Onity Group Inc (ONIT) 2006 Q4 法說會逐字稿

Good morning and welcome to the Ocwen fourth quarter and year-end's earnings for 2006 conference call. At this time all participants are in are listen-only mode. After the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). Today's conference call is being recorded and if you have any objections you may disconnect at this time. I would now like to turn the call over to Mr. David Gunter, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Thank you. Good morning, 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, and then calendar of events, and click here to view conference calls. Then under conference calls, fourth quarter year-end 2006 earnings, select 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 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 risks disclosure statement in today's earnings release as well as the Company's filings with the Securities and Exchange Commission, including Ocwen's 2005 Form 10-K. If you would like to receive our news releases, SEC filings, and other materials via e-mail, please contact Linda Ludwig at Linda.Ludwig@Ocwen.com.

As indicated on slide three, joining me for today's presentation are Bill Erbey, Chairman and CEO of Ocwen, and Ron Faris, President. This presentation will be followed by a question-and-answer period during which we will take questions from those of you attending the conference by telephone. Without further delay, I will now turn the call over to Bill Erbey. Bill?

Thank you, Dave. Thanks to all of you for attending Ocwen's fourth quarter conference call. I would like to cover three topics in my remarks today. First, an overview of our fourth quarter and 2006 earnings. Second, our efforts to narrow the focus of our operating segments to those activities which will yield acceptable returns on capital. And third, our superior loss mitigation capabilities and our goal to maximize the value of those capabilities.

We are pleased with our fourth quarter results. As shown on slide four, pretax income for the fourth quarter of 2006 was $14.9 million, which includes $6.9 million of losses related to our loan origination operation, which we have decided to close. Pretax income increased by $12.4 million, or 486%, over the fourth quarter of 2005, which similarly included $6.3 million of losses related to our loan origination operation and was well ahead of the quarterly averages for the past two years.

As shown on slide five, our 2006 pretax income was $8.1 million, which includes $12.4 million of losses related to our loan origination operation. This reflects an increase of $59.2 million, or 284%, over 2005. This growth reflects substantial progress in achieving our goal of increasing revenues while containing cost. Slide six illustrates our year-over-year revenue growth, as 2006 revenues totaled $431.7 million as compared to $375.4 million in 2005. This increase of $56.3 million, or 15%, was primarily the result of a significant increase in residential servicing revenues.

In addition to being pleased with our year-over-year revenue growth, we were particularly encouraged by the fact that our fourth quarter revenues increased by $19 million, or 20%, over the fourth quarter of 2005. Operating expenses as depicted on slide seven decreased by $1.8 million from 2005 despite an increase of $14.1 million in amortization of servicing rights. As shown on slide eight, other income and expense reflected net expense of $4.3 million in 2006 as compared to net expense of $5.4 million in 2005.

As we mentioned above and in our press release this morning, we are narrowing the scope of our Residential Origination Services segment. We have decided to close our loan origination operation, which reported pretax losses of $12.3 million and $6.9 million respectively for the year and quarter ended December 31, 2006. We believe that the remaining fee-based processing activities in the segment, which generated a pretax contribution of $15.7 million in 2006, are synergistic with our servicing operations and have the additional benefit of requiring limited capital.

We have continued to evaluate our other segments and narrow our focus to those activities which yield acceptable returns. In that regard, during 2006 we merged our Business Process Outsourcing segment into our Residential Origination Services segment. As we move into 2007, we are making further changes in our operations, having decided to close our domestic Commercial Servicing operations while retaining our domestic Commercial Special Servicing and asset management operations as well as our international servicing operations. As a result, we have included our Commercial Servicing segment in corporate consistent with our policy of classifying operations that are not individually significant in that segment.

In Ocwen Recovery Group, our focus during 2005 and 2006 has been on cost reduction and enhancing the execution capabilities of our global workforce and not on growing revenue. The lack of pretax income has been the result of low volume levels, resulting in us being unable to absorb the fixed cost. Unit margins have, however, increased sharply. Having achieved our unit cost goal, our focus in 2007 will be top line revenue growth.

While we will continue to focus on organic growth in this segment, we will also selectively consider acquisition opportunities. We believe that narrowing the focus of our operating segments is consistent with our goals of growing revenues while containing operating costs. At the same time, it will allow us to further optimize our use of capital.

I would now like to discuss our superior loss mitigation capabilities. At Ocwen we take great pride in our loss mitigation capabilities. Loss mitigation will become even more important in the current environment of rising delinquencies, which we believe provides us with a competitive advantage over other subprime servicers. We're very proactive in developing best practices for loss mitigation and embedding them in our technology. Our success relates to our ability to resolve loans pre-foreclosure and keep people in their homes.

One illustration of this, as demonstrated on slide nine, is the continued improvement in our pre-foreclosure resolution rate, which has improved each year since 2003, moving from 80% in 2005 to 84% in 2006. We further believe that the quality of our servicing and our superior loss mitigation capabilities increased the value of the subordinate and residual securities of the securitizations that we service. We are currently evaluating capital efficient strategies to capture that value.

As I mentioned our last call, one potential strategy being explored is to create a special purpose investment vehicle in conjunction with third-party investors to acquire mortgage servicing rights and related mortgage-backed security assets and hedge these with default protection. In this manner, we believe that our superior loss mitigation capabilities -- in this manner, we benefit from our superior loss mitigation capabilities. This vehicle would be much like our current investment in mortgage-backed assets except that the majority of the investment will be from other investors. This initiative would enable us to, one, realize value for the quality of our servicing in the form of incentive servicing fees. And, two, enhance our competitive position by becoming a client of, in addition to being a vendor to, Wall Street.

In summary, we are pleased with our financial results for 2006 and our ability to grow revenues while containing operating costs. We continue our efforts to narrow the focus of our operating segments to those activities which yield acceptable returns on capital and are evaluating capital efficient strategies to maximize the value of our servicing and superior loss mitigation capabilities. I would now like to turn the call over to our President, Ron Faris.

Thank you Bill. My remarks today will cover our three core business segments -- Residential Servicing, Ocwen Recovery Group, and Residential Origination Services. As shown on slide 10, the pretax earnings of our core businesses were $85.8 million in 2006, a 383% increase over the 2005 results of $17.8 million. These results reflect the continued strong performance of our Residential Servicing segment and the improved performance from our Residential Origination Services segment, offset by a small loss in the Ocwen Recovery Group segment.

Turning to slide of 11, the Residential Servicing segment recorded $80.5 million in pretax income in 2006 as compared to the 2005 results of $21.7 million and the 2004 results of $16.6 million. I am very pleased with the performance of the Residential Servicing segment in 2006. Our goal was to increase revenue while maintaining control of our cost. We succeeded on both fronts. Net revenues in the Residential Servicing segment were $343.6 million in 2006, a 23% improvement over our 2005 revenue of $279.6 million.

On the expense side, we recorded operating expenses of $201.3 million in 2006, a 2% reduction from the $205 million of operating expenses that we reported in 2005. We achieved this reduction despite an increase in MSR amortization and compensating interest expense of $5.1 million. Slide 12 illustrates the continuing improvement in the loan servicing portion of our Residential Servicing segment. Loan servicing achieved $85.7 million in contribution margin in 2006. This represents a 151% improvement over the 2005 contribution margin of $34.1 million. This improvement is the result of the increase in revenues while maintaining control of our expenses.

Our servicing fee revenue increased due to growth in the portfolio coupled with reduced runoff of the existing portfolio due to slower prepayments fees. Float income also increased due to a combination of increases in short-term interest rates and growth of the float balances, which results from the growth of the servicing portfolio. This growth also resulted in an increase in the cost of financing our servicing advances and mortgage servicing rights as reflected by the increase in interest expense, which is included in other income expense.

On the expense side, our amortization expense and compensating interest expense also benefited from the slower prepayment speeds. Our $179.2 million MSR balance as of year-end 2006 represents a 21% increase from the year-end 2005 balance of $148.7 million. While the MSR balance increased by 21%, our 2006 amortization expense of $110.5 million represents an increase of only 14% over the 2005 expense of $96.7 million.

Our 2006 compensating interest expense at $13.5 million also compares favorably to the 2005 expense of $22.2 million. This reduction is a direct result of the slowdown in prepayment speeds in 2006 as compared to 2005. We also benefited from a reduction in expenses as a result of the efficiency improvements that we implemented last year. While the average number of loans serviced grew by 25% in 2006, our 2006 compensation expense was $1.6 million, or 5% lower than 2005. This results in a lower unit cost service and improved profitability.

As shown on slide 13, our servicing portfolio's unpaid principal balance at year-end was $52.8 billion, a 24% increase from our 2005 year-end balance of $42.8 billion. As of December 31, 2006, we were the servicer for 474,000 loans as compared to 369,000 loans at year-end 2005. As I said earlier, our balance of mortgage servicing rights at year-end 2006 was $179.2 million, a 21% increase from our year-end 2005 balance of $148.7 million. In 2006, we purchased $141 billion worth of -- I'm sorry, $141 million worth of servicing rights and we amortized $110.5 million of our servicing rights.

Slide 14 shows the trend in prepayment speeds over the past several years. In 2006, prepayment speeds averaged 31%, well below the 2005 average of 38% and the 2004 average of 41%. As shown on slide 15, Ocwen Recovery Group, our unsecured collections segment, posted a pretax loss of $600,000 in 2006 as compared to the 2005 pretax loss of $700,000. Our 2006 focus for this segment has been on cost reduction and enhancing the execution capabilities of our global workforce. We believe that we have achieved these goals and are positioned for growth in 2005. We are exploring both our organic growth alternatives as well as select acquisitions of other collection agencies.

Slide 16 shows the Residential Origination Services segment's 2006 pretax income of $5.9 million versus the 2005 pretax loss of $3.2 million. In addition to the results of our startup origination operation, this segment includes our trading and investment activities as well as our fee-for-service loan processing businesses. We have decided to close our startup loan origination operation, which reported pretax losses of $6.9 million for the quarter and $12.4 million loss for all of 2006. We continue to provide our servicing customers the ability to refinance their existing loans with us.

Moving onto slide 17, in 2006 our fee-based loan processing businesses recorded revenue of $70.7 million versus $65 million and $50.9 million for 2005 and 2004 respectively. Slide 18 shows the contribution for our fee-based loan processing businesses. In 2006, these businesses recorded aggregate pretax contribution of $15.7 million, which is a 42% improvement over the 2005 pretax contribution of $11.1 million. This positive trend represents improvements in many of the components of our fee-based loan processing activities. In addition, we have recently ceased performing certain services which were unprofitable.

Overall in 2006, the Residential Origination Services segment generated pretax income of $5.9 million compared to a pretax loss of $3.2 million in 2005. This increase is the result of the improved earnings from our fee-based loan processing activities and our trading in investment activities, partially offset by higher losses in origination activities.

In summary, I am very pleased with the results of the Residential Servicing segment and the improvement in results of Residential Origination Services. I believe we have properly positioned Ocwen Recovery Group for growth in 2007. Thank you, everyone. I would now like to turn the call over to Dave Gunter.

Thank you, Ron. I would like to focus on three areas this morning -- changes in our balance sheet over the course of 2006, the operating results of our corporate segment, and our effective tax rate. Overall, our total assets grew by $155.6 million during 2006 to just over $2 billion at December 31, 2006. This growth reflects the net impact of several significant changes in the business. The single largest change is a decline of $525.6 million in our loans held for resale portfolio, primarily reflecting the securitization in 2006's large pool of loans that we had purchased for that purpose in 2005.

The remaining balance in our loan portfolio consists primarily of two components. The loans arising from our purchase and securitization activity in 2005 and 2006 and loans originated by our subprime origination operation, which as Bill mentioned earlier, we have now decided to close. Offsetting the reduction in total assets from our loan portfolio were a number of increases, most notably an increase of $35.1 million, or 24%, in mortgage servicing rights and a total increase of $300 million in servicing advances and match-funded advances.

These increases reflect the growth of our servicing portfolio that Ron covered earlier. In addition, we increased our cash and short-term investments by $40.3 million and our deferred tax asset by $153.9 million, reflecting the impact of the reversal of our valuation allowance in the second quarter as well as other changes associated with our operations. We decreased our overall liabilities by $54.9 million, reflecting a reduction of $301.9 million in our utilization of our lines of credit partially offset by an increase in our match-funded liabilities, which represent collateralized funding of servicing advances of $170.9 million.

We have also made substantial progress during 2006 in renewing and expanding our overall borrowing capacity. As of December 31, 2006, our overall borrowing capacity and lines of credit and advanced financing lines was $1.2 billion, an increase of $270 million over the end of 2005. As of year-end 2006, we had unused borrowing capacity of $341 million. Also important to note is the fact that we not only increased our overall borrowing capacity, we also expanded the assets eligible for financing on this line to include additional mortgage servicing rights coverage and various components of our receivable balances and also negotiated changes in terms to the Barclays advance facility, which increased our effective utilization of this line.

As shown on slide 17, our corporate segment recorded a pretax loss of a $5.7 million in 2006 as compared to a pretax income of $3.1 million in 2005. This segment includes the results of Commercial Servicing, our former non-core affordable housing, and discount loan businesses, as well as certain general corporate revenues and expenses, including any unallocated interest income or expense. One factor in our corporate results in 2006 is a reduction in pretax income in Commercial Servicing of $2.7 million primarily due to the absence of gains associated with the GSS Japan subsidiary, which was sold in the fourth quarter of 2005.

Our corporate pretax results also reflect an unfavorable variance primarily due to a number of one-time credits from 2005 which have no corresponding activity in 2006, including a reduction of gains on debt repurchases, which were immaterial in 2006, that amounted to $4.3 million in 2005; reversals of reserves in 2005 of $2.6 million; the absence in 2006 of interest income of $1.9 million earned in 2005 on income tax receivables which were collected in full that year; and the one-time gain of $1.8 million recognized in 2005 related to the sale of our deposits as part of our debanking in June of that year. These variances were partially offset by higher interest expenses retained in corporate in the first half in 2005 due to additional borrowings related to the debanking initiative.

I also want to touch briefly on our effective tax rate. As you recall, in the second quarter of 2006 we reported a tax benefit of $141.7 million primarily due to the reversal of $145.2 million of evaluation allowance on our deferred tax assets that we had established in prior years.

As required by accounting standards, we determine our tax expenses each quarter through the development of an estimated effective annual tax rate, with the required adjustment to that rate flowing through the current quarter. This is a complex computation made more so in 2006 by the reversal of the valuation allowance during the year. Our effective annual tax rate for the full year 2006 is 25.36%, down from our estimate of 27.5% as of September 30. This change is primarily due to the fourth quarter losses in our loan origination operation.

Before closing, I want to clarify a point regarding exposure that declining interest rates pose to our float earnings. While declining rates would of course reduce float earnings, it is important to understand that this exposure is limited to the net difference between the level of custodial balances on which we earned float and the amount of advances that we have financed during the period, as declining rates will also reduce our interest expense for that financing.

In summary, we achieved strong earnings in 2006 and ended with a strong balance sheet, as our equity to assets ratio increased from 18.7% as of December 31, 2005 to 27.8% as of December 31, 2006. I would now like to open the call up to questions.

(OPERATOR INSTRUCTIONS). Bob Napoli, Piper Jaffray.

A couple of questions. I guess first on the servicing business, I guess the big controversy is the weakening credit and subprime mortgage, the effect on your business, and try to dig into that a little bit and get your thoughts. If you look quarter over quarter, the residential servicing earnings were down, pretax earnings were down I guess about $3 million. The operating expenses jumped quite a bit from $56 million to $62 million.

And I guess maybe going into the balance sheet looking at the big increase in the match-funded liabilities and is there -- what is going on there? Have delinquencies had a significant negative effect on your business? Maybe give me some color on that. And what are the delinquencies right now, I guess those 15% at the end of the third quarter?

Ron, would you like to do that?

Okay. I would -- at this point in time, we have only seen a modest increase in delinquencies. So that I don't think has had a significant impact on operating expenses. Our servicing advances have increased somewhat through the course of the year and therefore, interest expense is up some from earlier in the year. We did, just through normal kind of activities, have some increases in some of our professional services fees as well as some losses related to some interest-rate hedging activities that we deploy. Those would be more of the drivers in the difference from the prior quarter.

So within there, Ron, you have -- how big is the hedge loss that you had in the quarter? And a lot of this data that you give out in the Qs and the Ks are very helpful. And it would be helpful if we had it when you released earnings, I guess. But what is the hedge loss in the servicing business and how high were the professional fees, if you could? I just know those can be very lumpy. A few million bucks here or there make a big difference.

This is Dave. That hedge loss is about $600,000 in the quarter.

Okay. And then professional fees?

Professional fees for that quarter are about $3.2 million. That is an increase over the prior quarter. We have had some legal items in there where we have trued up a couple of items. And then we have an increase in our servicing and origination based on a couple of unusual items that don't carry forward. And then, remember that the largest side inside operating expenses would be $2.5 million increase in the amortization.

Right.

Just trending up with UPBs and trending up with the revenue as it should.

Okay. Can you give, kind of give an updated feeling on your thoughts on the increasing delinquencies and subprime mortgage and then the positives and whether it is a net benefit to your business or not?

I can try that. Our delinquencies have not materially picked up this year at all. I think what Ron - it may be up a half of a percent. Not sure how --

Why do you think that is?

Pardon me?

Why'd you think that is when it does seem like the industry is moving up a lot more? Because your book is more aged or --

Well know I don't think it -- that would actually be negative to some extent. As you are average age goes up, obviously your delinquencies go up. And what we do run with an average portfolio that is, in fact, older than the industry -- the last time I looked at our average security was about -- our average loan was about 36 months aged. And also we run with a far lower FICO score. We have certainly made an enormous effort this year, not only in the technology front, but also in terms of adding loss mitigation personnel to deal with that effectively.

So I think our returns -- I mean, our performance has been in 2006, on a loss mitigation front, you know, quite good. And we intend to continue to pursue that. I do believe that when you look at -- and by the way, the 90-plus day delinquency rate is about 10.3% at the end of the year. When you look at overall what are the changes -- what is the environment -- what impact does the environment have on our operating cost? Well, certainly you will spend more money on loss mitigation. We, however, are still projecting that we will -- and I shouldn't say that word -- we are still intent upon being able to moderate our unit -- reduce our unit cost through additional -- continued application of technology and global resources. So we believe there is still economies to be brought out, gotten out of the system. So we are not overly concerned about that.

Obviously, one thing that does help is we happen to believe, on the other side, that prepayments, in fact, are somewhat inversely related to losses. In other words, as home prices cease to increase, obviously losses will go up in the industry as a whole, but also prepayment rates will start to decline as a result of that. When you look at our total expense structure, our prepayment -- our amortization of our PMSRs is about equal to our total operating costs. So when you look at the fact -- if we compare operating costs to that, number one, there is a fixed cost component to it. Number two, a large portion of the costs are not necessarily loss mitigation, but are on the front-end of basically boarding loans, customer relations, and all the front end administrative work associated with the loans.

So there is, one, much greater leverage on a slowdown in prepayments than there is a rise in defaults associated with that. I think that we also will probably have somewhat of an advantage as losses continue to rise simply because we have, with our technology, the ability to expand capacity very quickly. I think the industry, because of a lack of collectors, will find it very difficult if delinquencies pick up materially to actually keep pace with having a sufficient number of people to actually process the loans.

So I think on balance -- even though it is a bad thing for people and for the economy and we are certainly try to keep everybody we can in their homes, a downturn, in fact, does help the economics of our business.

What was the CPR back in your business, back in that business back in 2000. I guess the last similar environment to this maybe 2000, 2001.

I would guess, and Ron you probably know this better than I, but probably around 25%, something like that. 20 to 25%

Okay.

I am actually old enough to remember the last time there was a significant meltdown in the mortgage market. And that was like back in the 90s. And believe it or not, if homes stopped -- if homes start going down, people get trapped in the home and actually prepayment speeds do come down quite nicely. I have just been handed a piece of paper which shows that our prepaid speeds were slightly below -- really 2001, were around 30%. A little bit lower than that.

David, tax rate, GAAP tax rate you would expect for 2007. Can you give any color on that?

Sure, I can tell you that if we were to normalize 2006, our rate without the valuation allowance would have been just over 36.

And then just last question and I will cede to others, in your Origination Services business, which of those products are -- what did you shut down, what holds the most hope or potential for you? The due-diligence business had a good pick-up in the third quarter. Which of those fee-based businesses do you see the most growth potential from and have the most momentum? And what are you getting out of? You said you were going to get out of a few things --

I would say what we internally would think of as due diligence-related products are where we see probably the biggest -- the area that we would like to focus on and continue to grow. We were providing services -- what we call wholesale origination processing services to a couple of entities, which was at this point in time, was not really profitable for us. And so we have recently exited those or we will be exiting them shortly. And those were operating at losses, so that should be beneficial. And we would hope to expand in the area of services related to due diligence as well as some contract-type underwriting services that we provide, again capitalizing on our global workforce.

Thank you. And then any update on BMS? I am done. Thank you.

At this point in time, we are not able to comment on BMS. But it is with any -- other than to say that basically it is operating basically in accordance with our budget and our plan.

What effect does that have on the numbers I am looking at? Where is it at?

It varies -- it almost nonexistent because by the time you get done amortizing -- I mean it is producing a lot of cash, but by the time you get done amortizing the goodwill, etc. or the intangibles rather, it is nominal. It was $367,000 pretax. It generates EBITDA. At a corporate level, we earn about 46%, 47%. It generates EBITDA at a corporate level of $60 million -- $16 million a quarter.

$16 million per quarter and you are -- you own 40% of that?

46.

46. And is it growing, or is it kind of steady?

Right now it is kind of steady. It is very much related to the level of bankruptcies. And bankruptcies are a little bit of a lagging factor in terms of by the time they get there. So you just came off the reform act, which slowed down bankruptcies considerably, and off of some fairly good economic times. So volume -- growth there was basically somewhat in line with what we were forecast, a little bit lower than we forecast.

Rick Shane, Jefferies & Co.

Two questions. One is, Bill you made the comment that delinquencies aren't up that much. And it was sort of in the context of Bob's question of advances are up substantially. And your response is, "well, delinquencies aren't up that much." Why were advances up so much if delinquencies haven't risen?

And then the second question is you talked about sort of being at least, probably benefiting somewhat, if at least not being agnostic, to deteriorating credit. It strikes me that mailing a bill, having a customer sent back a check, and processing it is a lot cheaper than, sort of, the combat servicing you need to do as delinquencies rise. Can you, and I am sure -- I am assuming you have done this analysis internally. Can you describe to us on a per customer basis the cost associated for a current paying customer from an expense perspective versus someone who is 30 days late, someone 60 days late, someone who is 90 days late. What the unit cost to service each one of those loans looks like?

We have that. We use that in our pricing and if I told you, I would have to kill you. That is very -- Ron, maybe you could do it in relative numbers, if you would?

I guess a couple of comments. One, just to make sure we have things in perspective, and I think Bill sort of touched on this. We brought this up before. Prepayment speeds are a much bigger driver of, kind of, profitability than rising or shrinking delinquencies. So just to keep everything in perspective, prepayment speeds have a much bigger impact than delinquencies.

But that being said, more related to your question, it costs -- we tend to lump loans that are not in foreclosure into one bucket and loans that are foreclosure and beyond into another bucket. So generally, loans that are 90 days or less delinquent, we look at one way and loans that are more than 90 days delinquent we look at another way. And rough numbers, it costs about three times as much to service a loan that is in the 90-plus category versus one that is less than 90 days delinquent.

And how does the 90-day delinquent compare to loans that are current paying?

Meaning in size, numbers?

Well let's imagine there are three states of being -- someone who is current pay, who you send a bill to, they send you a check. That is obviously incredibly inexpensive to do. That is, it is still the majority and will continue to be the majority of your loans. Then you say that loans go delinquent, you have to step up the servicing, and then once you are past 90 days, it goes up three times from there. What is the difference between current pay and that next bucket, that middle bucket?

Well, like I said, we don't really break it out that way. We kind of lump everything that is less than 90 into one bucket. Because in subprime, borrowers tend to bounce around in that category regularly. So we don't really look at it that way.

Oh, so you are describing that you treat anything less than 90 days as lumped in the bucket with the easiest loans out there, the current pays?

Yes.

Because at the beginning of the month, Rick, they are almost all delinquent. It is a fairly large process to bring the vast majority of them back to a current status. Also, we should correct. We don't use combat servicing. That was used by another firm. We do a consultative approach to try to get people to really be, if you will, almost a financial advisor to them, to try to get them back on a forbearance plan, get them back current, and paying on a loan.

My word, not yours. I acknowledge that. In terms of the increase in advances given the delinquencies didn't rise, what is the explanation for that? I didn't really understand it when you tried to answer Bob's question or when you answered Bob's question.

I mean the portfolio did increase, so that is definitely part of the driver. Dave or Bill, any other comments on that?

No, I think that certainly the portfolio rose quite a bit. I think that you do see -- you know, people can still be current on their loan and not pay things like insurance and taxes and things of that nature. We are -- we have shifted some of our financing around to vehicles that are perhaps not as efficient as we would like to see them, but they are lower cost and higher advance rates. We will be working very diligently in 2007 to continue to try to improve the financing vehicles that we have out there. And I would hope that we can see some movement in that regard. But we are up almost 25% in our portfolio year-over-year and you do have some increase of people under some degree of strain, not paying their insurance and taxes as well. So it is not a number that is out of the realm of reasonableness for the size of the portfolio.

Okay. But I mean sequentially, the advances are up about 50% and the portfolio has grown 20% over the last 12 months. So there does seem to be some disconnect there.

If you look at just the recent trends in the business, I will try not to give you any forward-looking projections, but think about what is happening, first of all, in revenue growth where for the first quarter our growth was 12%, second quarter 14.3% over the same quarter a year ago, 13.7% in the third quarter, and now 20% in the fourth quarter. All that while expenses are lower fourth quarter than same time a year ago.

If you look at the revenue growth and then you try to correlate that to the growth of the portfolio, it is not a surprise to me that the advances went up. So I don't know how to answer you better than the growth in the portfolio, and then you can watch the increasing growth in the revenues.

Okay. I'm not sure I understand that correlation, Ron. Perhaps I should follow-up offline because I think I am missing something here. Thank you, guys.

John Hecht, JMP Securities.

Thanks for taking my questions. I don't mean to beat the credit over too much, but you gave the 90-day plus figure earlier in the call. I wonder, do you have the total nonperforming asset figure for us?

I don't think we have that available, and again to us our breakpoint is the 90 plus, loans that are less than 90 plus, although they have some advances on them or from an operating standpoint are generally treated in the same category as loans that make their payments. So I don't think we have that number right now.

I know it is not in the press release, but can you give us the float income number for the quarter?

Dave, do you have -- could you repeat that again?

Repeat that question, please.

Do you have the float income number for the quarter?

I can tell you that our average float balance for the quarter was about $1.1 billion, and then the float income for the quarter, let's call it just under $13 million.

And I know you guys touched on this before during some questions, but in terms of just modeling, can you give us some more information modeling the closure of the Residential Origination Services division? Do all the costs associated with that division go away, and what would be the effect of that on process management fees?

This is Dave. Let me talk to you, just if I can, how the accounting literature tells us to treat this. In the sense that we are closing the subprime originations business, it is not a sale that in the accounting treatment you would take and hold for sale and treat as discontinued operations, putting it under continuing operations. So this is not the kind of classic case where you would come to December and book all the future losses.

Instead what you see are the normal losses that came into the business in that period fourth quarter. So I would expect for the first quarter to have much, much smaller numbers. We have marked everything that we could find to make sure nothing falls out of period. But you would think of it just as a slow wind-down process. And remember that on the balance sheet where we had $625 million a year ago in loans held for resale, now that number is now $99 million as of December 31st. So you can just know that that number has been marked-to-market. We think that we are in good shape and have captured everything possible in the fourth quarter, so I don't expect much in the future.

And what about the impact going forward on process management fees; is there any carryover there?

We gave you the process management fees by themselves individually in the presentation. Is that what you're asking, what those are?

Yes. So which one -- I know you -- (multiple speakers) which one of these are most affected here?

Slide 17 shows you what the process management fees were for 2004, 2005 and 2006, excluding our origination costs, origination business. It went from $50.9 million to $65 million to $70.7 million.

So the closure of the Residential Origination Services would not affect that $70.7 million figure?

No.

No.

Can you give us some color on, I guess, the UPB or the servicing rights purchasing environment, are you seeing -- I know the fourth quarter is slow in terms of originations. So it is a probably seasonally slow quarter, but are you seeing with the large Wall Street purchases of some servicing platform, are you seeing anything change in the competitive dynamics for pricing?

Well, I think much less with respect to that, and Ron can comment as well. But I think it is more an assumption -- what affects pricing more than anything else is what people's assumptions are on prepayments. I think all the other things, whether you talk about what is going on in the marketplace is interesting, but if you had my druthers, I would much rather have people be in alignment on prepayment assumptions than anything else.

But in terms of your opportunity to bid in the environment?

We had a reasonably good fourth quarter, considering it is a slower part of the year. So I think that, I think we may have even talked about this before in that the Wall Street firms to date that have acquired their own servicing capabilities for the most part were not our bigger clients or were not our clients really at all in the last year or so. So the impact from them acquiring these platforms has had really not much of an impact on us so far. And we have had some good -- we have been fortunate to actually win some transactions from some of the firms that maybe we haven't done a lot of business with more recently. So overall, things at least in the current state have remained pretty good.

Obviously, it is something that we need to keep our eye on and the environment is changing and will continue to change. And that is one of the reasons, the other reasons -- and Bill mentioned it in his speech -- why we are looking for other ways besides just being a vendor to the street, if we become a buyer of, or at least through the investment vehicle that we are thinking about, a buyer of residuals or whatever it might be, that changes the dynamics as well and doesn't make us so reliant on just having the absolute best bid on servicing or doesn't make us so reliant on the fact that maybe a street firm has their own servicer. Because generally if you look at others out there that kind of are buyers of risk as well as servicers, they generally will demand that they get to service the product.

Thank you, guys, for all the color.

John, the one question you asked on total delinquencies was 16.7 as of December 31st. The 90 days plus has fallen from -- at the end of 2005, it with 11.2%. It has fallen to 10.3%, and about 3.3% of that 10.3% is actually cash flowing.

Okay, great. Thank you for that.

Just from perspective on all the questions about cost of service, we have added more people in terms of our ability to collect loans and to get the borrowers current. That is a critical focus for our business, is to be the best in the industry at doing that. It is why, quite frankly, I think we exist as much as anything else. However, I think the business unit utilizing a number of technology initiatives, as well as basically utilizing our global workforce this year as well as the prior year, as was the year prior to that, have made substantial improvements in terms of our unit cost, even though we are in fact dedicating more hands-on people per loan than the rest of the industry is doing.

So we can't make forward-looking statements, but shall we say I'm not concerned about that trend continuing into 2007 and beyond. I think that the business unit has done a very, very a good job of continuing to be more and more efficient all the time.

Bob Napoli, Piper Jaffray.

A question on the accounting on the collections of the servicing revenues. Are you booking the revenue, the servicing revenue on a cash basis or on an accrual basis?

Tell me more about what you are looking for.

Dave, let me try to answer. Things like servicing fees, the float income, those are -- I mean float income is pretty much real-time; but those are on an accrual basis, I guess you would say. But late fees and some of the other ancillary fees are as-collected. So just because a borrower is assessed a late fee does not mean that we record that as income. We only record that as income if and when we actually collect that from the borrower. That would probably be the biggest category that would fall into that cash basis accounting.

Right. So it is all essentially cash, and it is all essentially cash accounting as Ron said. The only thing where you don't collect the cash is in some of those ancillary fees. In other words, we get paid our servicing fee; we get paid our float income. Yes it is accrual. You are accruing it. But the only area that you have -- I think the genesis of your question, Bob, was from your note that came out this morning.

Yes.

Right. Obviously as delinquencies go up, we are not at the top of the waterfall in collecting late fees. That is really the major area that would show any sort of fluctuation as a result of that. All other revenue items would not be adversely impacted by delinquencies.

Then the late fees you do show are only as you actually collect them?

We have the cash, yes, that is correct. That is correct. So as delinquencies would rise a little bit, you in fact would see a little bit of a lag in terms of late fees, in terms of their relationship to the number of -- unit count of loans outstanding.

Is essentially 100% of your UPB in securitizations, or close to it?

Close to it, yes. We have front-end interim servicing that we do, right Ron? For about 3 or $4 billion?

Yes, that's probably about right.

And my question, I mean you see these subprime mortgage originators going out of business. They are now up to two-a-days, I guess, on some of these companies. And your credit exposure to any of these companies that are going out of business.

As a servicer, we control the cash and the collateral we get paid. That is not -- we are at the top of the waterfall in terms of being paid, other than for those fees that come direct from the borrower. But with respect to the client, all-cash goes to us and we are entitled to be paid first.

Okay. Now, the UPB growth you have had has been very good. And somewhat on the flip side, the investment banks that have acquired some of the servicers. Have you been able to garner additional business because your competitors are now owned by the investment banks? And so some of their competitors would probably rather, if they had a choice, sell to you. I'm not sure if they care that much or not, but they would probably rather sell to you than one of their direct competitors, or have you as the servicer than CS First Boston, for example. Have you seen anything?

I do think it -- I wasn't trying to be flippant before. It is a very large market and we have a 5% market share, which is not a bad market share as it goes. But I mean there is not per se -- and even with a downturn in the market, there is not a dearth of products out there being securitized. The issue really comes down to, at least in many cases, what your pricing level is going to be vis-a-vis other competitors, particularly as you get in to the less credit-challenged product.

Obviously the more credit challenged it is, we have a much greater competitive advantage because of, a, our better loss mitigation and, b, our ability to control our costs better. It is less capital-intensive. But by and large, a lot of this revolves around what cost of capital and what, primarily, what prepayment assumptions our competitors are willing to assume.

And that is really the issue. I mean it comes right down to if they are going to say that prepayments are going to go to 25, they are going to win every piece of business on the planet from us. If they think it is going to 38, we will win everything on the planet. So it is very, very much a pricing kind of an issue today.

I think that will be less of a pricing issue as defaults continue to increase. Firms will not have necessarily a capital constraint, but they will be having more and more of a personnel constraint because they rely on experienced collectors. And it takes you years to make them. So as defaults rise quickly, they are going to have a little bit more difficult time taking on additional business.

Last question just on your origination business, I want to try to be clear on the expenses that you expect. When do you expect to be totally out of that business? When does it totally shut down? I mean, you have already stopped originating, I assume?

Yes. The last loan I believe will be processed, what Ron, February 19th?

Well, I mean they're loans in the pipeline, let's just say, that still need to go through the funding process. That date is probably roughly right. As Dave sort of mentioned, the accounting rules don't really allow you to just accrue everything because this is not a discontinued operation in the accounting sense. So there are some additional expenses, leases, and some other things that will need to be dealt with. And the exact end of that will depend on various things, including whether how we maybe work through, buy-out those leases, or whatever it might be.

But for the most part, a large chunk of the compensation has already ceased. There still are some people left that have to finish through the rest of the loans that need to be originated as well as get them ready for sale. By the end of the -- by the end of February timeframe most of that will be, most of the compensation cost will be gone.

But you could have a couple million dollars of expenses in the first quarter to kind of clean it up and then you're done?

Well it's a little bit of a forward-looking statement, but as Ron said, the vast -- we are not taking any more loans on our books. A great deal of the compensation is gone, but we will have some that trailed over into the first quarter. And there is some severance associated with that. You are clearly on the downside of that whole process.

Stephen Tananbaum.

You have talked a little bit about the effect of housing prices on prepayment speeds. Today's New York Times has another article, it seems like there is an article every day, about Ownit, Sebring, and Mortgage Lenders Network all filing for bankruptcy or closing. And now you're closing your origination. I have also read that other lenders are losing or facing restrictions on their warehouse lines of credit. And I have even read that it is currently not profitable at all to generate a subprime mortgage.

So it seems to me like the whole infrastructure of subprime origination is falling away. Can you comment on that a little bit, how significant that is in relation to -- we've talked about delinquencies, we talked about housing prices, interest rates, but I haven't heard anything about this?

Well, I think it would not be a stretch, as you said, to say that almost, I mean -- it would be unique for someone to be making a profit originating loans today. I think that in order to adjust this -- because the ultimate buyer of the product is finally pricing into that product exactly some of the risk that is occurring to that, which puts a lid on what you can sell a whole loan for. And that means that these companies have to either reduce substantially their operating cost, which many of them have. But it also means, too, that one has to start looking at the whole food chain in terms of what compensation gets paid to the actual broker, the guy on the street that actually originates the loan application.

I don't think it has gone to that stage yet, where the message has been delivered to the brokers that you're not going to get paid as much as you have been paid historically. And also the wholesale originators have got to basically cut back their compensation from their account executives, those people who are the inside salespeople, who actually have the relationships with the brokers.

There is just way too much value out of the value chain being directed to those parties for that to continue for very much longer. I mean Ron, you may have a different opinion in terms of a different way of expressing it rather.

No, I think that is a good way of expressing it. But I think you should also -- there is some fairly smart people on Wall Street that are acquiring origination platforms at this point in time. So I mean, I think, and they are a big driver as to what the whole loan market is. So I don't think that anyone would say that subprime is going to disappear anytime soon. It is just there is a little bit of a shakeout going on and a shift. And some things will change, but I think the street believes that they are going to make a profit when they through originations or they wouldn't continue to be buying these.

I would also like to point out, I mean, our origination platform was much smaller, I mean almost nonexistent, compared to some of the other companies that you mentioned, like Ownit. They were much, much bigger than what we had. And really we are forced out of the business because of like you said, just things like warehouse lines and other things drying up. That really was not the same decision that we made.

So the significance I should be looking for is more in terms of looking for more-rational pricing rather than the business has gone away?

I think overall that the amount of mortgage originations will go down, but you have seen a remarkable trend for a shift in the mix from a prime into subprime. In other words, the U.S. consumer is, shall we say, significantly challenged at the present time. So what we are seeing is not so much that subprime loans business will go down dramatically. It may go down a little bit. But there is a decided shift that has been going on for all of since 2000, or and even longer, out of prime into subprime mortgages.

Subprime mortgages last time I looked at the number were 22% of all mortgages originated. I think back in 2000, they were 5%. They are a rapidly-growing component of consumer spending, if you will.

But I always thought that was because of the, kind of, I mean the housing boom and the irrational pricing and the creation of all of these marginal subprime lenders. With their at least cutting back or disappearance of the most aggressive ones, the problems that you have had in '04 and '05 should reverse here?

I mean, they write that in the press that that is the reason, but home ownership went from 65% to 67% in the United States. And the component of subprime of the entire mortgage market went from 5% to 22%. So I mean just on the map, they are not making babies that fast that you can have household formation to absorb that. I mean yes, there are a lot of people at the margin that were brought into several percent, you are right. To raise your homeownership rates from 65% to 67% is a meaningful impact at the margin. But it is 2% of things where you are seeing a four and fivefold increase to almost a quarter of all mortgages out there being subprime mortgages. That clearly was not from bringing marginal borrowers into the homeowner, ranks of homeowners. It is from prime borrowers slipping down into the subprime space, just on just basic math of it.

Okay. That's great. Thank you very much.

John Hecht.

Just one question on the -- related to the accrual question a bit ago. Just want to make sure I understand this. Now I understand 85% of delinquent loans are resolved before foreclosure. But if you are accruing servicing fees, do you have to charge off those fees that you accrued and if so, what point do you do that in the sort of foreclosure cycle?

We are paid at the top of the waterfall, John.

You always get your servicing fees. You don't necessarily get your ancillary fees, like late fees. But you always get your servicing fee.

Our fees and our reimbursements, if you will, and advances are superior to the AAA-rated bonds. They are super-priority cash flows. Only the late fees and a few other fees that, in fact, would be subordinated, if you will, to the cash flows of the bonds.

That answers the question. Thank you very much.

At this time, there are no further questions.

Thank you very much, everyone. Have a great day. Goodbye.