles Erbey:]

We could. I mean, it obviously depends on the share price. I think the whole management team and the board is a big believer in the company and its future. And we're not sellers. We're net buyers with regard to that. So depending on the relevant stock price, we may be slightly more aggressive. That always will be tempered by the fact, though, that I think one of the -- on the national stage across the whole -- just on a national stage, as well as in New York, one of the prime criteria they want to have is that they want to have the servicers, the nonbank servicers have very strong capital and a strong balance sheet. I think that's a fairly large dialogue that's going on today. We intend to keep that industry-leading position there.

[Kevin Barker:]

Could you speak to some of the capital structure -- some of the capital structures that -- the discussions that are out there about what the capital structure should look like or the capital requirements that nonbank servicers should have at market?

[John V. Britti:]

No. I mean, look, we're not -- I think that some of this is very speculative. And so we're not going to respond to that kind of speculations out there.

[Operator:]

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may all disconnect and everyone have a great day.

[Ronald M. Faris:]

Thank you.

[John V. Britti:]

Thank you.