Onity Group Inc (ONIT) 2004 Q3 法說會逐字稿

Good afternoon and welcome to the Ocwen third quarter earnings announcement conference call. (Operator Instructions). The conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the conference over to Mr. Robert Leist, Vice President and Chief Accounting Officer of Ocwen Financial. Sir, 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 Web site at www.Ocwen.com, select Shareholder Relations, then Conference Calls, Third Quarter 2004 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.

As indicated on slide 2, our presentation may contain certain forward-looking statements that are made pursuant to the Safe Harbor provisions of the federal securities laws.

These forward-looking statements may be identified by a reference to a future period or by use of forward-looking terminology. They may involve risks and uncertainties that could cause the Company's actual results to differ materially from the results discussed in the forward-looking statements.

For an elaboration on the factors that may cause such a difference, please refer to the risk disclosure statement in yesterday's earnings release as well as the Company's filings with the Securities and Exchange Commission, including OCN's 2003 10-K.

We're happy to make Ocwen news releases, 10-Qs, 10-Ks and other materials available to you by e-mail. If you're not already receiving our materials by e-mail, and would like to be added to our distribution list of 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; and Mark Zeidman, Senior Vice President and CFO. The presentation will be followed by a question-and-answer period, during which we will be taking questions from those of you attending the conference by telephone. Without further delay, I will turn the call over to Bill Erbey. Bill?

Thank you Bob. And thanks all of you for attending Ocwen's third quarter conference call. In my remarks today I will provide an overview of our third quarter earnings, which we believe demonstrate that our repositioning strategy is yielding positive results given that we're reporting our sixth consecutive quarter of income.

Following my remarks, Ron and Mark will provide more detailed information. As shown on slide 4, we have grown from average quarterly net losses of $17.2 million in 2002 to an average net income of $1.2 million in 2003 and quarterly net income of $6.8 million, $9.1 million and $39.3 million in the first 3 quarters of this year. Our third quarter results, as noted in our earnings release, include a net tax benefit of 31.5 million, which Mark will cover in more detail later in this call.

Slide 5 illustrates that we're achieving positive results across the board in our core, non-core and corporate segments despite the challenges facing our residential loan servicing business.

Our other core business lines are making an important contribution to earnings, increasing from average quarterly losses of $5 million in 2002 to an average pre-tax income of $2.5 million this year, while our average quarterly results in the non-core and corporate segments have improved to break even results this year.

In the aggregate, as shown on slide 6, our core businesses have improved from average quarterly losses of 2.8 million in 2002 to average income of $7.1 million this year. The performance of our other core businesses, OTX, ORA, Ocwen Recovery Group -- formerly known as Unsecured Collections, business process outsourcing and commercial servicing, have been critical to achieving this result.

There are two accomplishments in particular that I would like to highlight. The first is the ASP contract with AEGIS Mortgage for use of the REALServicing system that we entered into earlier this year. This is important not only because of its impact on earnings, but also because it had a positive impact our efforts to achieve future sales. In fact, we are actively discussing contracts with a number of other potential customers.

I'm also very pleased to note that our commercial servicing business, largely comprised of our global servicing solutions joint venture with Merrill Lynch, has achieved break even results for this year. We believe that this business has the potential to make a significant contribution to earnings in a future.

Our core business performance is also noteworthy because we have achieved these results while simultaneously investing in our sales and marketing functions. Thus far this year, we have increased our overall spending on our marketing function by $500,000 in the third quarter alone as we develop a disciplined approach to growing our core revenues in 2005.

The contribution by the other core businesses is particularly significant in light of the substantial ongoing challenges faced by our residential loan servicing business. As graphed on slide 7, our average quarterly income in this business has declined from $8 million in 2002 to 4.6 million thus far this year.

These results reflect the continued negative impact of low interest rates and high prepayments fees on this business. Ron will provide more details on impact of these factors later in this call.

As depicted on slide 8, our non-core businesses reflect a positive trend, improving from the substantial quarterly losses during the years of our restructuring to essentially break even results in 2003 and thus far this year. These results include positive cash flows on our remaining sub prime and residual securities as well as reduced interest expense as a result of the declining balance of non-core assets.

Partially offsetting these gains were impairment charges on our remaining commercial non-core assets. As graphed on slide 9, our corporate sector has improved from an average quarterly loss of $6.9 million in 2002 to an average pre-tax income of $600,000 this far this year.

As I mentioned last quarter, one of our goals is to substantially enhance our return on equity through more efficient utilization and funding of our assets. Our newer core businesses are a critical element to achieving this goal, because they require virtually no assets and hence generate very robust term returns on equity. Mark will provide more information on our balance sheet and on recent financing activities later in this call.

I believe that our continued profitability in the third quarter, the continued profitability of our core businesses, and the results in our non-core and corporate segments demonstrate that we're continuing to achieve the benefits we anticipated from our strategy.

Before turning the call over to my colleagues, I want to mention how proud I am of the performance of our people during the past 2 months. Despite having been struck by 3 successive hurricanes within 6 weeks, our primary U.S. production facility in Orlando remained fully operational on a 24 by 7 basis. Similarly, despite interruptions caused by two hurricanes in West Palm Beach, our disaster recovery plans and preparations enabled us to continue to operate effectively.

We want to thank all of our people for their dedication and hard work during a period of very difficult personal challenges. I would now like to the call over to our President, Ron Faris.

Thank you Bill. My remarks today will cover the residential servicing business, Ocwen Realty Advisors, Ocwen Recovery Group, business process outsourcing, OTX and commercial loan servicing. These core business lines generated 4.2 million in pre-tax income, a 47 percent decrease over the third quarter of 2003.

For the 9 months ending September 30, 2004, our core business lines generated 21.3 million in pre-tax income, a decrease of only 5 percent despite a $12 million decline in pre-tax net income year-over-year for the residential loan servicing business.

The residential servicing business reported pre-tax income of $3.4 million in the third quarter compared to 8.2 million in the third quarter of 2003 and 4.6 million for the second quarter of 2004. As reflected on slide 10, this business line reported 13.8 million in pre-tax net income year-to-date as compared to 25.8 million in the same period last year, a 47 percent decline. I will discuss the reasons for this decline in a moment.

As shown on slide 11, our servicing portfolio's unpaid principal balance at the end of the third quarter was 34.4 billion, a 1 percent decline from the second quarter of 2004 and an 8.8 percent decline from the December 31, 2003 balance.

The decline in loan service during 2004 can be attributed to the continued high level of runoff due to prepayments and to our having adopted a more cautious acquisition strategy as a result of the uncertainty of prepayment speeds in this current environment.

New loan volume for the fourth quarter, however, appears strong. And we anticipate some growth of in the portfolio during the fourth quarter. Our balance of mortgage servicing rights at September 30, 2004 was $135 million, a 19 percent decline from the end of last year, reflecting our increased rate of amortization due to the increase in actual and projected prepayment speeds.

To explain the reason for the decline in income, I would like to provide some details on both revenues and expenses. Net revenues in the servicing business were 25.2 million in the third quarter, a 1 percent increase compared to the same quarter of last year.

The increase in revenues from 2003 (technical difficulty) was primarily result of these generated from the new VA property management contract, offset by a relative increase in our rate of amortization on servicing rights compared to the respective average mortgage service rights balance.

Slide 12 shows the trend in prepayment speed over the past 6 quarters. As you can see, prepayment speeds increased to a record high of 44 percent annualized CPR in the third quarter, compared to 38.6 percent in the same quarter of last year and 43.2 percent in the second quarter of 2004. You'll note that CPR was less than 30 percent in the first quarter of 2003.

We anticipate the prepayments will continue at high levels in the near future. Slide 13 presents the adverse trend of the impact of prepayments over past several years. Amortization and compensating interest expenses absorbed 53 percent of related growth revenues in the third quarter, compared to 50 percent during the third quarter of 2003.

As we have reported today and in the past, this business continued to be adversely impacted by the current interest rate environment through faster than anticipated prepayment speeds and low net earnings of (technical difficulty) float balances.

Slide 14 highlight the impact of interest rates on our float earnings. Despite the fact that float balances have increased by almost 5 times from 2001 to 2004, interest earned on float balances has increased by only 75 percent due to the significant decrease in short-term interest rates over that period.

Put another way, had rates remained constant since 2001, we would have earned $39 million of annualized float income in 2004 as compared to the $14 million shown on this slide. Fortunately, the recent increases by the Federal Reserve Board in short-term interest rates have begun to have a positive impact on our net float income. And we continue to hope for a positive effect on prepayment speeds over time.

Turning to slide 15, you can see the gross revenues for the residential servicing business have increased by over 33 percent since 2002 in comparison to a 1 percent decrease in net revenues during the same period.

As I have previously stated, this reflects the relative increase in amortization of mortgage servicing rights and compensating interest expense caused by the increase in prepayment activity due to lower interest rates and tighter sub prime mortgage spreads.

On the expense side, we saw a 30 percent increase in expenses in the third quarter of 2004 over the third quarter of 2003, primarily as a result of an increase in the average number of loans serviced, costs related to the new VA property management contract, and the increase in certain costs due to bringing in-house in the fourth quarter of last year certain servicing activities previously performed by third parties.

Excluding this last item, we continue to make progress in reducing our average cost per loans serviced as a result of technology enhancements and the shifting of additional job functions to our India servicing centers.

I'm also pleased to report that as of October 1 of this year, we have expanded our relationship with the VA. In addition to our REO property management contract, will also now be managing the VA Vendee loan program, which will result in additional fee revenues for residential servicing.

Ocwen Recovery Group, our unsecured collection business, posted pre-tax income of $700,000 in the third quarter as compared to 1.1 million during the same period of 2003. As shown on slide 16, pre-tax net income for the 9 months ending September 30, 2004 was 3 million or a 12 percent decline from the prior year.

This decline can primarily be attributed to the fact that certain portfolios of assets, which generated high levels of collections in 2003, have declined in size and have not been replaced. Although we're disappointed with these results during the quarter, we remain optimistic that we can grow this business over time once we improve our recovery rates and further reduce our cost structure.

Ocwen Realty Advisors, our property valuation division, reported pre-tax income of $1.5 million for the third quarter of 2004, slightly ahead of the 1.2 million reported in the third quarter of 2003. As reflect on slide 17, for the first 9 months of the year we generated 5 million of net income compared to net income of 3.8 million during the same period last year.

This increase is a direct result of Ocwen Realty Advisors having added a number of new clients this year. Our business process outsourcing business generated 2.4 million in revenue during the third quarter compared to 1.9 million during the third quarter of 2003, and 2.2 million in the second quarter of 2004. This business generated $700,000 in profit during the third quarter, equal to our second quarter results.

As shown on slide 18, for the year we earned pre-tax income of $1.8 million and 80 percent increase over 2003. We continue to invest in this business, expanding our sales and marketing activities to acquire new clients and to expand our relationships with our existing clients. We are also currently working on productizing certain aspects of the loan origination process, such as loan underwriting, and hope to roll these products out in early 2005.

Ocwen Technology Xchange posted a loss of $2.1 million in the third quarter, which, apart from the second quarter of this year, is approximately equal to the results for the past several quarters. You will recall that OTX results for last quarter included the recognition of onetime documentation fees associated with our contract with AEGIS Mortgage to use our REALServicing system.

As reflected on slide 19, the September 2004 year-to-date loss declined 71 percent from 2003 to $2.4 million. The implementation of the system at AEGIS Mortgage has gone well, and they continue to increase the volume of loans serviced on the system.

As shown on slide 20, we are pleased to report that our commercial servicing operations achieved profitability for the year during the quarter, reflecting a $3.4 million improvement over the same period last year. This improvement reflects the expansion of our servicing JV with Merrill Lynch and the addition of some new U.S.-based servicing clients.

All of these businesses capitalize on our core competencies and provide additional value-added services to our core client base. These business lines continue to make progress in reducing their cost structures and improving their product quality through Six Sigma initiatives, the better use the technology and globalization.

A main focus for 2004 continues to be expanding our sales and marketing efforts to accelerate the growth of the newer core business lines. Thank you everyone. I would now like to turn the call over to Mark Zeidman.

Thank you Ron. I would like to focus on 3 areas -- first, the status of efforts to raise new sources of financing and the Company's cash position; second, an update on our efforts to sell our remaining non-core assets; and finally, the $31.8 million tax benefit we recorded in the third quarter.

First, regarding the Company's efforts to obtain new sources of financing, as we have previously stated we're considering the possibility of terminating Ocwen Federal Bank status as a Federal Savings Bank. This would, among other things, eliminate certain restrictions imposed on the amount of mortgage servicing rights we may obtain and therefore provide us with more flexibility to grow our residential servicing business.

A key component of this process is securing alternative sources of financing. Towards that end, we issued $175 million of 3.25 percent contingent convertible senior unsecured notes in July. This transaction, net of funds used to repurchase stock and certain deal expenses, raised approximately $125 million of cash.

In general, we used proceeds from this deal to pay down some of our deposits and other liabilities and to add to our cash reserves. As a result, cash and cash equivalents in total, including investments in short-term AAA rated securities, increased from $282 million at the end of June to approximately $340 million at the end of September as you can see on slide number 21. As such, cash and AAA rated securities now represent almost 27 percent of total assets.

We are continuing to work on additional new sources of financing as an alternative to the thrift charter. For example, on October 1, we closed a $15 million loan on our call center in Orlando. More importantly perhaps, we are continuing to work on a securitization of our servicing advances and hope to launch a deal in the fourth quarter of this year.

Second, regarding non-core assets, although we didn't close the sale of any non-core assets in the third quarter, we did enter into agreements to sell non-core assets with a net book value of almost $60 million or 46 percent of remaining non-core assets. These sales are scheduled to close in the fourth quarter, but remain subject to the completion of due diligence and other contingencies. Although it's not unusual for these types of transactions to fall out, if the sales close as expected, the Company would recognize a modest gain on sales.

From a P&L perspective, the non-core businesses incurred a loss of approximately $600,000 in the third quarter, although they burned a small profit of $300,000 on a year-to-date basis. In general, the commercial assets and affordable housing business units continue to incur financing costs and certain operating costs. These expenses are offset by interest income recorded in connection with the cash received on the residual interest that remained in our sub prime finance business unit.

It's our belief that we will be able to recover the net book value of our remaining non-core assets over time without any significant impairments or losses in the future.

Finally, I would like to discuss the 31.8 million of net tax benefits reported in the third quarter. The tax benefit is the net of 2 components. The first component is a credit of 37 million to reverse the portion of the reserve recorded in prior years against our deferred tax asset.

As many of you know, Ocwen has a significant amount of net operating losses, tax credit carryforwards, and other deferred tax assets. In prior years, we've largely fully reserved against this asset in conformity with GAAP. However, because of changes in the tax law, we were able to file refund claims with the IRS to carry back net operating losses incurred in 2001 and 2002 to recover income tax payments that we had made in earlier years.

Because the IRS was auditing the tax returns filed in those earlier years, we waited until the IRS agent had completed the audit and determine whether he was an agreement or not with our refund claim. This occurred in September. Accordingly, we think it's appropriate to reflect a receivable for the amount of the claim, 37 million, and reverse into income that amount of our valuation reserve as it is no longer needed.

We had been utilizing net operating losses to reduce our current year's tax -- income tax expense. However, we utilized all of our currently available NOLs to apply for the tax refund claim to recover prior years' taxes. We do, however, continue to have $170 million of other tax benefits, including tax credit carryforwards.

Tax credit carryforwards can of course be used to offset current year's income tax expense. However, unlike NOLs which could be used to reduce taxable income to zero, tax credits can only be used to reduce tax expense to the alternative minimum tax rate of 20 percent. Accordingly, in the third quarter, we recorded income tax expense of approximately $5 million on current year's tax income.

As I mentioned, we closed the quarter with deferred tax assets totaling approximately 170 million, against which we've posted reserves -- we have reserves posted of approximately 162 million. GAAP requires that we periodically reevaluate whether the reserve balances are too high or too low depending upon several factors, including recent operating results and the outlook for future earnings.

To the extent we continue to record profitable quarters and build up our core businesses, the need for this level of reserves against our deferred tax asset will be reduced.

I would now like to open up the call questions.

(Operator Instructions). Richard Shane, Jefferies & Company.

You talked about selling assets with about $60 million worth of book value. And you'd also mentioned that non-core assets had -- or non-core businesses had about $600,000 worth of losses in the third quarter. Was that specifically the 60 million of book value that you say is in an operating -- or an agreement to sell? So should we basically be looking at that as that loss going away going forward? Or is it the complete non-core assets?

The $60,000 loss was against one of the assets that was being sold.

Okay. And when you -- it basically sounds like you're going to get out of the -- you're going to be able to exit those businesses, break even to your book value. How will you be able to redeploy that capital? Is that capital that from a regulatory standpoint you'll be able to use to buy MSRs? Or is it's going to, at least temporarily, just build the cash balance and we wouldn't expect to see much growth in the MSR balances?

We expect to sell these assets for cash. If we sell them all for cash, we will have somewhat in excess of $60 million of additional cash to deploy. As Ron mentioned, we're seeing a stronger deal flow in the fourth quarter. And at this point, I think it would be difficult to predict with any degree of accuracy how much of the cash proceeds from the sale of non-core assets would be used to acquire additional servicing rights versus how much would just be used to add to cash reserves.

In addition, we still have our limit -- regulatory limits on the amount of servicing rights we can acquire. So we couldn't deploy the entire 60 million against it, I don't think, at this point in time.

That's what I'm trying to figure out. Some of that 60 million will be basically restricted for -- against -- at least you can't use it to buy MSRs?

Correct.

And also my colleague -- no, we don't have any other questions I'm sorry about that.

John Hecht, JMP Securities.

This question is related to the comments you've made on the increase in MSRs and (technical difficulty) recently. We are aware of some changes at the rating agencies that are due to take place. And we've also seen a lot of capital come into the sub prime market over the last couple of months. With that in mind, do you guys see this increase in MSR supply as sort of a periodic change maybe just through the month of October? Or in your mind, is this part of an ongoing trend?

I think it's a little bit difficult to answer. I think that the reason we're seeing better flow in the fourth quarter is related to -- there's a variety of reasons. One, with at least seeing the short-term interest rates rising a little bit, I think our -- although we still have a somewhat fuzzy view on where interest rates are going and where mortgage rates are going, we have a little bit more appetite for acquiring products.

So I think in the past we have mentioned that we were being a little bit conservative in our acquisition strategy and I would say that we are still conservative. But we may be a little less conservative than we were earlier in the year.

I think we've also seen situations where some of our clients -- some of our competitors have purchased a lot of volume in the first part of the year and are not quite as aggressive right now. So it has given as a better opportunity to buy products at what we think our reasonable prices.

As you mentioned, though, there continues to be very -- more capital in this sector and continues to be a lot of volume in the sector, which creates more opportunities for us to bid on product. I don't really view that as a short-term thing. But it will depend on a lot of factors, including where interest rates go and how much capital stays in -- or in the sector. But there's no reason to believe that it will not be strong going into next year as well.

Okay. Thanks. One additional question is can you give me an overview of what type of fees or rates you might be able to charge on things like special servicing if you're able to bid on a block of special servicing versus the more traditional just typical servicing?

To be honest, there really is very little special servicing available in the marketplace. And it's really not something that we have had any active transactions on in quite a long time. So I don't think I can really comment on that because it's really not something that is happening in the marketplace right now.

I guess more specifically, historically when you have got some opportunities to service nonperforming assets, and others -- probably not much available today given the current credit situation. But historically when you were able to bid on those, what type of rates were you able to charge on those assets?

It's somewhat difficult to say. I mean, the nonperforming pools generally -- they are generally smaller in size. Obviously the cost structure is higher so we do charge a higher fee. We generally would not purchase those servicing rights. We would do it on a fee-for-service basis.

We have seen some aged pools. I don't know I would call them nonperforming, but aged pools recently where the servicing fees have been 55 to 60 basis points on an annual basis, whereas we could service a brand-new pool of sub prime loan at much less than that, down in the 20 basis point range. So maybe that gives you some idea of the difference.

Yes, that does. Thank you very much.

John Morsani, ING Investment Management.

I have got a couple here. Mark, are the balance of the non-core assets that will remain on the books, are these the ones -- the affordable housing and that kind of stuff -- that will just run off rather than something that you try to sell?

Well, actually there are very few affording affordable housing assets remaining on the books. And what remains were trying to sell; I'd say roughly maybe $15 million give or take. The biggest single asset non-core assets that will remain, assuming these sales close, will be the sub prime residual bonds.

In particular, there's one -- the so-called CMR bonds, UK-backed or backed by UK mortgages, which is probably on the books now for about $31 or $32 million. That is -- we continue to see very healthy monthly cash flow on those bonds; in the most recent quarter, approximately $8 to $900,000 per month.

And we are able to get financing on the security. So we're likely to just keep that on the balance sheet and let it run off over time. But other than that asset, by and large all of the other non-core assets are up for sale.

The other non-core assets -- a lot of them are actually performing loans. There's no way we can get them off the books, because they're performing contractually in accordance with their terms.

Second, the tax asset after the -- this latest write-up or whatever or debit to it -- I guess, what you have left in that account?

Before the evaluation allowance, there is $170 million left of deferred tax assets. And against that, we have reserves of about 162 million. So the net amount on the balance sheet is about $8 million. But we still do have 170 million of tax benefit that we should be able to utilize as we go and in the future.

Lastly, did you mention what sort of the click volume was in OTX last quarter? And if you did, maybe just compare it to where we were in the first quarter -- the transaction volume?

Sure, first question -- no we did not mention it. And our click volume in the fourth quarter -- rather, in the third quarter was about the same level as it was in the second quarter as well as the third quarter of last year. So it's about 250,000 clicks.

Okay. Is there something that keeping that from growing -- is WAMU not turning on more sites? Or what sort of -- what is causing that to stay flat?

One of the biggest things is that unlike the sub prime area, the prime refinancing market has fallen off fairly significantly.

But Bill, if I'm not mistaken, your penetration in that area is so small.

It is. No, we have not done what we need to do there with respect to penetration. We have in fact fundamentally replaced the fall-off in refis with new business. But it hasn't enabled us to grow materially there.

What is your outlook kind of going forward here? I mean we are multiple -- do you see a strategy where kind of regardless of what happens in that market, you can start getting enough penetration to really get to the point where this can be a seriously profitable thing for you or --?

As a matter-of-fact, I spent time on that yesterday. We need to address what our value proposition is within this space. It's a large space in terms of what people spend to process mortgages internally as well as third party services that are ordered.

In other words, according to the last MBA study you spend about -- the average originator spends about $1700 processing a mortgage file, a large portion of which happens to be the ordering of third party reports. They also order about $1700 in third party services.

Our difficulty has been that we're picking up nickels in transactions that are fairly large transactions. So we need to basically look -- had the same discussion yesterday as a matter of fact. As part our strategic planning process, we need to look at our value equation and see how we can basically increase the revenue per transaction within that space, and also how to increase better penetration.

We have, as you pointed out quite rightly so, we have had nominal penetration in the accounts that we've had on the books for a considerable period of time. And we need to fix that problem. So two things -- greater penetration, and secondly we need to in fact provide more services that provide greater revenue potential than just simply the clicks.

Was there any kind of low hanging fruit or simple solutions? Or what can you offer us in terms of -- I mean this is -- there's been a lot of promise in this business for long time period. It looks like you have developed the platform, built the field, but nobody is showing up to play. I'm kind of wondering when do you either solve it or do something else?

I think one thing to keep in mind is we actually used REALTrans as a backbone for some of our other businesses such as ORA, etc. But you are correct. We have had executional challenges in that business on the revenue-generating side of the business. We've brought in a new head of sales and marketing with regard to this. I think that we are in the process of trying to do both things that you just pointed out.

We need to get revenue -- we need to get greater penetration on accounts where we are providing good quality services already. Secondly, we need to -- basically, out of that $3400 that our clients spend we cannot afford to have average revenue of somewhere around $6. It makes no sense. So we need to provide a better value equation there.

Getting to my question of what it is you can do, or to do that, do you -- can you give us any confidence that there is something within that system that will provide you -- provide your customers with that value proposition that you can see that $6 number go substantially higher?

We believe we can. I'm not at liberty to comment on what that strategy is right now. With regard to how we're going to approach that market, we call it an ecosystem, how you want to participate within that system. That is something, though, to that is very much top of mind because even though we're not losing much money in the business, we're certainly not taking advantage of one of a handful of platforms that are still out their providing these services.

So, I'm not going to give you a forward-looking statement with regard to that. I can tell you need is very much top of mind to try to solve that. And I think we have today the personnel in place to be able to execute on that strategy.

Got you. Okay thank you.

Josh Elving, Piper Jaffray.

Question I had regarding the corporate and other line. My understanding was that we're going to see a run rate of about maybe a loss of 1.5 to 2 million on a quarterly basis. And I did see in the press release that there was included in the line this quarter 2.7 million from interest income on a tax return claim. I was wondering if there were some other items that were one time in the quarter and maybe what the run rate might look like going forward.

There was one other -- I will call it a onetime item in the quarter. You may recall we had match funded loans that related to an on balance sheet securitization that we executed back in 1998. And that securitization hit -- it's -- I think it was a 10 percent clean up (ph) call. So we collapsed the transaction at a profit and sold the loans because as you can imagine, the loans were all the loans with higher coupons. That area earned about a little over $1 million profit from that -- from collapsing that deal. So that was the other nonrecurring item.

With respect, though, to interest we do have a $60 million receivable from the U.S. government. So we will be earning continuing ongoing interest income off that receivable until in fact we -- that is paid in cash, which generally is anticipated to be somewhere around a year to a year in half.

So on a go forward basis is that likely to -- that line likely to be around breakeven?

The objective is to have it zero, yes. We allocate out all costs of all of our support departments at this point -- technology, accounting, HR, everything. But on occasion, there are onetime costs and onetime revenues like the interest income on our federal tax receivable that we just deemed to be corporate in nature and think that it would to some extent distort business unit operating results if we allocate it out because it doesn't really have much to do with their operations. But the objective is to get it to zero, yes.

And then a little bit more on the restrictions you have regarding making additional acquisitions for servicing rights. Can you talk little bit about I don't know if you can give an exact number but are you restricted from drawing at all or to the full 60 million or excuse me full 30 million that you took in the reversal of that tax credit? Can you give me color -- any more color?

The basics -- and there are two basic restrictions. One is 50 percent of consolidated equity. The second is 60 percent of core capital at the bank. And I mean we're currently within both of those restrictions, so we do have room to grow. But we have to be mindful of not exceeding those limits to any significant extent.

So, okay. What is the minimum amount of time it might take for you to get out of your Federal Bank standing which will give you the opportunity to grow the servicing a little more?

It’s uncertain at this time.

Is there a ballpark?

In our statement is that we -- you know, to be precise our statement is that we're contemplating that.

Let's see I think I have one more question. Just in general, I know you said that there's been a lot more product available as far as MSRs is concerned. From a higher level, how do you feel about what we've seen from a lot of the sub prime players building portfolios and hearing more about how Countrywide is getting more and more serious about the sub prime space given the fact that they are usually considered to be a great servicer. Is that concern of yours looking long-term?

Definitely our competition in the marketplace has changed over the last 2 years to where competition is more within the large -- traditionally been the large prime players such as Countrywide, Chase and say Wells Fargo and then Wachovia, which I wouldn't call a prime powerhouse but obviously a large institution.

I think as far as -- I think Countrywide is known as a large and very good servicer in the prime space. But I think that Ocwen still has demonstrated that our performance as a sub prime servicer generally outperforms most other servicers in the industry. And so I think we still have a quality advantage and to some degree a cost advantage for what we've done offshore. That helps us compete effectively with those companies.

There have been some studies done over this past year that would indicate that our loss rates are probably the lowest in the industry, which is a significant value to the residual holders of the securities. And so they are very interested in having us service their loans.

Yes, having someone like Countrywide enter the space in a bigger way is a concern. But I think we still have some competitive advantages that will keep us in the market and getting our fair share of receivable future.

Right, I guess I didn't mean to assume otherwise. Everything I've heard is that Ocwen does a great job with servicing. Thanks a lot for your time.

(Operator Instructions). At this time gentlemen, there are no further questions.

Thank you very much everyone. Have a good afternoon. Bye.