Onity Group Inc (ONIT) 2002 Q2 法說會逐字稿

Good afternoon, and thank you all for standing by. At this time, your lines have been placed on a listen-only mode throughout the duration of today's conference. Today's conference is being recorded. If you do have any objections, you may disconnect at this time.

At this time, I'd like to turn the call over to Mr. Bob Leist, Vice President and Chief Accounting Officer of Ocwen Financial Corporation. Sir, may begin.

Thank you. Good afternoon everyone, and thank you for joining us today.

For the first time, we have prepared a slide presentation to accompany our remarks. To access the slides, log onto our website at www.Ocwen.com. Then select Shareholder Relations, conference calls, second quarter 2002 results, and then view slides. Each viewer will be able to control the progression of the slides during the presentation. To move the slides ahead, please click on the gray button pointing to the right. If you have trouble with the slides connecting, you should try to hit the refresh button to refresh your browser in the course of the presentation.

As indicated on Slide 2, our presentation may contain certain forward-looking statements that are made pursuant to the Safe Harbor provisions of the federal securities laws. These forward looking statements may be identified by reference to future period or by use of forward-looking terminology. They may involve risks and uncertainties that could cause the company's actual results to differ materially from the results discussed in the forward-looking statements.

For an elaboration of the factors that may cause such a difference, please refer to the risks disclosure statement in today's earnings release, as well as the company's filings with the Securities and Exchange Commission, including Exhibit 99.1 attached to OCN's 2001 10K. We're happy to make Ocwen news releases, 10Qs, 10Qs available to you via E-mail. If you're not receiving them via E-mail and would like to be added to our distribution list, please e-mail Linda Ludwig at lludwig@ocwen.com.

As indicated on Slide 3, joining us for today's presentation are Bill Erbey, Chairman and CEO of Ocwen, Ron Faris, President, Art Ringwald, President and CEO of OTX, and Mark Zeidman, Senior Vice President and Chief Financial Officer.

This presentation will be followed by a question-and-answer period, during which we'll be taking questions from those of you attending the conference by telephone.

Without further delay, I will now turn the call over to Bill Erbey. Bill?

Thank you, Bob. Thanks to all of you for attending Ocwen's second quarter conference call. I'd like to open this meeting with my perspective on our performance for the second quarter of 2002, after which Ron, Art and Mark will provide more detailed information.

As shown on Slide 4, I would like to cover three topics in my remarks today. First, the actions taken in the second quarter in establishing substantial additional reserves on noncore assets. Second, our progress in continuing to sell our remaining noncore assets. And third, the continued strengthening of earnings in our strategic sea-based businesses.

Our results for the 2nd quarter 2002 include new charges and provisions of $45 million related to our remaining $326 million of noncore assets. Based on our analysis of recent events in the current market situation. This analysis led us to record these amounts to minimize the risk of future losses consistent with our objectives of selling the remaining assets in a timely manner.

In our commercial finance business, these actions accounted for $35 million of our pretax loss of $38 million. As shown in Slide 5, these charges, together with asset sales during the quarter, raised our reserve levels on REO and loan assets from 11% of book value at March 31st to 20% at the end of June.

In affordable housing, we recorded charges of $10 million as part of the reported loss of $12 million. Of this amount, $4 million represents a discount on a long-term receivable related to the sale of seven properties with a book value of $29 million. This amount will be recorded in income over the remaining term of the future payments.

Slide 6 illustrates that our reserve levels on our remaining affordable housing properties and loans rose from 26% at March 31st to 40% at June 30th.

While no one can predict the future with certainty, we believe we've established reserve levels that will minimize the risk of future losses consistent with our goal to sell these assets in a timely manner.

As you can see in Slide 7, during the second quarter, we reduced our noncore assets remaining to be sold by 19%, or $76 million, leaving us with $326 million on the books at June 30th. Our budget is to reduce noncore assets at year end to $200 million, and we are presently within 3% of our mid year budget goal.

We made substantial progress in sales of our affordable housing properties during the second quarter, as transactions on $40 million of these properties qualified for sale treatment.

Overall, our affordable housing loans and properties declined from $96 million at March 31st to $50 million at June 30th, a reduction of 48%. Of the $50 million remaining, $12 million are loans, and $38 million are properties, half of which are already under sales contracts that have not yet qualified for sales treatment, and half of which remain to be sold.

As shown in Slide 8, the combined results of our core businesses also continue to show strong growth -- strong earnings growth in the second quarter. After adjusting 2001 results for nonrecurring amounts and comparability, the combined annualized pretax earnings of these businesses in 2002 grew to $18 million, as compared to $3 million of 2001, and a loss of $25 million in 2000. Or increases of $15 million and $43 million respectively.

As illustrated in Slide 9, our residential services portfolio growth continued with the unpaid principal balance of loans serviced increasing by 19% since the end of last year. While this growth attests to our capabilities in this area and the prospects of continued growth remain excellent, our earnings have been constrained by the current low interest rate environment, and Ron will cover this in more detail later.

Looking forward, we anticipate improvements in earnings in the servicing business as we begin to benefit from the cost-reduction impact of our India operations centers. This operation has been growing ahead of our expectations and is yielding high-quality results.

However, as with any transition, in the short term, the cost of migration and training result in incremental staff costs. As we emerge from the first phase of this migration, we expect cost reductions to favorably impact the bottom line in the latter part of this year.

OTX results have also improved this quarter as charted on Slide 10, reflecting a 27% decrease in losses compared to the second quarter of 2001 as adjusted. This primarily reflects the impact of our ongoing cost-reduction efforts. As our use of India resources and OTX continues, we expect further improvements during the year.

We continue to be excited about the expansion of our REALTrans product, some of whose key clients are shown on Slide 11. As we noted last quarter, the achievement of profitability in this product is no longer a function of adding new accounts, but rather of arriving at full product and geographic integration with our existing customers.

I'm also happy to announce that during the second quarter, we have begun the process [INAUDIBLE] from WAMU and City Mortgage. While still in the early stages, we expect to realize continued volume growth from these new customers during the remainder of 2002.

We continue with our preparations for a full-market launch of REALServicing, and are excited about the response to the product and its default management components from leaders in the industry.

Before turning the call over to my associates, I also wanted to note that our international division is gaining momentum. During the first quarter, we announced the formation of a new venture with Merrill Lynch to service their nonperforming assets globally.

Since that time, we have been moving steadily forward in performing that adventure, and are preparing to open our first office in Japan during the third quarter. Shortly thereafter, we expect to open a second office in Taiwan.

I remain convinced that our strategy to liquidate our noncore assets and use the proceeds to reduce leverage, and to continue to invest in our core fee-based businesses, is the best course for our stake holders. As shown in Slide 12, since December of 1999, when we began the implementation of this strategy, our noncore assets to sold have been reduced from $1.9 billion to the $326 million that remain to be sold as of June 30th, 2002, a decrease of 83%.

We have significantly strengthened our reserves, and we're in the final stages of achieving our goal. Today, we have equity at $325 million in cash, and cash equivalents of $244 million. We're confident that this strong financial foundation will provide us with the ability to stay the course and achieve our strategic objectives.

I would now like to turn the call over to our President, Ron Faris.

Thank you, Bill. My remarks today will cover the servicing business, Ocwen Realty Advisers, and our unsecured collections business.

As shown on Slide 14, I am pleased to report that we continue to see strong new product flow in the residential servicing business, as our portfolio grew from $21.9 billion at December 31st, 2001, to $26 billion at June 30th, 2002, an 18.7% increase. This represents an annualized growth rate of 37.4%.

We continue to make progress in expanding our customer base, having closed transactions with 13 different clients thus far this year. We remain confident that we have the human and technical resources to capitalize on the market opportunities that currently exist to continue to grow our servicing portfolio through the remainder of 2002 and into 2003.

For the second quarter, we recorded $8.1 million in pretax net income in the servicing business, compared to $8.5 million in the second quarter of 2001. Although the second quarter 2002 earnings remain strong, they continue to be impacted, as they were last quarter, by lower earnings on the collection account or float balances, as a result of the lower short-term interest rate environment we have experienced since the first quarter of 2001.

Adjusting for changes in size of the servicing portfolio, the change in the yield curve resulted in $2.4 million less in net float revenue in the second quarter of 2002 as compared to 2001, as a result of the overnight reinvestment rates coming down much faster than longer-term financing rates. Similarly, the effect of this reduction in short-term interest rates reduced net flowed earnings by $5.6 million in the first half of 2002, as compared to the first half of 2001.

On the expense side, we continue to make progress in reducing our per-unit costs to service of loan. For the first six months of 2002, we have reduced our average per-unit cost to service of loan by 14.5% on an annualized basis over the average for all of 2001.

As illustrated in Slide 15, we continue to transition job functions to India. At June 30th, we had approximately 350 active servicing staff in India, up from 200 at year end.

We continue to be impressed with the quality of our staff in India. I would like to point out, however, that much of the anticipated cost savings from our move to India is still to be realized as we incur start-up and training costs in India and downsizing costs in the U.S.

We also remain committed to better servicing our customers and improving our efficiency through the use of six Sigma. We plan to start and complete eight six Sigma projects in 2002, with estimated annual savings of over $2 million.

Excluding the $1 million litigation reserve recorded during the first quarter of this year, the pretax profit margin in the servicing business remains strong at 32% for the first half of 2002.

Before I move on from servicing, I would like to review some of our key performance metrics for the servicing operation.

Slide 16 demonstrates that our key performance drivers for the first half of 2002 have improved in most categories.

We achieved a preforeclosure resolution rate of 80% in the first half of 2002, up from 77% in all of 2001.

We increased our percentage of foreclosures completed ahead of standard agency time lines to 90%, from 88% in 2001.

In addition, net proceeds received on REO sold, as compared to the REO appraised market value, increased to 94.1%, up from 92.9% in 2001, while at the same time, increasing our REO portfolio turnover rate.

Finally, during the first quarter of 2002, we officially launched our new investor reporting website. We believe this site provides significant value to our clients. We significantly expanded the rollout of the site in the second quarter, and we continue to receive very positive feedback, both from our clients and from the investors and their securitizations.

As shown in Slide 17, our unsecured collections, or asset recovery business, posted pretax income of $1.1 million in the second quarter, as compared to a loss of $2.1 million in the second quarter of 2001. This represents the third quarter in a row that we have achieved positive earnings in this business line. We continue to make progress in improving our collection capabilities and in attracting new fee-based collection contracts.

Slide 18 shows that Ocwen Realty Advisers, our property valuation division, earned pretax income of $499,000 for the second quarter of 2002, compared to $205,000 in the second quarter of 2001, reflecting both revenue -- a revenue increase of $1.1 million or 47.5%, and an improvement in margin from 8.6% to 14.2%.

Both the asset recovery business and ROA complement our servicing business, and provide additional value-added services to our core client base. Both business lines have also made progress in reducing their cost structures and improving their product quality through the use of our India labor force.

Thank you, Everyone. I'd now like to turn the call over to Art Ringwald.

Thanks, Ron. Good afternoon, everyone.

As you know, OTX products feature superior work flow management supported by outstanding technology. The benefit to our customers is reduced operating costs and enhanced customer satisfaction, which represent the underpinnings of the value proposition for each of our product lines, REALTrans, REALServicing and REALSynergy.

Having said that, it's obviously incumbent on the company to create this value proposition at the lowest possible cost to optimize shareholder value.

In that regard, I'm pleased to report that over the past 18 months, as shown on Slide 20, we've reduced OTX's normalized pretax operating loss from $8 million in the first quarter of 2001, to $4.9 million in the second quarter of 2002, nearly a 40% improvement. Said another way -- The annualized run rate, as shown on Slide 21 has improved by $12.4 million over the 18-month period.

A significant portion of this benefit was derived from reduced personnel expenses, which, as you can see on Slide 22, have declined from $5.8 million in the first quarter of 2001 to $2.8 million in the second quarter of 2002, a 52% reduction. This reduction was achieved through a migration of a significant number of OTX domestic positions to our Bangalore, India facility.

More specificly, we've migrated a total of 92 domestic positions to Bangalore, where the labor costs are dramatically lower and the quality of the workforce is excellent. It is important to note that our global migration plan calls for the continuing migration of domestic positions to India through the end of the year.

While this will result in additional severance expenses in the short run, it will clearly reduce our overall personnel expenses in the longer term.

The net effect of these expense reductions has been to significantly lower the break-even point for OTX, which reduces the number of sales and integrations required to achieve that goal.

Moving on to RealTrans, quick volume grew from 76,000 transactions in the first quarter to 81,000 transactions in the second quarter. The key issue continues to be the pace of new integrations and the rollout of our products at certain lenders where we're integrated, but where the utilization is tied to the rollout of other technologies.

On a brighter front, we are gaining momentum, as our third-quarter run rate, based on July's results, is north of 125,000 transactions per quarter.

This is particularly encouraging, as both City Mortgage and Washington Mutual have just begun to order products over the REALTrans network.

In addition, I would note that the REALTrans platform rollout at WAMU is scheduled to continue through the year end.

On the business-development front, we've recently added Aurora Loans Services, the nation's 44th largest lender, as well as Evergreen Mortgage Company, a regional institution, to our impressive stable of clients, some of whom are shown on Slide 23.

With regard to the financial performance of REALTrans, shown on Slide 24, the annualized second quarter pretax operating loss was $7.3 million, representing an $800,000 improvement versus the previous quarter's annualized run rate.

Based on 2001 loan origination volumes, we estimate that the annual revenues from our existing customer base for the REALTrans product, based on completed and pending integrations for our current customers, would have been in the $10 million to $11 million range, versus our current annualized expense base, which is in the $7 million to $8 million range.

We believe that this analysis supports our message that REALTrans is poised to achieve break-even based solely on the sales made to date.

At REALServicing, our focus remains on preparing the product for sale to the larger servicers. This effort is expected to be completed in early 2003.

As an integral part of this strategy, we have completed development and begun initial market of the loan resolution workstation and real estate-owned modules. The product has now been demonstrated the three of the top 15 prime servicers, and one of the top five subprime servicers. Each of these potential customers reported a very positive first impression of the product, and all have elected to move to the next phase of due diligence.

As shown on Slide 25, the annualized second quarter pretax operating loss for REALServicing was $9.6 million, and a favorable variance of $1.1 million versus the first quarter of 2002.

This was expected, as the second quarter contains three full months of depreciation expense on hardware investments made earlier this year to provide additional capacity in anticipation of the commercial introduction of the product.

In spite of this increase in expenses, RealServices annual run rate has improved by $6.2 million since the first quarter of 2001.

With regard to REALSynergy, we continue to develop new functionality for this already robust platform, which should allow us to sell to those commercial servicers who also invest in commercial loans and real estate, in addition to our existing third-party servicer base.

REALSam, RealSynergy's asset management modual, is now being implemented in Japan, through the Merrill Lynch joint venture involving [INAUDIBLE] Financial Corporation. We expect to complete at least one additional installation by the end of the first quarter of 2003.

As shown on Slide 26, the annualized second quarter pretax operating loss for REALSynergy was $2.3 million, $800,000 better than the previous quarter's annualized rate. This product requires only $2 million in additional [INAUDIBLE] revenue to break even.

As you can see, we have made significant progress transforming OTX into a lean and cost-efficient organization that is poised to achieve profitability on a run-rate basis sometime in 2003, with additional success in sales and subsequent integration initiatives. I remain confident in the future of OTX.

I will now turn the meeting over to Mark Zeidman.

Thank you, Art.

The second quarter of 2002 reflects a continuation of the strategy we followed for the last 2 1/2 years of growing our core fee-base servicing and technology businesses, while liquidating our remaining investments in capital-intensive, noncore business lines. Accordingly, we're able to report that pretax income from our core businesses grew from a profit of $3.7 million in the first quarter of 2002 to a profit of $4.8 million in the second quarter of 2002.

Note that this represents the sixth consecutive quarter in which the combined pretax results from our core businesses improved quarter over quarter, as presented on Slide 28.

As Ron mentioned, our loan servicing business continues to expand, and the unpaid principal balance of loans serviced for others grew by approximately $2.5 billion, or 10.6% in the second quarter, to a total of $26 billion.

And as Art reported, we're continuing to make progress in approaching profitability at OTX by integrating customers on to REALTrans and by taking actions to reduce expenses.

Meanwhile, we continue to incur losses in our noncore business lines, which reported a combined pretaxed loss of about $49 million in the second quarter of this year.

As Bill noted earlier in the call, the loss in our noncore businesses was primarily due to additional reserves and impairment charges totaling approximately $45 million, including $35 million recorded in the commercial finance business, and $10 million recorded in the affordable housing business. These charges significantly increased our reserves as a percentage of the remaining assets, and were determined based upon our perception of current market conditions.

However, the second quarter's losses on noncore assets should be understood within the context of the progress made in reducing the company's remaining exposure in these asset classes.

As the chart on slide 29 shows, the company's investment in unsold noncore assets has decreased from approximately $1.9 billion at the end of 1999 to $326 million at the end of June. In the second quarter, the company's investment in unsold, noncore assets was reduced by $75 million, or 19%, as compared to the end of the first quarter of this year.

As presented on Slide Number 30, of the remaining assets, fully $247 million, or 76%, represent commercial assets. $41 million, or 12%, are unrated or noninvestment grade rated subprime residuals and subordinates, $31 million, or 10%, are affordable housing assets, and $7 million, or 2%, are residential assets.

The company also made progress in the second quarter towards its goal of reducing its liabilities. Slide Number 31 presents the trend in liabilities since the end of March 2000. As you can see, the company has reduced its liabilities from approximately $2.9 billion at March 2000 to approximately $1 billion at the end of June 2002, including a reduction of $132 million in the second quarter of this year.

As a result of these efforts, as presented on Slide 32, the company was able to maintain its financial leverage ratios at the end of June at approximately the same levels that existed at the end of March, and ahead of the levels that existed at the end of 2001.

For example, the company's ratio of assets to equity at the end of -- I'm sorry, the company's ratio of equity to assets at the end of June was 23.3% virtually unchanged from the end of March. And over the long term, the ratio of equity to assets shows a steady strengthening from the 15.4% ratio that existed at the end of 1999.

The long-term strengthening of these ratios reflects our aggressive efforts to reduce the company's debt burden. We've been able to pay down our liabilities and maintain strong cash balances due to positive cash flow from operating activities and from the sale of noncore assets.

As shown on Slide 33, the company's cash balances have generally increased over the last two years, even as the balance sheet has decreased. At the end of June 2002, the company had $244 million of cash and cash equivalents. Of this amount, $115 million was at the bank, and $129 million was at the holding company.

Total cash and cash equivalents represented approximately 18% of total assets at the end of June, about the same percentage as of the end of March.

Also at the end of June, the company had additional sources of liquidity, including approximately $22 million of unpledged, AAA-rated residential CMOs, and approximately $177 million of unpledged servicing advances.

From a cash flow point of view, the second quarter was similar to the first quarter of 2002 and to last year as indicated on Slide 34.

In the second quarter of this year, operating activities generated positive cash flow of approximately $91 million, primarily from net earnings from the loan servicing business, sales of and principal payments on subprime residuals and liquidity bonds, and from recoveries on servicing advances.

Note also that in the second quarter of 2002, $45 million of noncash provisions for loss and impairment charges, and $13 million of depreciation and amortization expense, were added back to cash flow as an adjustment to net income.

Investing activities generated positive cash flow of approximately $12 million in the second quarter of 2002, primarily from the sale of noncore asset, offset in part by $35 million of acquisitions of new servicing rights.

And financing activities used $133 million of cash, primarily to pay down $96 million of maturing deposits.

Finally, we've received a number of inquiries from investors asking about our thoughts concerning repurchasing our stock. We continue to believe that using our cash to invest in our fee-base servicing and technology businesses will yield higher returns to shareholders in a long run.

Also keep in mind that we have approximately $86 million of bonds, the OCN 11 7/8th senior notes , maturing in October 2003. We believe that taking advantage of opportunities to repurchase these bonds at or prior to maturity will reduce our negative interest spread and thereby improve our bottom line.

We believe that if we stay on course and return the company to profitability, these efforts will ultimately be reflected in the price of our stock.

I'd now like to turn the call back over to Bill.

We'd now like to open the call for any questions.

Thank you. At this time, if you'd like to ask a question, press star 1 on a touch-tone phone. To withdraw your question, you may press star 2. Once again, to ask a question, press star 1.

Our first question today comes from John Morrocani. You may ask you question, and please state your company game.

Hi. It's ING Asset Management. Ron, can you tell me of the -- I'm sorry, I have a little problem with my computer here, of the increase in your servicing assets -- or your unpaid balances during the second quarter, how much of that came from picking up servicing rights versus what you've talked about in terms of the natural flow of business? Of, you know, the customers you've signed up, the ongoing customers?

I don't know the exact figures, but it's sort of a -- it's definitely a combination of both. Much of the flow volume that comes in to it, in many cases, the loans are then sold to another party, but those parties have then been hiring us to continue on servicing the loan.

So a very large portion of it is coming from, you know, what I would call the flowed clients but at the same time, many of our clients are out in the market buying loans, and immediately then transferring those loans from other servicers to us. So to some degree, even the client that may have in the past considered bulk clients are now becoming almost flow participants in that they're buying loans and transferring them to us.

Okay. And the bulk of what you're doing is still in the subprime area? Is that correct?

The bulk is in -- virtually all of it is subprime -- in the subprime area. Most of it is first lien product, and almost all of it, during this year, has been new origination product.

Okay. And did I see in the paper today, or yesterday, that the subprime business continues to, you know, march forward at a pretty good rate? As we --

I haven't -- I'm not sure what you were looking at, but my understanding is that, you know, the market does continue to march forward. There have been some articles of originators, such as New Century have recorded, you know, record volumes, I think in the month of July. So, yes, I think volumes remain strong, the industry remains strong.

Okay. Let me step out and let other people ask questions here.

Thank you.

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

U.S. Bancorp Piper Jaffray. I was wondering if you could talk a little bit more -- you talked about the earnings outlook for the servicing in the 2nd half of the year in line with the interest rate environment. As a follow-up to that, I wondered if could you give a little more clarity on OTX and the kind of revenue you believe you'll see out of WAMU and Citigroup in the back half of this year?

This is Ron. In the servicing business, as you know, we don't really give projections as far as where earnings will be. But, you know, as we mentioned in the -- in the call here today, you know, we have been growing volume, which is obviously a positive thing, but that's generally been offset by the low interest rate environment. And so, we'll probably continue to see some of that offset to our growth in the latter half of the year, as rates remain low. If they move up, then we should benefit from that.

But as we also reported, you know, we are seeing very good progress with our India operation, and we do expect in the latter half of this year to see a bigger impact on the cost side of the equation from that. I mean, we have made progress in reducing our per-unit costs this year over last year, as I reported, but we expect to see further improvements there in the latter half of the year as the savings from India kick in in a bigger way.

What does it take for the profits to grow in line with the portfolio growth? If the interest rate environment stays steady, as it -- with where it's at today, should we see profitability growth because of your efficiencies exceed the growth in the portfolio? Or not?

I mean, it's hard to say at this point in time. I mean, the -- our older business continued to be impacted by the lower-rate environment, more than the newer business that we put on, so over time that impact should, you know, start to be less. But I can't say right now, you know, how much of that impact will be offset by the cost savings and where, you know, where that break-even is.

I think to some extent, we're not looking for a large increase in earnings at all in the third quarter. The transition plan requires a reasonable level of severance to occur.

Okay.

We begin to severe domestic U.S. workforce, and that's going to start accelerating from -- a little bit from its -- where it's been here before, so we would not see a large up tick, I don't believe, in the third quarter at all. I think we'll see far more impact flowing through in the fourth quarter of the year.

Okay. And then, on OTX, you know, the kick you -- you kind of put some quantification on what you think you -- you know, generally you can get out of WAMU and City Mortgage.

As you know, we don't issue forward-looking forecasts. I can give you some thoughts that might help new that regard, though.

Washington Mutual's origination volumes run in excess of a million units a year for the total company.

City Mortgage is someplace north of 2,000 based on 2001 results, and I have reported in the past that our average fees were north of $3. I think the last time we had a call it was $3.33 or something, it's up a bit from that.

And then the final piece, I can tell you, I think is okay, is that the companies can choose up to six products, and the full product suites normally, and I guess can you work from there.

I'm not saying City and WAMU are taking all sixth. I don't want to overstate the case. Washington Mutual has committed to a large segment of our product suite, and City will be migrating in that direction as well.

I think that's about as far as I can go. I'd like to tell you more, but obviously I can't.

Keep in mind that not all products are ordered for every loan. So, in other words --

That's important.

-- you might get a flood on every loan, you're certainly not going to get an MI policy on every given loan.

So from WAMU, if you have 1 million units per year, and the average fee is $3.33, is that $3.3 million in revenue?

Well, if they only ordered one average product per loan, that would be 3.3. We would hope they would order more than one --

what does the average -- I'm sorry, the average customer uses how many products? Or what would you expect them to use?

I don't think the average right now is very useful to you in looking at any individual client, but we would hope it would be north of one.

Okay. All right. That's helpful. Thank you.

Thank you. Once again, if you'd like to ask a question, press star 1 on a touch-tone phone. Thank you.

Andrew [Kanipt], you may ask your question, and please state your company name.

Lighthouse Partners. Ron, can you tell us, you grew the portfolio by $3 billion and I'm wondering how much of that was how the runoff was affected the gains?

Our runoff has been running this year probably around, you know, kind of 28% on an annualized basis. So you can just kind of go back to the beginning of the quarter or the beginning of the year, and look at what that's been.

Okay. And, Art, with Washington Mutual coming online and using three of the applications, MI, Title, and Flood, do you think it will stay north of three, the average click? That's what -- with them doing such an enormous amount compared to City Mortgage, what about Principal and Banc of America, could they help keep it above three?

Yeah, the number actually went up quarter over quarter. The issue I passed out, the last call we had, which product gets integrated first. If everybody goes to Flood first, that's the lowest yielding product, and then they add MI and Title later on, you'll see a deterioration and then a pickup. So it's really a matter of the rollout of the integration.

In the case of Washington Mutual, I they're doing Flood and MI simultaneously, so that is actually a fairly good from our point of view.

You won't -- again, the ratio of Flood and MI will not be one to one.

Right. It depends on the market conditions and low-rate environment. MI's probably ordered on 15% to 20% of an average lender's products. In a higher-rate environment, where there are much fewer refinances, one would expect to see a higher percentage of MI.

Okay. In the paper down here, I saw you did sell the Cortes Plaza, which was on your March Q for -- I think it was 20.6 and you told it for 21.1. Is that correct?

Those numbers are approximately correct. I can't tell you precisely off the top of my head, but it was basically sold for, you know, flat to what was our book value.

Have there been any other recent events such as those asset sales? Because that happened the beginning of July. Are there any others that we might be of interest?

We did, I guess since the end of the second quarter, we have sold the Thompson Street Hotel loan. That was a loan.

Can you give us the value of that?

Book value.

Yeah, at about book value, and that was about --

$17 million.

-- $17 million.

Okay. I appreciate it, fellows. Take care.

We had one other small paydown on a loan that was a paydown of about $1.5 million on a loan. But since the end of the quarter.

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

Sure. It's ING again. Art, can you tell us, or tell me what percent of the WAMU offices are currently up and running on your system now, or let's say were at the end of July -- kind of where were you in the month of July when you had that nice pickup and click-through?

As I understand it, the integration began about two weeks ago, or the rollout. That rollout occurred in their Irvine Operations Center.

Right.

it's the largest operations center they have. As large as it is, it has 40 facilities or so that process loans, so that gives you some flavor. It's more than [INAUDIBLE], but I can't tell you the exact percentage, and they're scheduled rollouts that would provide for a completion of the rollout to all of the existing Washington Mutual exclusive to North America, I believe, don't quote me on that, by the end of this year.

And that's sort of straight line to the end of the year or is it bulky in one way or another?

I'm not close enough to it to tell you that. I don't know the answer. I'm not ducking.

But if you're -- maybe I got this the wrong way, if you're telling me that that -- that you're -- you are running a 50% increase in click-through, you know, sort of annualize that number in the -- with only barely one week of July going, is that -- am I reading that the right way?

That's about right. It might be ten days, but it's right about one week. And City is just starting getting off the pad, also. That was my point, is that they are -- their impact on that 125 is basically small at this point in time and should be growing.

The 125 is basically done without much effect from Washington Mutual or City at this point.

And at the risk of sounding stupid, if you were to run to a 250,000 rate, you know, by the last couple of weeks of September, would that overwhelming you? Or are you guys total scalable in that?

I believe we're scalable. I hope I have to find out.

Okay. Once again, I'll step out of the way here.

Thank you. Andrew [Kanipt], you may ask your question, and please state your company name.

Lighthouse Partners again. Art, I was wondering -- Principal you signed up a while ago, and they're one of the top ten, how is that integration coming along? I mean, everyone talks about WAMU and City Mortgage, but [INAUDIBLE] and Principal could be nice contributors as well. So if you could give me some idea on applications they're using and what's the scale, when are they going to start employing the product?

They're using three of our products at this moment. We are installed in one other major divisions. They're rolling us out to the others as we speak.

The issue in terms of the integration and rollout process has been -- they've been distracted with the huge amounts of volume they've gotten like everybody else. I think I've said before that this huge refinance boom, in some ways, hasn't been helpful to us, because many of our customers have had an all-hands-on-deck response to dealing with the enormous volumes they've all gotten.

Our relationship with Principal continues to be extremely strong. Bill and I were just out there, and we will continue to expand, and migrate into other venues that they have, and those rollouts are planned -- some of those are planned over the next couple of months.

So my expectation, what I'm trying to say, I'm fearful I'm not doing that well, is our relationship with Principal is going fine. It is their intent, told to Bill and I, is to continue to expand our presence in their origination activities. And I would expect to see improving click volumes from Principal as time goes forward here.

Are they just using the Flood application, or what other applications are they using?

They're using Appraisal, Title and Flood right now.

Okay. And what about the status of Banc of America?

Banc of America is currently using us in their second mortgage division. We just built a custom product for their construction lending group that was installed two weeks ago. That seems to be going fine, and we are in dialogue with other elements of Banc of America with regard to both the expansion of REALTrans and our loan resolution workstation products.

Okay, thank you.

Thank you. Bob Napale, you may ask your question, and please state your company name.

U.S. Bancorp Piper Jaffray. I wondered how exclusive are your agreements with Washington Mutual, City, et cetera, et cetera, and how long are the agreements that you have? I have one follow-up question.

I really can't comment on that, because of the confidential nature of those agreements. I don't have permission from the other side to do that. It will be inappropriate for me to comment without that, certainly.

Okay. So, they could be using somebody else in addition to yourself?

As a practical matter, I don't think you'd want to do two installs of the same product, ordering the same things from the same division. You could have different products in different divisions, you know, something like that.

Okay.

Or you could do different products by -- being delivered by different vendors.

Yeah.

In other words, they could split products.

Okay. The follow-up, on profitability of OTX here, you said your stated goal was to be break-even or to become profitable in 2003. Did I hear that correctly?

That is correct.

And would you expect to be at least break-even for the full year of '03? Would that be a fair statement?

That's a -- again, I believe that would be a forward-looking forecast.

Okay. All right. And then you had mentioned some numbers, I'm sorry, you were talking about REALTrans, and I think you were giving out a $10 million to $11 million run rate, versus a $7 million to $8 million expense. I'm not sure if I heard that correctly. Could you clarify that?

That's a great question. What I was basically saying is sort of a proof statement of what we've been saying about our current customer base being sufficient to take REALTrans to break even without future sales.

We went back to 2001 mortgage origination volumes, which are now posted by lenders, so we know what they are, and we took the products that they have integrated or are committed legally, signed up to be integrated, and said if they had used those products in the way that they are committed to do them in 2001, as an example, what would the revenue stream look like?

Assuming no additional sales, no additional cross sales, these are all the things that were basically signed contractually, and that number was in the $10 million to $11 million range.

And I had also stated that our expense base for REALTrans, which would not move up much, with the increased volumes --

right.

-- was someplace in the $7 million to $8 million range.

So when you do the math, it makes the point fairly firmly that we have more than enough to get the product to break even just by completing the integrations that are basically already committed to, without any additional sales. And that was really my point, is we did it with some comfort in the margin.

Okay. I see what you're saying. Now 2001 was a great mortgage year, obviously, this year is, too. That's about a $2 trillion market, so if you took it down to a normalized market, maybe 1.4, 1.3, that'd probably get to you a break-even on the current customer base or something like that?

Sure. If you just run that math, you're saying it's about 70% of the 2001/2002? That would take us to -- using my example, about 7 to T7.7 million dollars, which is still above -- right about break-even, where we'd be seven or eight. Conversely our expenses wouldn't go a lot, if the volumes went to that level.

Right.

So, I think that statement is accurate.

Okay. What kind of mortgage market are you assuming for next year, and your thoughts on profitability for this business?

Well, I'm not a --

You have to have some kind of thought process for --

I think though -- it seems to me that having been in that business for a long time that interest rates are the key determinant usually of the mortgage activity.

Right.

I don't see a whole lot of rate pressure on the upside at the moment. So, you know, unless the economy would swing back very strongly and the fed would start to tighten, which doesn't appear at the moment to seem a high probability outcome, 2003 will likely be a very strong year.

Those assumptions, getting to break-even next year, you also are assuming some lift from the other products.

Right.

That, in fact, are not necessarily volume-driven based on mortgage origination. Certainly REALSynergy in a commercial space on the servicing side would not be volume driven by the interest rates, and even REALServicing on the lost mitigation side, if we were to sell one or two lost mitigation modules, that would not be affected by the level of interest rate and mortgage originations.

Okay. Thank you.

Thank you. John Morrocani, you may ask your question, and please state your company name.

ING. Two questions here. Ron, you mentioned at the outset that you were still transitioning your workforce to India and you were running training costs there and severance costs and whatever. When do you think you're going to be sort of done the overtraining and, you know, have finished the transition?

Well, I think we're -- to some degree, this is ongoing and won't necessarily be 100% completed by the end of the year, but, you know, we do expect to ramp that number up. I think we said we had 350 active employees at the end of June, and that number is expected to more than double by the end of the year.

So, I mean, we still will continue to see, you know, transition costs and things like that. But I think going into next year, you know, it'll be a much more stable environment.

And what is your U.S. head count due in the same sort of time period?

Well, in volume -- if volume remains flat, then the U.S. head count volume should come down close to one to one, maybe not -- maybe not exactly one to one. It may come down a little bit less. But, you know, if volume increases, as it has been increasing, you know, we've grown on an annualized basis close to 40% this year, you know, you won't see the U.S. head count come down, you know, one for one, because we'll have an overall growth in the number of employees in the operation.

And what's your U.S. head count right now?

Probably be at about 1,200.

Okay. Gotcha.

And, Mark, a question for you. And I apologize, I'm on having trouble logging on to your website. I have a failure there.

But in terms of the noncore assets that you sold in the quarter, can you tell me what your realization was versus your -- either your book value, and I don't know whether your book would be adjusted to reserves, or just raw book, and then maybe reserve adjusted book?

By and large, the assets that we sold in the second quarter were sold at book value. I mean, give or take a couple of percent. With the only exception being a little bit on the technical, which were the certain affordable housing assets that were sold as installment sales, where we had to discount the book value to its present value based on an interest rate. But aside from that, by and large, they were sold at book value.

And by book value, you're referring to your reserved for books, stuff you had already taken reserves for, whatever huh written those down to?

Yes, that's correct.

Okay. And is that the sort of experiential level that would cause you to take, you know, the additional big hit to your asset base that you took at the end of this quarter?

It was one of the factors we looked at certainly, other factors included -- I mean, just our understanding of the, you know, current market for commercial assets.

Right.

And, also, you know, we have been marketing our -- these assets and have new -- continuing new information on what their net realizable values might be.

I guess what I'm trying to get to is, are we at a situation where, you know, when you're trying to -- when you're trying to drain a swimming pool, the first eight feet of a nine-foot pool is pretty easy pumping, and then it's kind of the sludge at the bottom? I mean, as you get down to that bottom part, are we getting to the really hard-to-pump out stuff or --

On many of the loans, many of the commercial assets that we still have on the books are performing loans. Some are not. I think, you know, to some extent, as Bill indicated, we do plan on getting down to about $200 million of noncore assets by the end of the year.

So we do think that there is a market for these assets and hope to be able to demonstrate that when we release third quarter and fourth quarter results.

Gotcha. Okay. Thank you.

Thank you. And Andrew Kanipt, you may ask your question, and please state your company name.

Lighthouse Partners. Mark, had just a question on the high-interest bearing CDs remaining. How much -- how many are there left?

There's approximately $250 million of what I'll call brokered CDs that were issued -- oh, you know, upwards of two years ago. At interest rates of approximately 6%. Those CDs are running off rather quickly. About $100 million ran off in the second quarter, a like amount ran off in the first quarter of this year, but there remains about $250 million to go.

For the third quarter, is there going to be that same rate, another $100 million, or does it slow down from there?

It slows down, I believe, in the last six months of this year, another $100 million are going to mature.

Okay. And, Bill, can you talk about -- I've heard some rumblings about Ocwen getting into servicing of credit card debt, and I just wanted to get some idea about that.

We have a -- that's the unsecured group that we -- that Ron spoke about in his talk. We have a small operation that, you know, we've been focusing a lot of attention on in terms of working out nonperforming credit card debt on a contingency fee basis.

The reason we're focusing on that is we believe that it relies on skill basis and technology that we have already existing in-house, and the contingency fee basis of business, in terms of raw income potential, raw revenue potential, is considerably larger than the mortgage business.

So we have a small group located in Orlando, Florida, that we've been focusing on, and I think we've been producing very -- you know, very credible results in terms of being able to collect on credit cards.

Once we've been able to prove that out, you know, and adjust the technology a little bit more than it is today, you know, we would look then to add some more volume in that shop.

Okay, thank you.

Thank you. Once again, if would you like to ask a question, press star 1 on a touch-tone phone.

At this time, I have showing no further questions.

Thank you, everyone. Have a great day. Good-bye.

Thank you. That concludes today's conference.