Onity Group Inc (ONIT) 2003 Q3 法說會逐字稿

Good afternoon and welcome to the Ocwen third quarter earnings announcement conference call. All participants will be able to listen only until the question and answer section of the conference. This conference is being recorded. If anyone has any objections, you may disconnect at this time. I will introduce your host for today's conference, Mr. Robert Leist, Vice President andChief Accounting Officer. You may begin.

Thank you. Good afternoon everyone and thank you for joining us today. Before we begin, I want to remind you that a slide presentation is available to accompany our remarks. To access the slides, log on to our website at www.ocwen.com. Select shareholder relations, then conference calls, third quarter 2003 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, push on the grey button pointing to the right. As indicated on slide two, the presentation may contain 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 a future period or 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 elaboration of the factors that may cause a difference, please refer to the risk disclosure statement in today's earnings release as well as the company's filings with the Securities and Exchange Commission including OCN's 2002 10(k). We were happy to make Ocwen news releases 10-Qs, 10(k)s and other materials available to you via e-mail. If you are not already receiving our materials by 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 today for today's presentation are Bill Erbey, Chairman and CEO of Ocwen, Ron Faris, President, and Mark Zeidman, Senior Vice President and CFO. This presentation will be followed by a question and answer period during which we will be taking questions from those of you have attending the conference by telephone. Without further delay, I will turn the call over to Bill Erbey.

Thank you, Bob, and thank you for attending the conference call. As shown on slide four, I will cover two topics in my remarks today. An overview of our third quarter earnings and remaining noncore assets. Following my remarks, Ron and Mark will provide more information. I'm very happy to open my remarks this quarter by noting we reported net income for the second consecutive quarter and have achieved year-to-date profitability. These results reflect continued growth in our core business results and improvements in our noncore businesses and corporate segments as well.

As illustrated on slide 5, year-to-date pre-tax income in our core businesses rose to $23 million in the third quarter, an increase of 108% over the same period last year. This continues our trend of improving core earnings. As shown on slide 6, our core businesses reported an average quarterly losses of $7.4 million in 2000 and $1.7 million in 2001. In 2002, these businesses reported average quarterly pre-tax income of $3.4 million as compared to pre-tax income of $7.2 million, $7.5 million, and $8.8 million in the first three quarters of this year.

Our Residential Loan Servicing business earned $26 million in the first nine months of this year, an improvement of 13% over the same period last year. Our servicing earnings continue to be impacted by the low interest rate environment. On slide 7, our portfolio continued to grow and we closed the period with $37.1 billion of unpaid principle balance, an increase of 10% over the June 30th level. Ron will cover our servicing and other core business results in more detail later in the call. OTX results have improved by 48% thus far in 2003, as compared to 2002, although the rate of progress slowed somewhat in the third quarter.

As graphed on slide 8, OTX posted a $2.4 million loss in the third quarter as compared to a $2.6 million loss in the second quarter, and average quarterly losses of $6.9 million and $9.1 million in the preceding two years. One factor in this slower trend was REALTrans. As illustrated on slide nine, REALTrans transaction volume was $253,000 in the third quarter as compared to $316,000 in the second quarter and $231,000 in the first quarter. In light of the 75% decline in the MBA refinance index in May of this year, our 20% decline in the third quarter, while disappointing, indicates we are performing better than the industry.

Despite the volume decline, REALTrans revenues declined only 3%, reflecting a 24% increase in our average click charge as a result of the positive evolution of our product mix. Based upon current market conditions, we expect that REALTrans will not break even until the first half of 2004. As depicted on slide 10, our year-to-date noncore losses after excluding the arbitration charge of $10 million in the first quarter of this year were a $3 million loss as compared to a loss of $66 million in 2002. These results reflect a significant reduction in new reserves in 2003, as compared to 2002.

Strong cash flow in 2003 on a residual securities portfolio and approximately $4 million of gains on noncore asset dispositions thus far this year. Our corporate sector also reflected improvements. Reporting a year-to-date pre-tax loss of $9 million, as compared to a loss of $19 million in the same period last year. This improvement is primarily due to reductions in corporate interest expense in 2003, as well as a reduced level of unallocated technology costs. As shown on slide 11, since December of 1999, our noncore assets have been reduced from $1.9 billion to $189 million as of September 30th.

Although we recorded a relatively modest reduction of $12 million in the third quarter, we reduced these assets by $62 million or 25% thus far this year. As shown on slide 12, our remaining noncore asset portfolio consists of commercial assets of $132 million or 70% of the total. Subprime securities of $38 million or 20%, affordable housing assets of $16 million or 8% or $3 million or 2% of corporate assets. As of September 30th, the five largest noncore assets accounted for 68% of the remaining total.

As depicted on slide 13, our remaining commercial assets consists primarily of 13 loans and properties. Three of our five largest remaining assets are commercial assets with a combined book value of $90 million. Commercial assets declined by $59 million or 31% since December 31st, 2002, including the sale of 7 assets for a net gain of $4.5 million. As illustrated on slide 14, our affordable housing assets amounted to $16 million of which $6.4 million consists of two loans and $9.6 million are the four remaining properties.

Though the small number of remaining assets makes it difficult to forecast the timing of future sales with precision, we are pleased with 2000 results thus far. I believe that the outlook for further sales in the fourth quarter and in 2004 remains positive. We continue to maintain the strongest reserve levels we have ever had and we believe that we are in the final stages of achieving our goal. I would also like to note that we have made significant progress in reducing our high cost debt.

On September 30th, we redeemed the remaining $33.5 million of the Ocwen Federal Bank 12% subordinated diventures. On October 1, the remaining $43.5 million of the 11 7/8 Ocwen notes matured and were repaid. Mark Zeidman will cover the impact of these events in detail later in this call. I remain convinced our strategy to liquidate our noncore assets and use the proceeds to reduce high cost debt and continue to invest in our core fee base businesses is the best course for our stakeholders. I believe our return to year-to-date profitability, the continuing growth in our core business earnings and the reduction of losses in our noncore and corporate segments demonstrates we are approaching our goal.

As of September 30, we had equity of $310 million and cash and cash equivalents of $247 million. We are confident this strong financial foundation will provide us with the ability to achieve our strategic objectives. I would like to turn the call over to our President Ron Faris.

Thank you, Bill. My remarks will cover servicing business, Ocwen realty advisors, unsecured collections and global outsourcing. I am pleased to report that these four business lines generated a total of $11.5 million of profit in the third quarter, an increase of $2.3 million or 26% over the third quarter of 2002. Turning to slide 16, you will see that our servicing business reported pre-tax income of $8.2 million in the third quarter compared to $7.2 million in the third quarter of 2002.

As shown on slide 17, our servicing portfolio's unpaid principle balance at the end of the second quarter at the end of the third quarter, was $37.1 billion, a 10% increase from the second quarter of 2003. We continue to see strong new product flow in the residential servicing business. Net revenues in the servicing business increased to $24.9 million, a 4% increase compared to the same quarter last year. In spite of increased amortization of purchase mortgage servicing rights and continued lower net earnings and float balances due to the ongoing decline in short-term interest rates.

Over the past several quarters we have been steadily increasing our rate of amortization on servicing rates to reflect increased projected prepayment speeds. The unpaid principle balance of our portfolio has increased by 33% over the past year while amortization has increased 65% to $25.3 million in the third quarter compared to $15.3 million during the third quarter of 2002. Our net earnings from interest earned on collection account balances and compensating interest payments on payoffs declined by $2.5 million or 31% over the same period the prior year.

We expect that our net flowed earnings will continue to be negatively impacted on an ongoing basis due to the current low short-term interest rate environment. On the expense side, we continue to make progress in reducing our per unit cost to service a loan. During the third quarter of 2003, our average per unit cost to service a loan was 12.4% below the average for 2002. Year-to-date, we have reduced our work force by 40 positions. In September 30, 2003, we had a approximately 1,378 active servicing staff.

As shown on slide 18, as a result of implementing our REALServicing software in January 2001, and our globalization initiative, we have reduced the average cost to service a loan by over 54% over the past 11 quarters. The profit margin in the servicing business remains strong at 33% in the third quarter of 2003. We signed a contract with the United States Department of Veteran's Affairs during the third quarter to manage its portfolio of REO properties. This contract will result in substantial growth of our REO distribution business. We expect to begin active operations late this year.

As shown on slide 19, our unsecured collections business posted pre-tax income of $1.1 million in the third quarter as compared to $1 million during the same period in 2002. We continue to make progress in improving our collection capabilities, reducing our cost structure and in attracing new fee based collection contracts to expand the business and offset the decline in collections on our maturing own portfolio. Slide 20 shows that Ocwen Realty Advisors, our property evaluation division, reported pre-tax income of $1.1 million for the third quarter of 2003 compared to $902,000 in the third quarter of 2002. Third quarter 2003 margins declined slightly to 25% compared to 28% during the third quarter of 2002.

We continue to make efforts to maximize our cost efficiencies by expanding our vendor network, fully deploying REALTrans as our vendor management and product fulfillment system and implementing our globalization strategy. We made great strides in expanding our client base and improving customer satisfaction. Both unsecured collections and Ocwen Realty Advisors compliment our servicing business, capitalize on our core competencies and provide additional value-added services to our core client base.

Both business lines continue to make progress in reducing the cost structures in improving their product quality through Six Sigma initiatives, the better use of technology in globalization. As we have previously reported, we continue to pursue new opportunities to leverage our technology and global capabilities. I am pleased to report that during the third quarter our global outsourcing business generated $1.9 million in revenue, a 368% increase over the second quarter of 2003.

As shown on slide 21, this business generated $1 million in profit during the third quarter with a profit margin of 54%. We had three active clients anticipate opportunities to continue growing this business over the coming quarters. Thank you and I would like to turn the call over to Mark Zeidman.

Thank you, Ron. I would like to discuss two remaining aspects of the company's performance during the third quarter of 2003. First, the $3 million loss in the corporate division, and second the company's cash and Iiquidity position. Regarding the corporate division loss of $3 million, remember that the corporate division consists of several components as depicted on slide 23.

First, the net interest expense incurred to finance corporate assets such as cash prepaid expenses, fixed expenses and other assets that are not identified with any particular business unit, second, unallocated costs of the technology services division that are incurred for general corporate purposes rather than in direct support of any business unit. Third, any gains or losses on the redemption or repurchase of debt. And fourth, certain expenses that are general in nature and not directly associated with the business unit and are therefore not allocated out to a business unit. Examples of these costs include costs incurred in connection with our Six Sigma department.

As you can see on slide 23, the largest individual component of the overall loss in the corporate division is the net interest expense incurred to finance corporate division assets. The good news is that this expense is decreased by over 50% from $3.9 million in the third quarter of last year to $1.8 million in the third quarter of 2003. Better news is that this expense should decrease even further in the fourth quarter of this year and thereafter. The decrease in net interest expense reflects the progress the company is making in reducing the amount of high yield bonds and expensive broker deposits.

As you see on slide 24, the amount of high yield bonds declined from $133 million at the start of the year to $100 million at the end of the third quarter. The decrease reflects the redemption of the remaining $33 million of Ocwen Federal Bank 12% subordinated diventures that was executed on September 30th, 2003. Also as you can see, the balance of high yield debt will decrease further by the end of this year because of the maturity of the remaining $43.4 million of Ocwen Financial Corporation 11 7/8 senior notes that has already occurred on October 2, 2003. As both of these transactions occurred at the very end of the third quarter, their impact on net interest expense will not be reflected until the fourth quarter of this year.

By the end of the year, therefore, we should only have approximately $56 million of high yield bonds remaining or only 42% of the amount that was outstanding at the beginning of the year. Additionally, as you can see on slide 24, the company continues to make progress in reducing the amount of expenses in brokered deposits outstanding. In the fourth quarter, $40 million of brokered deposits are scheduled to mature. The high yield deposits have an average interest rate of approximately 6.36%. By the end of the year, we should have only approximately $85 million of such deposits remaining or again less than 50% of the amount outstanding at the beginning of the year.

The maturity of these liabilities should continue to reduce the company's debt burden and improve the results of the corporate division and the profitability of the company as a whole. The second significant component of the net loss in the corporate division is certain unallocated costs of the technology services division. As you can see on slide 25, the unallocated costs have been reduced from $2.5 million in the third quarter of 2002 to $1.2 million in the third quarter of 2003.

More important, perhaps, than the reduction in unallocated costs, is the fact that total expenses of technology services division have been reduced from $6.4 million in the third quarter of last year to only $5.2 million in the third quarter of 2003. The reduction cost was accomplished largely by reductions in staffing levels. Turning to the company's cash and liquidity situation, as you can see on slide 26, the company closed the third quarter with cash and cash equivalents at $247 million or approximately 19% of total assets. Of this amount, $170 million of the cash was at Ocwen Federal Bank and $77 million was at the holding company.

Keep in mind, however, that the holding company's cash balance was then reduced by approximately $47 million on October 2, 2003 in connection with the maturity of and the final interest payment due on the OCN 11 7/8 senior notes. After taking into consideration the redemption of this note, cash at the end of third quarter was still modestly higher than cash of $192 million at the beginning of the year. As you can see on slide 27, on a year-to-date basis, cash from operations was basically break even. As significant positive cash flow from net income adjusted for non-cash charges for depreciation and amortization, was offset by an increase in servicing advances.

Vesting activities used net cash of approximately $18 million year-to-date with acquisitions of mortgage servicing rights totaling $79 million, offset in part by proceeds from noncore assets of $70 million. Financing activities provided net cash of $73.5 million through the first nine months of this year. The cash was generated from increased borrowings on secured credit facilities and net increases in new retail CDs and escrow deposits offset to some extent by the repurchase of the bank's 12% sub-debt. On a net basis, cash increased by almost $55 million during the first five months of this year. Now I would like to turn the call back to Bill Erbey.

Thank you and I would like to open the call to questions.

At this time we were ready to begin the formal question and answer session. If you would like to ask a question, press star 1. You will be announced prior to asking your question. To withdraw your question, press star 2. Once again to ask a question, press star 1. One moment, please. Our first question comes from Blake Howells of Becker Capital Management. You may ask your question.

I have two questions. First, if we could try to quantify a little bit more the interest expense saves that you assume you might achieve with the debt repayments that have occurred. Secondly, I was wondering if we could explore the impact the low rate environment on your servicing portfolio, specifically the impact of the low interest rates on your float position and the impact of the high amortization rates on your MSR assets.

Perhaps I could start with interest expense on the reduction in debt. As I mentioned, we bought back that $33 million of the 12% bonds and a little over $44 million of the 11 7/8% bonds. That's roughly $77 million in high yield debt. And just to keep it simple, call it an average coupon of 12%. If you assume for the sake of argument that we replaced that debt with certificates of deposits at 2%, just to keep it simple, that's a 10% savings on $77 million or a little less than $8 million a year.

Just achieved through the buy back of those debts. Similarly, we were about to have roughly $40 million of broker deposits maturing at a average yield of 6.36%. So that's another $2.5 million gross of interest expense during the course of the year. Even if you assume there, too, they are replaced by say 2% CDs, it's a significant savings over the course of the year. Hopefully that will put parameters around it.

I had gone back to the press releases that you had issued when you were announcing the debt repurchasings and included what you were expecting your interest expense savings to be over a 12 month period and you added what your net cost savings anticipated to be. I kind of ran the map and came out with an interest save of per quarter about 2 1/2 to 3 cents per quarter. Does that sound like it's in the right ballpark, just in the debt repayment? For example, on your August 27th press release you talked about a net cost savings of $3.2 million over the next 12 month period.

Let's say 2 1/2 cents on 67 million shares is $1.7 million per quarter. I would say -- it's approximately right.

And is it correct to assume that should occur starting with the fourth quarter '03?

Yes, that's right.

Second, as a follow-up, we had discussions before on the low interest rate environment on your servicing portfolio and you given me pramenters of an average flooat of about $900 million earning interest in a feds fund 10 basis points. Is that the correct paramenters to think about, the impact of the low interest rate environment on the servicing portfolio profitability?

Yeah. That's accurate.

I was going to say has the flow increased given that the servicing portfolio is growing? Do I need to move that number up or is it about $900 million?

I think in the third quarter the average float balance was $1.1 billion.

And you guys are at interest of the rate fed fund basis point?

Yes.

You given additional disclosure on your prepared remarks on the amortization rate and I got it down at $25.3 million for the third quarter versus $15.2 million for the third quarter of the prior year. If I look at those amortization rates as a percentage of the average mortgage servicing rate asset it looks like it has gone up 10% to 14%. Which looks like it's obviously impacting you in a substantial way. Any further thoughts on when you might see the amortization rates against that asset start to come back down?

Not at this point. We continue to see prepayment speeds within our portfolio to be relatively high and have been on an upward trend over the last six months. At this point we don't see -- we don't see that coming down any time soon.

Mark, am I doing my math correct as I look at the impact of that higher amortization rate on the profitability of the servicing division? I'm looking -- Certainly having an impact on the profitability, yes. I did some quick math and looked like it was $7 million per quarter on the numbers you had given.

I don't have the -- well, I didn't redo the math you are referring to. But it sounds approximately correct. We could talk about it off-line after the call if you like.

Part of that -- there is some -- it is increased over last year, but part of that is simply because the portfolio has grown as well. So the raw number of amortization has grown partly because the portfolio is bigger and but also because we had to accelerate the speed at which we amortize the PSMRs because of the faster prepayment speed environment that we are projecting.

I was just looking at the amortization as a percentage of the MSR asset trying to neutralize the impact of the larger portfolio and it looks like the amortization rate as a percentage of your portfolio is about 14% and prior year was about 10%. So looks like it's having a substantial impact.

You have two factors. One of which is as rates go down, obviously the amount of the amortization goes up. But also there is potentially a catch-up as a result of the delta, the rate change. Our best indication is that for every one percent change in interest rates you have about $7 or $8 million increase in PMSRs on a steady basis.

Great, thank you.

Once again, to ask a question, please press star 1. Jeff Elding of Piper Jaffrey, you may ask your question.

Question regarding the global outsourcing business, I think you mentioned something about it here minute ago, but I missed it. The $1 million in pre-tax income in the third quarter, is that a reasonable run rate? Or was that -- there was something in the press release that talked about there were some results in this segment reflected activities reflected in the one time consulting contract. I was confused about that a little bit. Could you talk more about that?

Yeah, I think that part that was confusing you was really related to a one-time consulting contract in our international business which is different from our global outsourcing business.

And so the $1 million in the pre-tax income in the third quarter, does that reflect in the new contracts you generated in the third quarter? And therefore would be likely run rate going forward? Potentially growing?

We did sign our third and our biggest client during the third quarter and that was a primary reason for the significant increase in revenue and profitability. Were there output costs? Is that a recurring deal?

I mean, I think it's -- you know, directionally in the right place. I don't know that we can say exactly that that will be our run rate for the fourth quarter and going forward. But I think it's reasonably -- we expect there to be profit on a go-forward basis based on the contracts that we currently have and based on the volume that they are currently putting through the system.

I think the third quarter represented catch-up and the second quarter we had done work in anticipation of a contract being signed. So we had more revenue in the third quarter. I think as business is growing very rapidly. We are pleased with its performance. But there was a -- it's probably more -- probably higher than what you will see in the fourth quarter but we expect to be at those levels next year.

Okay. And then also on OTX, or REALTrans, any further plans with regard to that business line? Will we just continue to keep growing it as best you can? You said profitability mid '04?

That's right. We tend to continue what we are doing. Even with the fairly substantial downturn in volume, our revenues were essentially flat in the third quarter. Given the downturn, we were reasonably pleased with that level of performance and think in the first half of next year we will achieve profitability.

Any indication of what clicks are tracking at thus far in the fourth quarter?

Yes. Clicks are around 270,000 rate for the quarter.

So they picked back up a little bit?

Yes, even though obviously refi's are still -- the number we gave you downturn was really pretty much through the end of September but you are still seeing some weakness in re-fi's.

My other question has been answered.

John Morrisoney of ING will ask your question.

Couple of questions. On the interest income part, you had a pretty good sized downturn here on the stuff called trading securities. It was $2,749,000, down from sort of the $4.7, $4.8 million level quarterly level and earlier in the year and down from $3.5, what is that reflecting?

Let's say interest for the quarter about $4 million.

Now, I'm sorry. Under the interest income breakout, you show trading securities of $2,749,000, down from $3,507,00 million a year ago and roughly $4.7, $4.8 rate in the first two quarters. And it's been a much higher number for the last six or seven quarters.

Right. To some extent most of that represents interest income that we record on our CMR bonds. And it changes as we change our estimates of future cash flows from CMR bonds and the cash that we actually collect. And we update those projections every month, every quarter in particular. So that is less cash and have a lower expectation of future cash flow.

From just for someone who is truly ignorant in this area, what has changed so dramatically in the last quarter? Is that just versus all the quarters before, this is an area where interest rates go up, that goes down?

The bonds are relatively complex. They are U.K. securities They can be impacted by losses within the securities. Various things can impact the cash flows that are received on these bonds.

And so we are able to monitor what we are receiving each month and then based on that and based on new information we have, we are able to update what we think our future projections will be. It's a little bit difficult to truly, accurately forecast the cash flows. We do the best we can as we get new information. We see what actuals come in and we see what kind of losses are going through. The underlying security, that's going to impact your cash flows on a quarterly basis.

So looking forward with the current environment, are we sort of steady state of where we were before or do we go back to where we were? How would one model that?

I'm tempted to say we were steady state to where we are today if you are looking to model it on a go-forward basis. It's difficult to predict future cash flows on these instruments.

In the VA business, can you just talk about the revenue potential there and maybe kind of what your margins might be on that revenue?

I think at this point we were not prepared to -- we don't give forecasts anyway and we aren't really prepared to discuss in detail where that is headed. We are currently working closely with the VA to get set up and to start the program. There are still lot of questions that need to be answered and we don't give those forecasts.

And where is that going to show up? What line item in your income statement will it show up in?

It will be part of the -- it will be rolled up as part of the servicing business. It's really -- we do a lot of REO work within the servicing business. I'm guessing most of the income will come through just the servicing fees income line because it's, basically we receive a fee to manage these assets and then, of course, we can expect some increase in our expense levels because we will be adding staff to take on the contract.

So if we were to look at your servicing revenues next quarter and kind of figure out what the increase in your average servicing portfolio, should we be able to guesstimate where you are in the VA side?

Not in the fourth quarter as we really -- it will be late in the fourth quarter when we first start taking on new properties. And again, we aren't really prepared to give any forecast as to what we think revenue or expenses will be related to that.

I'm trying to get a sense of in the future how will one sort of get a sense of how that business is going? Will you break it out after the fact, and I appreciate the lack of forecasting, but can we get a sense of what that's going to look like?

I think that's something that we will take under advisement as to how much we break that out on a go-forward basis. I don't think we truly addressed that or made that decision at this point in time.

Okay. Last question, do you have any sense of the percentage of the wamu offices that are all fully configured to process the OTX stuff now?

The last time I checked on that we were somewhere around 50%.

And is the idea to get to 100% at some point? Do you know what the schedule there is?

I think that the schedule is somewhat up in the air with regard to that. We are still scheduled -- we are still planned that we, in fact, will be rolled out to all of those offices after the system is rolled out.

Can you qualitatively give us a little -- are they ecstatic or is it sort of meeting their expectations? Is it giving them a leg up over other people? How would you characterize it?

I tend not to -- I tend to be fairly cautious about commenting on comments that wamu has or discussions we have with them. They are an important client and I think that they -- the system is something that they need to comment on themselves as opposed to us.

Thank you.

Bob Napoli of Piper Jaffrey, you may ask your question.

Couple quick questions. What point would you expect to begin paying taxes? Do you have your tax rate -- I'm assuming you are using NOLs, is that right?

Yes, probably -- I'm not young enough to see that day, Bob.

So you will not be a taxpayer for quite sometime?

We could -- in a very crude sense in terms of precision, we probably can make somewhere around $500 million before we pay taxes, really. From a GAAP standpoint.

Okay. Secondly, just to make sure I was clear, you said is it the entirety of OTX you expect to be profitable by mid '04?

No, REALTrans.

What about the entirety of OTX? Weren't we hoping to be profitable with OTX by the end of '03?

We were. We did not achieve that.

And what you are saying now is only a piece of it by mid '04, but you -- you are saying that you don't see profitability for the entirety of OTX until a later date? Is this something that you need -- are you going to reduce your investment OTX? Do you have a time frame on when you want OTX to be profitable? Is this something that you will just look at as a long-term investment at this point and is helping you with some of your other businesses?

It's a key element of our operating system. All three products we use. And I think -- you will continue -- our projections are you will continue to see those losses come down. We are just not projecting they will come down overnight. You will continue to see hopefully quarter-over-quarter improvement in the loss. $2.4 million loss last quarter was -- we weren't ecstatic, when it's down over $9 million a quarter, we have made progress there. And we are just being -- we are being cautious given the current environment of knowing where interest rates and re-fies are headed.

Assuming the mortgage market goes -- it's going to $1.4 trillion and has stayed there for three years. It's that kind of environment where this business has to be successful. How we gauge if you are making progress or not in that business. I understand you are behind where you wanted to be. It's hard to tell. Obviously the refi boom is going to end at some point. But -- are you making revenue progress? Obviously you are making great expense progress.

We're making revenue progress. The expense progress has been more substantial than the revenue progress has been. I think that we need to in our REALTrans product line and we have put some increased focus on just basically managing the existing accounts we have and trying to increase penetration on those accounts. Basically sales and relationship management improvement in those. We have a footprint in 12 of the top 20 mortgage originators in the country.

We need to be able to do a better job of penetrating those accounts, not only by products, ie, the 10 or so products that we offer, but also by various channels and by geographic distributions within the products. I think that the product was strategically well-placed. I'm not sure that we have executed as well as we might in terms of penetrating the already existing client base that we have. So I'm hopeful that we will do better than what we were saying here. I think what we gave you was a realistic projection of numbers that we can hit.

Within the servicing business, the prime market, you have seen a massive slow down in prepayments. Are you not seeing the same thing? I understand the sub prime market is less cyclical. Shouldn't you be seeing at least a somewhat tapering off of prepayments or at least a leveling of prepayments and you are not seeing that?

We definitely are not seeing that at this point in time. Subprime does tend to lag. We have been seeing an increase over the last six months. If you look at what some of the big originators are doing in volumes, their volumes actually are -- have increased substantially. Which would lead one to believe it can't all be coming from new subprime borrowers. A lot has to be coming from refi-ing existing borrowers. At this time it's very difficult to predict but it's definitely not showing signs of weakening. It's actually at least for our portfolio and from what I understand in the industry, it's been accelerating.

Have your earnings from that business -- are they going to be able to continue to grow from this level and -- you've grown the portfolio nicely and if rates stay where they are right now, with the prepayment expense accelerating, should we expect for a quarter for profitability to be flat from where we are at today before we can start to see growth? Is that a rational way to think about it?

We don't really forecast, so I don't think I can answer that question. Sorry.

Okay. Thank you.

At this time, we have no further questions.

Thank you everyone. Have a great evening. Good-bye.