Onity Group Inc (ONIT) 2005 Q2 法說會逐字稿

Good afternoon, and welcome to the Ocwen second quarter earnings announcement call.

[OPERATOR INSTRUCTIONS.]

Today’s call is being recorded. If anyone has any objections, you may disconnect at this time.

And now, I’d like to introduce your host for today’s call, Mr. Robert Leist, Senior Vice President, Principal Financial Officer. 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 onto our website at www.ocwen.com, select "Shareholder Relations," then, ”Conference Call Second Quarter 2005 Results," and then, “View Slides." Each viewer will be able to control the progression of the slides during the presentation. To move the slide ahead, please click on the gray button pointing to the right.

As indicated on slide two, 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 of the factors that may cause such 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 2004 10-K. We’re happy to make Ocwen news releases, 10-Qs, 10-Ks 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 linda.ludwig@ocwen.com.

As indicated on slide three, joining me for today’s presentation are Bill Erby, Chairman and CEO of Ocwen, and Ron Faris, President. 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’ll now turn the call over to Bill Erby. Bill?

Thank you, Bob, and thanks to all of you for attending Ocwen’s second quarter conference call. I would like to cover three topics in my remarks today -- first, an overview of our second quarter earnings, second, the completion of our debanking initiative, and third, the narrowing of our business focus.

As shown on slide four, pre-tax income for the second quarter of 2005 was $5.2 million as compared to $3 million in the first quarter, and quarterly averages of 6.4 and 1.4 million in 2004 and 2003 respectively. In summary, non-interest revenue grew for most of our businesses -- most of our core businesses -- however, operating costs increased more rapidly, which bears discussion later in this presentation.

As shown on slide five, our non-interest revenue in the second quarter of 2005 amounted to $59.5 million as compared to $56.7 million in the first quarter, and quarterly averages of 55.7 million and $44.4 million in 2004 and 2003 respectively. Overall, this trend reflects positive revenue growth in most of our core business segments. Our Residential Loan Servicing unit, despite the continuing pressure on MSR amortization from high prepayment speeds, posted non-interest revenue growth in the second quarter of 9% as compared to the quarterly average in 2004. We also achieved revenue growth in our loan processing services businesses, within residential origination services, and in our ORG and BPO segments.

Partially offsetting these positive trends in revenues are declines in our VA servicing unit, reflecting a sharply reduced number of properties, and the absence in 2005 of the 2.9 million of fees we earned from our REALServicing platform in the second quarter of 2004.

As depicted on slide six, non-interest expense amounted to $52.1 million in the second quarter of 2005 as compared to $51.7 million in the first quarter, and quarterly averages of $48.2 million and $39.2 million in 2004 and 2003 respectively. To some degree, this increase in expenses reflects the need to establish capacity in our loan origination processing and due diligence operations to meet customer requirements in advance of recognizing incremental revenue or earnings from those operations.

I would like to note two significant factors in our expense increases during 2005. First, our Chicago due diligence operation, which we purchased at the end of 2004, incurred approximately $3.8 million of expenses thus far this year, although it is already achieving a break-even contribution margin. We expect our margins to increase over time as this operation grows and we’re able to leverage our global resources. And second, expenses in ORG and BPO rose in the first half of this year by approximately $2.6 million as compared to the first half of last year. Ron and Bob will provide further information on our second quarter earnings later in this call.

As we previously announced, we completed the sale of our U.S. deposits on June 30th, and have turned in the thrift charter of Ocwen Federal Bank, which has been our principal operating subsidiary. All of the remaining assets and liabilities of the bank have been transferred to Ocwen Loan Servicing LLC, a new subsidiary licensed in all 50 states, as well as the District of Columbia and Puerto Rico, to engage in all of the core businesses that we historically conducted in the bank. This initiative positions us to grow our servicing business in the coming months, although we will continue to maintain a conservative stance with respect to the pricing we encounter in the market. This transition entailed a significant effort throughout the organization in order to convert our operations from a bank to a non-bank platform while ensuring that this change was seamless to our customers. I also want to acknowledge the efforts of our team in accomplishing this goal.

I also want to share with you our plans to narrow our business focus. As shown on slide seven, we are focused on being a leading provider of process solutions to the loan industry. We enable our clients to achieve their goals by leveraging our superior processes, innovative technology, and high quality cost-effective global resources. We make our clients worth more through our servicing and loan origination processing services. We are well recognized for our ability to mitigate our clients’ losses on the loans that we service. Our loan origination services allow our customers access to low-cost transaction -- to low transaction processing costs and economies of scale usually attainable only by the largest origination firms. We are able to achieve lower costs by leveraging our technology infrastructure and our access to high quality, low cost global labor. We are also able to offer even small originators the ability to securitize their mortgage loans, further enhancing the value of their production.

Our revised segments, which we introduced in the first quarter this year, are reflective of this approach. As shown on slide eight, our five core business segments can be aligned within our two areas of focus -- servicing and loan processing services. In servicing, our residential and commercial segments, as well as Ocwen Recovery Group, enable clients to maximize the performance of their assets. Our Residential Origination Services and Business Process Outsourcing segments offer a wide range of origination solutions. We believe that there is significant demand in the marketplace for these product offerings, and have focused our sales and marketing efforts on servicing and residential origination services.

Before turning the call over to my colleagues, I also want to note that, beginning last January, we also officially closed our non-core affordable housing and commercial asset segments, and are now including the results of managing the remaining non-core assets in the corporate sector, and Bob will cover the corporate segment later in this call.

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

Thank you, Bill. My remarks today will cover our five core business segments -- Residential Servicing, Residential Origination Services, Commercial Servicing, Ocwen Recovery Group, and Business Process Outsourcing. In the aggregate, the pre-tax earnings of our core businesses were $5.2 million in the second quarter of this year, which includes approximately $900,000 of additional overhead allocation as compared to 2004, because we no longer allocate these costs to the closed non-core businesses.

As graphed on slide nine, after adjusting 2005 results to eliminate this cost, the core businesses would have reported pre-tax income of $6.1 million in the second quarter as compared to the quarterly averages of 9 million and 8.2 million in 2004 and 2003 respectively. Comparing year-over-year, these core businesses generated 12.9 million in pre-tax income in quarter two 2004, a difference of $7.7 million. Three primary factors contributed to this reduction. First, our Q2 2004 results included 2.9 million of one-time REALServicing fees. Second, the contribution from our servicing for the U.S. Veteran’s Administration has declined due to reduced transaction volumes. Third, our sub-prime finance group’s contribution declined by $1.6 million primarily due to reduced cash proceeds from our sub-prime residual trading portfolio.

As reflected on slide 10, the Residential Servicing segment reported 2.6 million in pre-tax income in the second quarter of 2005 as compared to an average of 4.2 million per quarter in 2004, a 38% decline. This decrease is primarily due to an increase in the percentage amortization of PMSRs and an increase in overhead allocations, primarily due to the fact that we no longer allocate these costs to the closed non-core business loans.

Net revenues in the Residential Servicing segment were 29.2 million in the second quarter of 2005, basically flat when compared to our 2004 quarterly average revenue. However, examining the revenue contribution from the individual business units provide some additional insight into the segment’s results. Loan Servicing’s second quarter 2005 net revenue was 24 million, a 10% improvement over the 2004 quarterly average. The VA servicing unit’s second quarter 2005 revenue dropped 30% over the 2004 quarterly average, primarily due to the reduced transaction volumes. And as I said earlier REALServicing’s revenue is down primarily due to the absence of one-time revenue reported at 2004.

Slide 11 illustrates the continuing improvement over 2004 results in the residential loan servicing portion of our Residential Servicing segment. Loan Servicing achieved 5.3 million in contribution margin in the second quarter of 2005 versus an average of 3.9 million per quarter in 2004. This improvement is the net result of the 10% improvement from second quarter 2005 revenue over the 2004 quarterly average, partially offset by a 4% increase in direct costs and charges.

As shown on slide 12, our servicing portfolio’s unpaid principal balance at quarter-end was 38.7 billion, a 12% increase from the December 31st, 2004 balance of 34.5 billion. As of June 30th, 2005, we were the servicer for 347,000 loans as compared to 320,000 loans at year-end 2004. Our balance of mortgage servicing ranked (ph) at June 30th, 2005 was 133 million, a slight increase from our December 31, 2004 balance of 132 million. This increase represents acquisitions of 51 million, offset by amortization of 50 million.

Slide 13 shows the trend in prepayment speeds over the past 10 quarters. As you can see, prepayment speeds at 40% in the second quarter of 2005 continue to remain below their 2004 high of 44%. We remain cautiously optimistic about prepayment speeds over the remainder of 2005. While we would have preferred to see prepayment speeds continue to decline, we were not surprised by the increase in prepayment speeds in the second quarter over the first quarter, as the first quarter of the year typically reflects reduced prepayments.

Slide 14 highlights the impact of interest rates on our float earnings. Despite the fact that float balances are approximately 5 times greater than their 2001 balance, the interest earned on float balances has only increased 3 times. This is due to the significant decrease in short-term interest rates over the period. Put another way, had rates remained constant since 2001, we would have earned 39 million of annualized float income in 2005 as compared to the $26 million estimate shown on this slide.

Fortunately, the recent increases by the Federal Reserve Board of 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.

Slide 15 shows the Residential Origination services segment’s second quarter 2005 pre-tax income of $1.7 million versus the 2004 average of 3.4 million and the first quarter 2005 pre-tax income of 2.8 million. The decline is primarily due to the reduced contribution from our sub-prime finance group, and the decline in earnings of Ocwen Realty Advisors. As I indicated earlier, the VA program’s transaction volumes have reduced significantly, and the impact of this reduction is affecting ORA’s results.

Turning to slide 16, on a more positive note, despite the fall-off by ORA, the Residential Origination Services segment’s servicing and vendor management fees increased to $12.9 million in the second quarter of 2005, a 25% increase over the 2004 average, and a 6% increase over the first quarter of 2005 results. One of the primary drivers behind this positive trend is our new mortgage due diligence services group. We are pleased with the progress that this group has made in its first six months of operations, recording $4 million of revenue and $200,000 of contribution before overhead. We are optimistic that this operation, combined with our existing origination services capabilities, will provide meaningful growth opportunities in the future. As we continue to grow this business, we anticipate leveraging our global resources to improve our cost structure, which should result in a significant margin improvement.

Moving on to slide 17, our Commercial Servicing business reported pre-tax income of $300,000 in the second quarter of 2005, a slight improvement over the small loss in 2004, but a significant improvement over the 2003 results. In the second quarter of 2005, Commercial Servicing reported 4.7 million in revenue, an 11% improvement over the 2004 quarterly average revenue. In 2005, we will continue to grow top line revenue while remaining focused on maintaining control over expenses.

As reflected on slide 18, our Business Process Outsourcing segment reported pre-tax income of $300,000 for the second quarter of 2005 versus the 2004 average of 600,000. This decrease is a direct result of increased expenses in this segment. We continue to invest in this business, including improving our value proposition to our customers, and our sales and marketing activities. We believe that we are beginning to see the results of these investments.

BPO’s second quarter revenue of $2.8 million represents a 20% increase over our 2004 average quarterly revenue. As shown on slide 19, Ocwen Recovery Group, our unsecured collections segment, posted pre-tax income of $200,000 in the second quarter of 2005 as compared to a quarterly average of $1 million during 2004. Despite an increase of 8% in revenue in the first half of 2005 as compared to the first half of last year, pre-tax income has declined. This reflects a reduction in revenues from our aging proprietary asset portfolio, which yielded high margins, and increased staffing costs as we built capacity in this business. Although we are disappointed in these results, we are starting to see improvements in our offshore collection capabilities, which should, over time, substantially reduce our costs as a percentage of collections.

In summary, I am pleased with the growth we saw in top line revenue in our core segments, and the results of our mortgage due diligence services business. I remain confident that we can grow the Ocwen Recovery Group and Business Process Outsourcing segments as we continue to invest in these businesses.

Finally, as a means to further improve our bottom line, we have taken recent steps to improve our cost structure in many of the core business units, including Residential Servicing and BPO. We have also reduced our ongoing cost structure in some of the support groups, such as sales and marketing.

Thank you, everyone. I would now like to turn the call back over to Bob Leist.

Thank you, Ron.

I would like to focus on three areas this afternoon -- the operating results of our corporate segment, including the status of our remaining non-core assets, changes to our balance sheet reporting in the wake of debanking, and our leverage and liquidity position subsequent to the completion of debanking effective June 30th.

Let me begin the discussion of the operating results of our corporate segment with a definition. The corporate segment consists of any unallocated net interest income or expense, the results of business activities that are not individually significant, and certain general corporate expense and income items. As shown on slide 20, for the second quarter of 2005, the corporate segment reported break-even results as compared to a pre-tax loss of 3.5 million in the first quarter, and quarterly averages of 600,000 and 3.2 million in 2004 and 2003 respectively.

Corporate pre-tax income in the second quarter includes the following -- the 1.75 million pre-tax gain on the sale of our deposits, $1.2 million of net interest expense, income of 600,000 related to interest earned on our income tax receivables, and costs associated with our debanking initiative of $500,000. I also want to note that, in the aggregate, the remaining non-core and other small business units included in the corporate segment posted a break-even result. There were no valuation reserves for non-core assets required in the second quarter.

The interest expense in corporate represents both the interest cost of carrying our corporate assets such as the income tax receivable and affordable housing receivables, and also includes a portion of the interest on the 3.25% contingent convertible senior unsecured notes that we issued in July of 2004. As we did for the past two quarters, we decided to retain this cost in the corporate segment rather than allocate it to the business units. We felt that this has been appropriate because the notes were issued to accumulate cash in preparation for debanking, rather than to fund current business activities. Now that debanking has been completed and cash balances are more reflective of operating requirements, we will begin to allocate these costs to the core businesses.

As graphed on slide 21, as of June 30th, our remaining non-core assets amounted to $22 million. Three assets in affordable housing property, which consists both of the property value and a loan to the property, and two commercial real estate assets comprised $18 million, or 79% of the remaining balance. In July, we sold a portion of one of these three assets, the real estate partnership, for a gain of approximately $1.8 million, and we expect the remaining two large assets to close prior to the end of the year.

As Bill mentioned earlier, we completed our debanking initiative during the second quarter. As a result, we’ve begun to reflect changes in our financial reporting. For the second quarter, the debanking initiative, as well as changes in our overall cash management practices, resulted in the creation of a new caption in the liability section of our balance sheet, servicer liabilities. In brief, this caption represents amounts we have collected, primarily from borrowers, that will either be remitted to the off-balance sheet custodial accounts, paid directly to the investment trust, or refunded to borrowers. Previously, we had included some of these balances within escrow deposits, while others were reflected as a reduction of our cash balances. We have restated our December balance sheet in today’s earnings release to reflect this change on a comparable basis.

As shown on slide 22, we had $310 million of cash as of June 30th as compared to 543 million at December 31st of last year. With the completion of debanking, we removed from our balance sheet $409 million of deposits and escrow deposits that were outstanding as of December 31st last year, and increased our non-deposit liabilities by $92 million. Ensuring that we maintain adequate borrowing capacity was another objective of the debanking process. As of June 30th, in addition to our long-term debt, our three principal credit facilities had an aggregate borrowing capacity of $615 million, of which 301 million was unutilized and available. At this time, we believe we have adequate liquidity and credit capacity to meet our daily operating cash requirements.

Before closing, I also want to note that we have received notification from the Joint Committee On Taxation of the U.S. Congress that our income tax receivables claims have been officially approved. We therefore expect that we will receive the outstanding receivable balance of $64.3 million, inclusive of accrued interest of $7.8 million, in the relatively near future.

I would now like to open the call up to questions.

Thank you.

[OPERATOR INSTRUCTIONS.]

Josh Elving, Piper Jaffray.

Hi, good afternoon.

A Quick question regarding the Residential Origination Services business line. With regard to the sub-prime residuals and the lower contribution from those residuals, was that due to more of a run-off of some of those residuals, or was there a charge in there, or how do we look at that, going forward?

There was no charge, per se. It is a portfolio that, clearly as time goes on, the underlying mortgages are paying down, and, at certain points, there are releases of cash reserves. It is a mark to market security, so it is subject to kind of fluctuations in market price, depending on market conditions. The bottom line is, is last year, due to some distributions of cash on certain pieces of it, the cash flow was very high, the yield on the investment was a little over 30% this year. So far, the yield on the investment had been a little over 20%. So, it’s still a very high earning asset, but we don’t necessarily expect it to earn the 30% on an ongoing basis.

So, is the current run rate in that pre-tax line?

The best we can tell, again, is because it’s subject to mark to market and fluctuations in prepayment speeds and losses on the underlying collateral, but the current -- the first half of the year is probably more reflective of where it would be on a go-forward basis.

OK, so if the first quarter was 2.8 million and the second quarter was 1.7, somewhere in between there might be a reasonable expectation, or is it closer to the second quarter?

I want to check the numbers you just gave us.

Well, it’s just a fairly big difference.

Yes, it should be closer probably to the second.

OK, that all right.

Then with regard to the servicing segment, can you tell us what amortization expense was in the quarter?

Hold on one second.

And also what percentage of the unpaid balance was owned versus sub-servicing?

[Inaudible.] Do it with the first -- I know it off the top of my head for the first half, but I don’t know for the quarter.

Yes. For the first half, it was approximately 50 million.

We were amortized -- on an annual basis, if you had 133 million at the beginning of the year, we would have amortized 100 million over the period of the year at a run rate.

OK, so flattish with the first quarter, because I think the first quarter was 25.1?

Yes, it would be very -- yes, it would be flat.

And your second question was?

With regards to the unpaid balance, or the mortgage servicing portfolio, what was the breakout between owned and sub-serviced, or ballpark?

I don’t have the exact -- it was approximately 87% owned and 13% sub-serviced.

One good thing also starting, I believe, next quarter, Bob, we’re going to be showing PMSR separately [inaudible].

Certainly by year-end when we’re looking at third quarter, we’re sort of understanding the disclosure implications are changing mid-year, but we do intend, now that we’re debanking, to break that out.

Right, OK. And then, as far as going forward, do you have any kind of an update as to, now that you have gone through the debanking process, what kind of a growth outlook you might have, or what your ability to grow that servicing portfolio might be? Do you have any goals, or can you describe kind of what you could do potentially?

Well, we certainly have the resources to grow it faster than we have in the last several years, in terms of financial resources. From quarter to quarter, you do see different pricing assumptions that competitors make with regard to things such as what the yield curve is going to look like, or not -- I mean, how much you’re going to price into the yield curve, and elements of that nature. So, pricing does fluctuate from quarter to quarter, so it’s difficult for us to say precisely what that growth rate would be over the period of the year. We’re not -- generally, we start the year off and try to gain something like, if we could, around a 15% growth rate in the business. We obviously didn’t achieve that last year with the high run-off rate and the pricing pressure. But if we had our druthers, we would like to do it at around that range.

So, a 15% growth in, like, pre-tax, or in unpaid balance?

No, UPB.

John Hecht of JMP Securities.

Hey, guys. Hey, Bob, could you repeat the tax information you gave at the end of the call?

On the receivables, sure. We have a total amount of what we expect to receive of $64.3 million. That’s inclusive of the accrued interest, which amounted to 7.8.

Remind me of that. How much of this have you already recognized, or do you intend to recognize in the future?

It has all been recognized. In other words, it’s sitting on my -- the interest has run through our income statement, and the receivable is sitting on my books as a receivable. It is not an earnings event, it’s a cash event.

OK. In terms of prepayment rates, you gave a little bit of commentary on you’re feeling a little bit optimistic for the remaining part of the year. Sort of two thoughts around that. Did you see any trends during the quarter that gave you some feelings with respect to the trends, or are there other trends you’re looking at in the marketplace, going forward, that gave you more comfort in that?

And second, what kind of magnitude do you think this might be on prepayment rates?

Well, I don’t know that we can give you the magnitude. I guess what we are basing some of that on is, as the Fed continued to increase short-term rates, I mean, we believe it just continued to put pressure on sub-prime rates, which really haven’t increased at all, and, at some point, the margins will be squeezed to the point where it will have to be an increase in sub-prime rates, which should result in a slowdown on prepayment speeds. Of course, there has been some innovations in the market, such as the I/O product, which has been -- allowed the market to continue to market a lower payment option to borrowers even in a stable rate environment. But we believe as the short-term rates continue to creep up, that there -- eventually, there will have to be an increase in the sub-prime rates, which should result in a decrease in prepayment speeds.

If you look at the -- I mean, the creativity of figuring out how to basically lower payments has been quite impressive on the part of the originators. You look at the quality of the product that’s being originated today versus a year or two ago. There’s -- it’s difficult to imagine that you could -- there’s much room left in being able to structure products that investors would actually continue to purchase. But having said that, I mean, one cannot underestimate the creativity on that side. I think the other issue is really what’s really driving sub-prime, I believe, is far more housing prices, which obviously have a second order effect with respect to interest rates. And obviously, the re-fi that’s occurring is a function of people extracting equity out of increasing value of their homes. So, the trees don’t grow to the sky forever in term of that, for that -- from that perspective, and it’s certainly to reduce payments. Unless you start paying the borrower to take the loan, the monthly interest payment, is -- there’s not a lot more you can do to increase affordability.

OK. And then, last question is to the new liability item on your balance sheet is servicer liabilities. What -- how do we look at that in terms of offset -- offsetting assets, or how is it collateralized? And what are the kind of rates of payment, or what type of asset should we compare those to, to determine where the cost of those might go over time?

Well, let’s see. It’s not a collateralized liability, per se. A lot of it is simply -- refers to cash, both cleared and uncleared cash sitting on my books, right, that I’ve received in that, on some terms, is either very rapidly, in the case of a collection account, or somewhat longer in case of other items, items that move out of the door. I’m not sure I’m answering your question. It’s not an interest-bearing liability. It’s simply cash movement that’s going to move out.

OK, so it’s entered your system, but you owe it to the trusts at some point?

Well, in some cases, it hasn’t even entered. It could be uncleared -- a large component of it is uncleared balances. It’s just -- it’s a future liability when the cash actually clears. So, keep in mind, we don’t have $300 million of cash in bank. It is -- and there’s no change from what it was before, but just with the banking and looking at how the business is operating, it made more sense to reflect it.

It made more sense to reflect it grossed up, to some degree. And part of it, as I mentioned in my comments earlier, was -- has always been in liabilities. It’s just been a component of what we used to refer to as escrow, and, with the advent of debanking, obviously, we looked and said, “What’s legally escrow,” and we’ve moved all the off-books. But that which was escrow-like, but not really escrow, has remained behind. So, it’s a combination of things. But there is no -- as I said, there’s no interest expense associated with it, or anything like that. It’s just trying to give a gross -- a more accurate picture of how all these pieces move.

Richard Shane with Jefferies.

Good afternoon, guys. Three questions, actually.

The first is could you just give us the detail on the compensating interest for the quarter, please?

We don’t have that available at our fingertips. I’m sorry.

OK. Second question, Bill, you had -- in response to Josh’s question about asset growth or portfolio growth, had sort of set a historical 15% growth benchmark. How quickly, given the debanking process, do you think you can go back to some sort of positive growth? And when you set that 15% benchmark, is that in terms of unpaid principal balances, or is that in terms of the asset value of the MSRs? And the reason I make that distinction is because it seems like there has been some shift over the last couple of quarters to more third-party servicing, and I’m wondering if, now that you have more capital availability, you’ll go back to growing the owned portfolio? If you could put that 15% in some context of that question.

We really look at the 15% in terms of UPB. The -- we tend to be more competitive in pricing today on sub-servicing than we are on servicing, i.e. our view of -- our prepayment assumption view is more conservative, perhaps, than some of our competitors would have. The only difference between servicing and sub-servicing, in terms of your pricing algorithm, would really be prepayment speeds.

We clearly are assuming prepayments speeds much higher than some of the other competitors, because we are extremely competitive on a sub-servicing basis, and we are less so on a servicing basis. But again, these are -- as you go forward, and particularly at an inflection point, these tend to be fairly assumption-driven.

And so, you’re saying that, as your prepayment assumptions converge with sort of consentive prepayment assumptions, that you will see that shift to sub-servicing move back to sort of an owned portfolio?

Right. If you look at the market, there’s a couple services that people use for pricing. And if you were to see our historical -- if you look at our historical prepays, believe it or not, for 2001, 2002, 2003, 2004, with minor differences, they are right overlaying, even on a month-by-month from an aged portfolio performance perspective. Those numbers are significantly higher than the external services that other people may be using. That obviously is a -- if we were to go to those services, we would win almost every bid. But again, we have to make a judgment, and where we are -- where we’re -- even though we have the financial resources to go out and buy more product, we don’t quite see our way clear yet to doing that. In some cases, it’s because our competitors have a natural hedge in terms of their origination business. That actually -- they’re less sensitive to that prepayment assumption than we would be because they are, in fact, an originator. I was saying the other day good news and bad news. Our old competitors really aren’t as effective as they used to be. The bad new is now we have bigger competitors who, in fact, are originators on the other side. So, in a period of uncertainty over prepayment, they would probably be more aggressive on servicing as opposed to sub-servicing, than we would be.

I guess one of the things we’re all trying to sort of figure out here is how much of it is a price sensitivity issue versus a capital--?

It’s a price-sensitive -- today, it is almost exclusively a price sensitivity issue today.

Right. Post de-thrusting (ph), it’s really all around price sensitivity, not around financial resources.

And it purely revolves around the assumption of PMSR speeds, or prepayment speeds, and our primary competitors being originators today do not -- are less sensitive to that prepayment assumption because they have that natural hedge on the origination side.

And then, last question, and this is less applicable to you, but I think you have a lot of people who were interested in the sector in general. If you could give some sense in terms of what you’re seeing for credit performance at this point, I think you have some very interesting perspective there. Are you seeing any deterioration? Are you seeing things that concern you? You’ve talked a little bit about products that increase affordability, but are you seeing that lead to any troubling patterns in terms of credit?

I mean, Ron should chime in here, as well. I mean, you don’t -- our delinquency rates are as good as they’ve ever been. Looking at delinquency, though, in this market I think is an irrelevancy because so much of it is -- people just refinance their way out of the problem. As home prices are going up, even though they can’t pay, they can always get a new loan and extract more cash out of the property.

So, it’s sort of like you’ve changed the risk from a normal credit risk that tends to be more like a high incidence of -- high probability but low severity -- into more of a situation where it’s more like a cat risk, where, in fact, whenever the music stops and home prices start going up -- stop going up, you’re going to have a higher -- a much -- a very rapid spike in delinquency rates, because people can’t finance their way out of their problem. Natural delinquency in the industry is probably a multiple, at least, of what you see in the numbers today because of that refinancing safety valve, if you will.

So, that -- our biggest issue is that, in and of itself, higher delinquencies does not have a -- because of our cost structure, does not have an extremely -- does not have an adverse impact on our earnings. I think it’s more of an issue of a global issue that the whole lending industry faces, is what’s going to happen, in fact, when more people start losing their homes. That’s something that’s -- everybody needs to think about in terms of that exposure. But rising delinquency rates in and of themselves are not a negative impact for our income line.

All right. And as Bill said, we are not seeing a rise in delinquencies. In fact, as Bill mentioned, in some -- you look at it in certain ways, they’re as low as they’ve been. We’ve also gotten a number of questions on how is the I/O product been performing. It’s still very early in the lifecycle of that product but, generally speaking, most of the product that was done early on especially was higher credit quality borrowers that were able to get that product, at least initially, so it’s actually performing quite well at this point. Now clearly, at some point, most of them are ARMs, and the ARM will adjust, and, eventually, the I/O period will run out. That could be a different story down the road, but in the early cycle that, it is actually performing quite well, but you would somewhat expect that because it’s higher credit quality borrowers who have gotten that product.

I mean, even before they did most of the I/O product and everything else, if you looked at the teased rate essentially on the plain vanilla sub-prime product, you would probably have the product go from somewhere around, say, 7% up to close to 10% at its first reset date. Given that most people are fairly fully borrowed in terms of their debt to income ratio, going up almost 40 to 50% in terms of payment shock is really quite dramatic. And that’s why, quite frankly, you see prepayments of some 40% because what happens is, is when you hit the reset date of the 24 months, the spike goes to 70% prepayment speed. So, it’s -- even before these new products, this product had a high level of payment shock built into it. And so, again, I think that, really, the issue on delinquency is it’s going to be -- I don’t think you’re going to see delinquency drift up a little bit when it drifts up. I think it could go up fairly rapidly as people are unable to re-fi.

Brian Charles (ph) with Friedman, Billings & Ramsey.

Hi, good afternoon.

I missed a bit of your discussion toward the end of your statements in which you discussed your liquidity. Could you go over that again, or give a little color on that?

Yes, sure. I guess what I pointed out was two things. One was just what our cash balances are right from our balance sheet, with $310 million of cash at June 30 as opposed to 543 at December. In terms of where did that move, we also with the advent of debanking took off the $409 million of deposits and escrow deposit liabilities that we had at December 31. We’ve increased our non-deposit liabilities by about 92 million.

The other thing I’d point out is, putting aside our long-term debt, we have three principal credit facilities. In the aggregate, those have a borrowing capacity of $615 million, of which 301 million remains unutilized as of June 30.

OK. And finally, when thinking about cash, is that the cash you have on the balance sheet of 310 at June, is that there to substantially offset what you’re labeling now as servicing liabilities? And I ask just to get a sense of just to what extent that cash is restricted, or at least it’s set aside, and not easily utilized for other purposes.

Well, it’s not formally restricted. A lot of it is going to move – will move pretty quickly. And again, in any given period, that number is going to vary. But certainly, a significant portion of it will move to collection accounts very rapidly.

OK. And I’m sorry, let me ask one more question.

Let’s try it this way, Bob, fairly easy. If you know it’s on June 30th, what’s the difference between cash on the balance sheet and cash in bank?

I don’t know the difference between what’s actually clear in the bank at June 30. I don’t know. I do know collection balances are about 250 out of the servicer liabilities we’re talking about, so if that gives you help in terms of the [inaudible] to book balance.

Most of that is uncleared cash.

OK. And one last question. If I’m thinking about this correctly going forward, in looking at the different line items of income on the servicing operation, one interest on custodial accounts, is this new servicer liabilities line item something I could try to link that sort of income from? I mean, I know some of this cash isn’t clear, but is there a certain extent to which there is float you’re earning that’s showing up in this line item?

No. An entirely different line item.

No, not at all. In fact -- in other words, a lot of what’s in servicer liability will move to the cap and begin to earn earnings once it gets there.

Right. It’s -- think of it as purely -- I mean, it’s purely an accounting change. It’s uncleared cash, if you will, with regard to that. So, it wouldn’t even -- it’s not interest bearing. It’s doesn’t pay -- you don’t pay interest on it. There’s nothing to do with interest with respect to that account. It’s just unclear -- think of Ocwen as a massive check-cashing machine. We have $100 million -- or 75 to $100 million of cash a day. It takes a couple days to clear cash. It was always there. It just happens to be the way, when we debank, we, in fact, are accounting for the same thing. In other words, there’s a couple -- 100 to $200 million in there that’s basically just uncleared cash in other accounts, OK? That has -- nothing’s changed there. The income on float relates to -- it’s the float accounts that we’re able -- that we hold for people’s money when they pay for their principal, their interest, or they do a prepayment, and that’s what you’re looking at that other account where we’re bearing interest.

And really, it’s not -- we don’t really hold them. They’re held off balance sheet at a large commercial bank, but we are entitled to the earnings off of those -- any short-term earnings that are off of those accounts.

There are no further questions.

Thank you very much, everyone. Have a great afternoon. Good-bye.

This will conclude today’s conference call. You may now disconnect.