Onity Group Inc (ONIT) 2007 Q1 法說會逐字稿

Welcome to the Ocwen first-quarter earnings 2007 teleconference. Throughout today's presentation, all lines will remain in a listen-only fashion until the question-and-answer session. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If there are any objections, you may disconnect at this time.

I would now like to introduce today's conference host, Mr. David Gunter, Senior Vice President and CFO. 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 slide, log onto our website at www.Ocwen.com; select shareholder relations, then calendar of events, then click here to view conference call. Then under Conference Calls -- First Quarter 2007 earnings, select view slides. Each viewer will be able to program 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 risk disclosure statement in today's earnings release as well as the Company's filings with the Securities and Exchange Commission, including Ocwen's 2006 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 Chief Executive Officer of Ocwen, and Rob 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.

And now, I will turn the call over to Bill Erbey. Bill?

Thank you, Dave. And thanks to all of you for attending Ocwen's first-quarter conference call. I would like to cover three topics in my remarks today. First, an overview of our first-quarter earnings; second, our continued efforts to optimize our use of capital; and third, the focus on our business segments.

As shown on slide four, pre-tax income for the first quarter of 2007 was $18.8 million. Pre-tax income decreased by $2.7 million or 12.6% from the first quarter of 2006. And [as an] 84% increase in operating income was offset by a significant decrease in other income.

Slide five demonstrates the strength of our operations, as operating income has increased to $27.9 million from $15.1 million for the first quarter of 2006. This 84% increase is a direct result of our ability to grow revenues while containing operating costs.

Slide 6 illustrates our year-over-year revenue growth as first-quarter 2007 revenues totaled $115 million as compared to $102.4 million for the first quarter of 2006. This increase of $12.6 million or 12.3% was primarily the result of an significant increase in Residential Servicing revenues.

Operating expenses of $87.2 million as depicted on slide 7 were flat compared to the first quarter of 2006 despite an increase of $5.9 million and amortization of servicing rights.

As shown on slide 8, other income and expense reflected expense of $9.1 million in the first quarter of 2007 as compared to income of $6.3 million in the first quarter of 2006. This section of our income statement includes not only the interest expense related to our advanced financing and general corporate debt, but also the net impact of our investments in loans and mortgage-backed securities and related hedging activities.

Since these activities are recorded on our balance sheet at fair value or [lower cost] to our market value, current market conditions in the subprime mortgage market had led to volatility in our other income and expense line items in the first quarter of 2007, as we recorded charges totaling $7.8 million to adjust these assets to their estimated market values. These charges were somewhat offset by $2.3 million in hedged gains.

We also had reduced interest carry of $3.4 million for the quarter related to our decrease in loans held for resale at March 31, 2007, to $112 million from $365 million at March 31, 2006.

Finally, we had no loan purchase and securitization transactions in the first quarter of 2007. Gains associated with such transactions totaled $4.4 million in the first quarter of 2006.

The substantial reduction on our whole loan purchase and securitization activities frees up resources for initiatives such as Ocwen Structured Investments, which supports our servicing business, and an acquisition in the Unsecured Collections area which leverages our infrastructure.

We continue to focus on the efficient utilization of capital. In this regard, we previously announced two significant events during the first quarter. On February 21, 2007, we announced the receipt of a $45.9 million cash dividend from BMS Holdings, Inc. Through this dividend, we have recouped our initial investment at BMS while maintaining our 46% ownership interest.

On March 9, 2007, we announced that we had obtained definitive commitments from affiliates of Angelo, Gordon & Company; Metalmark Capital, LLC; and other lead investors to form and capitalize a new business, Ocwen Structured Investments, LLC, referred to hereinafter as OSI. OSI will invest in mortgage servicing rights and the related lower tranches and residuals of residential mortgage-backed securities, and hedge those assets with the [full] protection. Ocwen will provide a dedicated team responsible for managing OSI's portfolio under our management agreement, and subservice the mortgage servicing rights that are acquired from time to time by OSI.

In the current environment of rising mortgage delinquencies, our new venture presents an exciting opportunity to leverage our superior loss mitigation capabilities and knowledge of collateral to generate attractive returns for the investment partners.

Our pending investment in OSI is an example of our efforts to optimize our use of capital. Additionally, we are continuing to investigate opportunities to efficiently finance our high-quality assets. And we are committed to growing our less-capital-intensive businesses, such as Loan Processing Services and Unsecured Collections.

As previously discussed, we have been narrowing the focus of our operating segments to those activities that yield acceptable return on capital. Today, we have three primary business segments -- Residential Servicing, Residential Origination Services, and Ocwen Recovery Group.

We continue to grow our Residential Servicing business, as evidenced by our 6% increase in UPB for the quarter. Our focus in 2007 will be on process management to improve upon our industry-leading loss mitigation capabilities and increasing our efficiency.

In Residential Origination Services, we are focusing on our fee-based loan processing businesses which generated $3.9 million of pre-tax contribution in the first quarter of 2007. These businesses provide various loan processing services to clients involved in the mortgage origination servicing, loan acquisition and securitization processes.

These fee-based businesses have limited capital requirements. We believe that our success in this area will be dependent upon our ability to provide quality and timely services at competitive prices.

Our financial results in ROS also reflect our trading and investing activities and the impact of our subprime loan origination operation which, as previously announced, we are in the process of winding down.

Pre-tax income for the first quarter of 2007 includes $2.7 million of losses related to the subprime loan origination operation compared to losses of $1.4 million for the first quarter of 2006.

In addition to winding down our subprime loan origination businesses, we have deemphasized our trading and investment activities in this segment. We do not have any significant whole loan purchase or securitization transactions in the first quarter of 2007.

Ocwen Recovery Group is our Unsecured Collections business. ORG generated a small pre-tax loss in the first quarter of 2007, as revenue was not sufficient to absorb fixed cost. During the past year, we have focused on optimizing our cost structure and improving unit margins, primarily by improving the productivity of our cost-efficient global workforce. As a result of this focus, we have seen a marked increase in our unit margins. We believe the key to our success in this segment will be our ability to generate sufficient topline revenue growth to leverage our fixed operating costs and take advantage of our strong unit margins. In this regard, we are pursuing growth opportunities, both organically and via acquisition.

As mentioned in our 2006 10-K, we are currently in the latter stages of negotiations to acquire by merger a large provider of receivable management services, subject to final due diligence and execution of definitive transaction documents.

I would now like to turn the call over to our President, Ronald 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 nine, the pre-tax earnings of our core businesses were $19.4 million in the first quarter of 2007, a 14% decrease from the first quarter of 2006. These results reflect the continued strong performance of our Residential Servicing segment, reduced income from our Residential Origination segment, and a small loss from the Ocwen Recovery Group segment.

Turning to slide 10, the residential servicing segment generated $19.4 million in pre-tax income for the quarter, a 9% increase over the first quarter of 2006 amount $17.8 million. Residential Servicing revenues were $93.5 million, a 17% improvement over first-quarter 2006 revenues of $79.9 million.

Even though loan servicing represents the majority of this segment's revenue and expenses, our VA servicing proprietary software business and our payment processing unit contributed $5.8 million in revenues in the first quarter of 2007.

On the expense side, operating expenses totaled $63.4 million, a 13.9% increase over the first quarter of 2006. Increased amortization of servicing rights driven by portfolio growth accounted for $5.8 million of the $7.7 million increase in operating expenses. Considering the fact that the average number of loans serviced in the first quarter of 2007 grew by 28% over the first quarter of 2006, we are very pleased with the continued progress we've made in reducing our cost to loan service.

Slide 11 illustrates the loan servicing portion of our Residential Servicing segment. Loan servicing achieved $20.8 million in contribution margin in the first quarter of 2007, which represents a 12% increase over the first quarter of 2006. First-quarter 2007 revenue of $87.7 million represents an 18.9% increase over first-quarter 2006 revenue of $73.7 million. This increase is a result of the portfolio growth coupled with reduced runoff of the existing portfolio due to lower prepayment fees.

This growth also resulted in an increase in the cost of financing our servicing advances in mortgage servicing rights as reflected by increased interest expense, which is recorded in other income/expense.

Slide 12 shows the trend in prepayment fees over the past several years. As you can see, prepayment fees, at 26% for the first quarter of 2007, are well below the 30% for the first quarter of 2006 and the quarterly averages of the past two years. The first quarter 2007 CPR of 26% is the lowest quarterly average in over five years.

Slide 13 illustrates our portfolio of growth, as unpaid principal balance at quarter ended was $55.2 billion, a 6% increase from our 2006 year-end balance of $52.2 billion, and a 31% increase over March 31, 2006 UPB of $42.2 billion. As of March 31, 2007, we were the servicer for 481,000 loans as compared to 474,000 loans at year-end 2006.

Our $215.8 million balance of mortgage servicing rights represents a 20.4% increase from the December 31, 2006 balance of $179.2 million. For the quarter, we purchased $68.6 million worth of mortgage servicing rights and amortization totaled $32.1 million.

As a result of the effects of increase subprime mortgage rates, [growing] housing price appreciation, and other factors in the subprime origination center, delinquencies have increased somewhat in the last year, as shown on slide 14. The balance of performing loans serviced represents 85.5% of total UPB at March 31, 2007 as compared to 88.3% at March 31, 2006.

As shown on slide 15, Ocwen Recovery Group, our unsecured collections segment, posted a pre-tax loss of $253,000 in the first quarter of 2007 as compared to a loss of $350,000 for the first quarter of 2006. We are pleased with the operational efficiencies we have achieved in this segment, and we are aggressively pursuing both organic growth opportunities and acquisitions of other collection agencies to drive revenue growth.

Slide 16 shows the Residential Origination Services segments first quarter 2007 pre-tax income of $256,000 versus the first quarter of 2006 pre-tax income of $5 million.

First-quarter 2007 revenue of $17.1 million is essentially flat compared with the first quarter of 2006. Operating expenses have decreased by $6.7 million primarily due to the shutdown of our subprime line origination business and the discontinuation of certain services which were unprofitable.

Other income decreased by $11.2 million due primarily to reduced loan carry of $3.4 million, market value adjustments to loans held for resale, and mortgage-backed securities totaling $7.7 million, which was somewhat offset by hedge gains of $2.3 million and the absence of transaction gains associated with loan sale in securitization activities, which totaled $4.4 million in the first quarter of 2006.

This segment continues to reflect our closed loan origination operation, which reported pre-tax losses of $2.7 million for the first quarter of 2007 compared to a $1.4 million loss for the first quarter of 2006.

Moving on to slide 17, in 2007, our Residential Origination Services process management fees generated revenue of $[16.8] million versus $17.2 million in the first quarter of 2006. The aggregate quarter-one 2007 pre-tax contribution from our fee-based loan processing businesses was $3.9 million, which is a 74% improvement over the quarter one 2006 amount of $2.3 million.

In summary, I'm very pleased with the results of the Residential Servicing and the fee-based loan processing components of Residential Origination Services. I also believe that we have properly positioned Ocwen Recovery Group for growth in 2007 and beyond.

Thank you, everyone. I would now like turn the call back over to Dave Gunter. Dave?

Thank you, Ron. I would like to focus on three areas this morning -- changes in our balance sheet during the first quarter; the operating results of our corporate segment; and a discussion of our effective tax rate and our implementation of FIN 48.

Total assets decreased by $58.4 million during the first quarter to $1.95 billion at March 31, 2007. We decreased servicing advances by $105.6 million as we focused on minimizing our advanced balances and increasing the effective utilization of our advanced facilities.

Advances and match-funded advances totaled $791.2 million at March 31, 2007 compared to $896.8 million at December 31, 2006. The decreases and advances in other assets were somewhat offset by a $37.2 million increase in mortgage servicing rights as purchases for the quarter exceeded amortization, and a $25.2 million increase in cash and investment-grade securities, which totaled $336.8 million at March 31, 2007.

We decreased our overall liabilities by $70.6 million, reflecting a reduction of $136 million in our servicer liability and an increase of $71.4 million in our lines of credit and other secured borrowings. As a result of these changes, our equity to assets ratio has improved to 29.2% at March 31, 2007 compared to 27.8% at December 31, 2006.

As of March 31, 2007, our overall borrowing capacity in lines of credit and advanced financing lines was $1.15 billion. And we had unused borrowing capacity of $303 million. Effective April 3, 2007, we increased the capacity of the variable funding notes included in our Barclay's advanced facility from $100 million to $200 million, increasing our total borrowing capacity to $1.25 billion.

The strength of our balance sheet at March 31, 2007, including our total cash and investment-grade securities of $336.8 million, affords us some flexibility in our capital allocation process. Alternative that we may consider include strategic investments like our pending investment in OSI; acquisitions; share repurchases; and retirement of our 10-7/8% capital securities, which we may redeem in whole or in part beginning August 1, 2007.

As shown on slide 18, our corporate segment recorded a pre-tax loss of $0.7 million in the first quarter of 2007 as compared to a pre-tax loss of $1.1 million for the first quarter of 2006. This segment includes certain general corporate revenues and expenses, including any unallocated interest income or expense, as well as the results of operations that are not individually significant.

As part of our overall focus on the effective capital utilization, we may determine that certain of these operations do not yield acceptable returns. Such a determination would cause us to evaluate strategic alternatives for those businesses.

I also want to touch briefly on our effective tax rate. That rate of 22.95% for the first quarter of 2006 included a reduction of 13.91% for the anticipated use of tax credits during the year. No such benefit is included in our effective tax rate for the first quarter of 2007, since we reversed the valuation allowance against our deferred tax assets during the second quarter of 2006.

Our effective tax rate of 33.99% for the first quarter of 2007 includes a benefit of approximately 2.09% associated with the recognition of certain foreign deferred tax assets during the quarter.

Also, during the first quarter of 2007, we recorded a $1.5 million adjustment to beginning retained earnings related to the implementation of FIN 48, Accounting for Uncertainties in Income Taxes. FIN 48 requires the recognition of uncertain tax positions when it is more likely than not that those positions will not ultimately be upheld.

In summary, we have strengthened our balance sheet as evidenced by our equity to assets ratio of 29.2%; our $336.8 million of cash and investment-grade securities; and our $303 million of unused borrowing capacity. And we are evaluating various alternative to effectively utilize our capital to maximize shareholder value.

We will now open the call to questions.

(OPERATOR INSTRUCTIONS). Robert Napoli, Piper Jaffray.

I'm not sure what the core -- if you are trying -- I don't know if you can help me with this. But if you are trying to get a core pre-tax earnings for the quarter, what onetime-ish items or unusual items would you back out? I mean, your pre-tax is 18.8. What would you view as an ongoing -- how would I look at an ongoing number?

Well, you are asking for a non-GAAP number. If we think about it together, in the revenue, I'd say there's no unusual adjustments. And in the operating expenses, there's no unusual items. So we would have to think with you about the losses on whole loans (multiple speakers) and the losses on trading securities that are down below in the other income/other interest section.

If we think about the losses on the subprime originations, you heard us discuss that we had $2.7 million there in the first quarter. So you wouldn't expect that to continue. We had a lower cost [or] market adjustment on whole loans of $[3.3] million.

Okay.

And then we had a loss in our subordinate and residuals. And those would be the pieces that you would want to go think about.

And then you had a gain on -- a hedge gain to (inaudible) on a --

Yes, there was a hedge gain. That one was $2.3 million.

And the subordinate residual writedown; I'm sorry -- that was --

$4.5 million.

4.5. So that's kind of [selling] -- so obviously, the net-net is that the pre-tax income was a lot higher than $18.8 million. But what surprised me, I guess, in this is that in the origination business that you had, that you are able to even -- I would imagine a lot of those charges are in that business, because that's where -- I think the number -- a fair amount of these assets were. But you still have like a breakeven quarter.

Is there anything else unusual on the good side? Or what happened there that you were able to offset a lot of those charges in the -- and still have what I thought was a pretty good number on the surface in the origination business?

Well, remember that overall, if you took our revenue minus the operating expenses, the increase on that margin was 84% year to year. And so also remember in the Residential Origination Services reporting segment that we have decreased expenses related to the subprime originations business.

Bob, we make on our fee-based businesses in that segment 3.9 -- we made $3.9 million.

Okay. Are those businesses -- how is that holding up? Obviously, you saw a big change in the market. Are those fee-based businesses -- what kind of trends are you seeing now on those fee-based businesses?

Right. We had -- I'm searching my notes here for the exact numbers. Do you have them?

Yes, the trends that you would think about for the first quarter this year compared to the first quarter a year ago in those fee-based reporting units inside the Residential Origination Services reporting segment would be that the revenue is down just slightly, but the operating expenses are significantly decreased -- and therefore, the increase that we talked about. So revenue -- roughly flat, but expenses well under control; cash flowing quite well.

And the revenue came down because we shut down the origination business (multiple speakers) and also contributed to help us take down our expenses. But that's to be -- if you will, the non-Funding America revenue actually shows some -- was reasonably vibrant during that period.

You expect -- in other words, that if you go into the future quarters of this year that that business would generate in a reasonable level of profitability then? (multiple speakers)

Well, I can just tell you, we'll be careful about the forward-looking statements. But the revenues have been solid for us. The expense is decreasing. We been able to control the compensation and benefits there very well compared to the same time a year ago. And so we do expect to continue to operate those reporting units as you suggested.

Okay. Now, did you -- I'm sorry, I had to miss the front end of the call. Did you talk about delinquencies on your subprime business -- how much that's trended up?

Yes, Ron did. Ron, would you like to cover that?

I mean, I can come back. You don't need to --

No, we just mentioned that with the higher subprime interest rate environment with slower housing price depreciation and some of the other factors that we are all aware of in the industry that we have seen a modest increase in delinquencies from the first quarter of last year. And we reported that in some of our slides and in the -- and I went through some of those numbers in the discussion.

(multiple speakers) I think the one place to look is also in our press release. One thing I would point out -- it shows really the quality of our ability to get loans back current and [reperforming]. If you look to the third bullet from the bottom, it talks about the increase of our -- overall, what we would call non-performing loans and (multiple speakers) REO service was 14.5% of the total.

If you look at those that are actually on -- non-cash-flow, either not on forbearance plans, that number drops (inaudible) to 8.6%. So that shows the value, if you will, of our ability to deal with non-performing loans and then get them to a cash paying position.

And considering the fact that our FICO scores on any standard tend to be significantly lower than our other competitors' in servicing -- i.e., we happen to get the more challenged assets, I think those delinquency numbers show extremely well compared to any other player in the market today.

Okay. That's interesting. Now I'm kind of surprised that your amortization expenses is as higher with the CPR coming down as much as it is. And just -- it seems like more so than -- I mean, your assets, I understood, grew. But it just seems like that amortization should decline more than what it has so far -- the amortization expense. Is that more forward-looking into the second quarter?

This is Dave. So if I could answer that for you -- think about the relationship where -- comparing the end of the first quarter of this year to the end of the first quarter a year ago, our unpaid principal balances grew by roughly 30%. And so you are seeing a correlation between all of the new dollars flowing into the mortgage servicing rights.

So there's the correlation. The increase in UPB has to cause the increase. What you see on the balance sheet is significant for the mortgage servicing rights. And that increase then flows into amortization. So the numbers make sense when you look at the relationship.

Okay. And just on the collections business, or the -- I'm sorry, the recovery group. You had mentioned in your 10-K that you were close to an acquisition. And I'm not sure if you updated on that.

We didn't. That still is proceeding. And we are in the final stages of documentation and due diligence.

That business is a very, very competitive business. And can you get decent margins on -- is this Company reasonably profitable? Or are you counting on making it profitable by outsourcing?

(multiple speakers) Let me deal with it generically a little bit, if I might (multiple speakers). I think that would be more useful.

Let me just give you the basic economics of the business. You are correct. We do [tertias], quads and quints -- i.e., they've been between -- they have had three, four, or five prior collection agencies dealing with those assets.

In the United States, you would be -- at a gross margin level, would be doing well basically at a 10% profit margin. Right?

What we have been able to do -- spent that five years investing in the business, is been able to raise our India collectors' performance up to and equal, if not exceeding, those of our U.S.-based collectors, and that is clearly unusual. Almost all collection work done in the United States or done in India -- really very, very front-end, simple calls, generally.

So I think we have cracked the code on that. Obviously, the question will be how fast can we make that scalable? But once you move it to India, basically your margins are at least 50% in the business.

Okay.

And the major portion of the cost becomes your mailing cost for letters as opposed to personnel calls. And we are obviously investigating ways of trying to be more efficient in that area.

So what you hope to do here is to buy a company in the U.S. that has U.S.-type margins and pay a price based on those margins, as you should. And then take -- do some outsourcing to bring the profitability way up is kind of the thought process?

Yes, and they have a variety of clients. Some of those clients will and shall remain U.S.-based clients. And generally, those tend to be very high-margin clients. They also have lower-margin clients that can actually be moved globally.

But you are correct. The quality collection agencies today literally are firing clients, because at the margin, they can't make any money with U.S.-based labor. And their collection -- the cost of the labor and their effectiveness at actually collecting.

Where our collectors are -- we are generally in the upper quartile of people's scorecards in terms of collection capability and quality. And we been able to replicate that with global human resources. So we are changing the economics and the metrics. To the best of our knowledge, we're the only firm that's been able to do that.

The challenge, quite frankly, will be to say, can we do that in scale? And can we scale that up in terms of the numbers of personnel we have operating in a global market?

Okay. And then last question, just on the growth of the subprime portfolio with the collapse of the subprime market, should we expect slow growth? Or is their opportunities with some of the other servicers being hindered? Are you seeing opportunities to accelerate growth in taking over other portfolios? And what kind of a -- what are you seeing as opportunities for that -- the growth of the portfolio?

That's a very interesting question. This is obviously a time where there are a lot of opportunities and a lot of challenges within the market from a volume perspective.

We are trying to, if you will, change to a degree our business model, or migrate our business model in the servicing area to being more based on our quality of the work we provide as opposed to simply bidding exclusively for servicing and being monetized in the business.

I think opportunities like OSI will enable us to do that. I mean, to the extent that we can fill up initially OSI, our initial investment in that, that's about $12 billion of servicing. We would like to look at again, migrating more of our capacity to those areas where we make money if we do a good job. We make virtually no money if we don't do a good job. But if we do a good job, we make multiples of what we would make on our current business model.

There are lots of opportunities out there. There are also lots of new entrants coming into the market and bidding for them. And one could question at certain points in time the rationality of a couple of the bids that have gone on recently.

But we are pursuing other opportunities. I think people do realize our scalability. Our ability to handle large amounts of challenge in non-performing loans is fairly unique in the market, so whereas we haven't won anything to date, we will continue to pursue opportunities that should be larger than our normal flow of business.

I would expect our flow of business not to be extremely robust, just naturally from our existing client base. But quite frankly, I would also expect, hopefully, that would be [nearby] slowdown in CPR and (multiple speakers) [runoff] as well.

So it's not all bed. You know, if you woke up one morning and told me there would be no more subprime loans ever originated, and CPR would be zero, that would -- I would have a little certain kick in my step that morning.

[Jeannette Daroosh], [JMPC].

Thank you for taking my call. Just a couple of questions (technical difficulty)

We're having difficulty hearing you.

Is that a little bit better?

A little bit. Yes.

Let me see if I can pick up the phone (multiple speakers)

That's great. That really works.

We noticed in the quarter that some of your variable expenses had declined quite nicely, specifically your technology and communications costs and your initial services and regulatory [fees] (technical difficulty). And we were just wondering how much leverage do you actually have leveraged (technical difficulty) [expenses], and what might we expect on a forward-looking basis?

While I wouldn't necessarily categorize it -- and Ron and Dave, please jump in -- I wouldn't categorize it necessarily as leverage in operating expenses. I.e., we don't have an extraordinarily high -- other than our corporate infrastructure, we do not have a very high fixed cost component to our business units. In other words, our $60 million at corporate is leverageable, if you will, in my opinion. When you get into the business units, we would view that, our fixed costs would be less than 50%.

The way in which we are driving our cost containment, first of all, is growing revenue and not growing corporate. That's one. Secondly, we are -- I think our technology people are doing a very good job at containing expenses within our technology unit, which is part of corporate.

But also, I think that the business unit managers have done an extremely good job of basically globalizing our workforce and also using process and technology to be able to produce more units of output per hour of input. So much to the chagrin of our business unit managers, we continue to establish reasonably aggressive -- they would think very aggressive -- goals with respect to managing our cost elements.

Okay, so would it be fair to say that the first-quarter expenses are a good jumping off point for modeling forward periods?

This is Dave. We're going to be careful about giving you forward-looking statements. We can tell you to take a good look and lay down quarter over quarter for the expense controls, which obviously has continued, and just tell you that we're going to do our best on a go-forward basis as we manage each component.

Okay. Thanks. And in the other question I had relates to your vendor management fees. Just wanted to understand what the components are, or whether these are simply driven by transaction volumes?

Ron, would you -- oh, Dave?

Can you tell us, Jeanette, what you are looking at with vendor management fees?

I'm looking at the process management.

And what was the question again related to that?

The components of those process management fees -- or are they simply transaction volume driven?

I wouldn't -- it depends on your definition of transaction volume. We have -- there's multiple things that go into that line item, including the mortgage origination services components, primarily, which is going to be things like our property valuation services that we provide.

Some of that is driven by the number of -- if you want to call it transactions that Wall Street sends us to do, in effect, to due diligence for them on. We have other components in [that] revenue line which are pretty steady. We have certain clients where we do underwriting and due diligence services for. And the flow there is pretty consistent. And in some cases, there's even minimum amounts of revenue that we have to generate, even if the flow comes in less than that. So as components of that are protected in that sense.

But I wouldn't call them transaction-oriented, per se. I would call them more ongoing type of revenue stream.

Ernest Jacob, Longnook Capital Management.

Thank you. I was wondering if you could update us on some of the litigation that's outstanding against the Company.

Ron, would you like to do that? Or --

We generally will report -- we recently reported that in our 10-K. So you have that information that was reported in the 10-K. Really nothing of any significant change from that. And you know, obviously, we will have an updated disclosure in our 10-Q. But nothing really to speak of there.

Steven Tannenbaum, Greenwood Investments.

Can you give us a little guidance as to what the limit might be on growing your principal balances in any one quarter, maybe something regarding to infrastructure as the opportunities are presented to you?

Steve, it's Dave. If we interpret that a different way, are you asking whether by our ability to serve capacity, are we limited to the amount of growth? Is that how we can interpret your question?

Yes.

I think that -- Ron, would you like to try that, or would you like me to or --?

I'm thinking more in terms of quarter by quarter rather than over the long period.

I think that we don't deem that we have any real system constraints. We're confident that our [system] can grow significantly from where it is. We always have some excess capacity in facilities and things like that.

And then there's just the challenge on a quarter to quarter basis of -- you will have to grow the number of people to do the work. We have a -- because of our training -- because of our systems that we use and the way that they basically allow us to train our people so that they can be up and productive much more quickly than really any of our competitors, we can experience growth -- more growth than almost all of our competitors.

It's a little hard to me to kind of say what it could be on a quarter-to-quarter basis. I don't think we really envision that there's any types of transactions or opportunities out there that could outstrip our ability to grow in a quarter. So we feel we have plenty of room for growth, and that our systems and our process that we use make it so that we can grow faster than anybody else.

I think if you look in the industry today, your actual capacity to effectively manage the portfolios is probably shrinking -- the reason being is as you see delinquency rise, your primary limiting factor are experience -- are collectors' ability to handle difficult or challenged loans. And certainly, those are rising very rapidly.

I certainly -- I do not believe there were many unemployed collectors at the [beginning] -- 12 months ago. And certainly, you have a demand for at least 50% more of them. The difference in our process is because of our technology that we provide to our employees, we are able to bring them up the curve very rapidly vis-a-vis, we believe, all of our other competitors, primarily because we want the systems to make the decisions, do a lot of the work that in fact many other people would attempt to do manually.

So that gives us very good growth opportunity or scalability, if you will, with the most critical factor in managing these assets, which is your human capital and ability to interact with your borrowers who need it most.

One more question. The receivable management acquisition -- you have mentioned it would be a large acquisition. Do you mean it's large in the receivable manager business, or large in relation to Ocwen? And you also used the term "merger." Should we assume this is a stock transaction?

No. The merger is just the terms of the legal form of it. The proposed transaction, if it were to occur, is cash. And it would be a large transaction within the receivable management business, not large relative to Ocwen.

(multiple speakers) If somebody told you it was large relative to Ocwen, it [would be] probably one account. (multiple speakers) And that's not the case.

(OPERATOR INSTRUCTIONS). John Hecht, JMP Securities.

Forgive me if this has been asked, but I had some overlapping conference calls. I wonder if you can talk about pricing trends for just straightforward MSR purchases, I guess, given on one level, lower volumes of available paper to buy, and that offset by maybe fewer competitors that are kind of capable of buying it in this market. And are you seeing pricing move in any direction on that front?

Ron, would you like to do that, or --?

Well, pricing has definitely trended up over the last year as people have deemed prepayments speeds -- their projection of prepayment speeds has slowed. This is probably held a little bit in check by anticipation of higher delinquency rates, possibly in the future.

But I wouldn't necessarily say that there's less competitors. I think the prior discussion on capacity, there maybe a few competitors that are a little bit concerned about their ability to handle the loss mitigation component, the back-end collection component, and may give them a little bit of pause.

But I think the competitive environment is still there. And unfortunately, there may be less deals in the markets and more [PPL] for people to chase.

So you know, it's really hard to gauge where it's going to be, because there hasn't been a tremendous amount of activity recently. I think Ocwen and others have certain clients that they have strong relationships with that slow that business. And that kind of business should continue to the extent originations hold with those certain companies. And they should be at values that definitely have risen over the last year, but not substantially higher than they've been in the last 3 or 4 months, I wouldn't think.

You have really seen stability, right, Ron, in the last -- since the latter part of last year?

Yes, I would say -- yes, it started to stabilize towards the latter part of last year. And at this point, we don't necessarily have any reason to believe that it's going to get more expensive or cheaper. It probably will stay where it is for the time being unless there is some big change in view on prepayment speeds or delinquencies.

[Cyra Sadik], [Cedar Capital].

Could you please tell me -- for your OCI unit, are you seeing -- how often are you seeing things -- looking at potential opportunities? Because it would seem now, with the whole quote-unquote subprime meltdown, you hear about resids available for very, very cheap on the dollar for what you're going to get. So is that something that literally every week you guys are looking at things? Or how often, given that there potentially is a lot of opportunity now to get things at very discounted values?

Well, we have just to give you some color on that, we have for several weeks after closing effectively entered into pricing exercises with many of the firms on Wall Street to try to understand what our view of value is compared to their view of value on the market.

We have exited that stage, and have begun to look at live transactions. We are obviously trying to -- we are not approaching this with a bunch of money, cash burning a hole in our pocket. I think that there are opportunities out there. But keep in mind that the production you are seeing coming through right now is the tail-end production of being swept up, the end of the pipeline pre the change that occurred at -- say, the end of February, beginning of March.

So you have some reasonably challenged product coming down the pike. So we have to do effectively 12 to 15 transactions to have deployed the $300 million dollars we had raised plus the anticipated $300 million of additional leverage. We are proceeding to bid. But we are not saying, oh, my word, I have to buy something yesterday -- so if that gives you any idea.

When you say in February, are you sort of alluding to the fact that you are taking more of a sort of -- let's hold back and potentially buy more of the things that were originated after February, when underwriting was sort of tightened up?

Well, I think you have to look at -- there were two -- first of all, if you look at '06 production, delinquencies and losses rose every single quarter. Okay? Not only was the 2006 worst than any other year, it was also got progressively worse with regards to it.

And if you look at what -- the stuff that's generally left at the end of the process when you go do a securitization -- you just have to be mindful you're going to have -- they're going to try to sweep up everything that they -- some stuff that they didn't get in before, as well, to a limited extent.

So we are just trying to be cautious, because keep in mind there is a huge -- the real break point -- there's a discontinuity in the value of a residual, and that relates to whether you pass or fail the triggers. So the valuation, assuming you don't pass the triggers, may in fact not be such a big bargain as some of the other bidders are in fact anticipating.

And maybe -- we are a little cautious. I think we are very comfortable that our performance on servicing, as you can see from our delinquencies on pretty low FICO scores are very good, in terms of the cash [paying]. But we also understand a little bit more about the collateral, perhaps, than some other people do. So we are looking at numbers of transactions. We are pricing them actively. And I feel comfortable we will get some product in the not-too-distant future. But we're not going out and just waving it in, either.

Can you also address the topic of loan modifications? It's obviously been pretty big at the moment. How susceptible are you guys to -- how do you approach loan modifications? Have you had a lot of requests? It's in the news a lot, to quote-unquote bail out customers -- or how much leeway do you guys have? And if you can address how you are addressing that, since it's become like the topic of the month (laughter) (multiple speakers)

I will try, and then Ron can correct me where I'm wrong. The view of my -- our view all along has been, we need to keep customers in their home and get them current. And we're the best there is in the industry at doing that. And I think last quarter, Ron, it was like 82% -- was our ability to cure a loan was more than 90 days delinquent. That's our primary metric. I believe it was 82, 83 in the prior quarter -- in the fourth quarter of 2006.

So we are very good at that. The industry average is about 40. So we foreclosed on about 15 -- basically foreclosed on 15%. The rest of the industry forecloses on 60%.

It's kind of interesting to look at it. What you're trying to do is to work with a client and get them into a position where they can afford to pay -- keep the house and stay on the mortgage.

I think we use a number of different tools and techniques. It's all of a sudden people have discovered modifications -- oh, my word, that's a Nirvana. I think we will -- we're going to continue to use an entire array of tools available to us, and very much attempt to maintain a current portfolio. So it's not all of a sudden, we're going to rush out and say, my God, we've got to modify everything under the sun. And that's not going to be the overall solution to every single account.

And in some cases, what you actually create is negative reinforcement. You have to be able to -- if every time somebody doesn't pay, you forgive interest and principal, and once the person is not observant, it will in fact just exacerbate that problem further down the line, both for the borrower as well as for the investor -- if that's to be a win-win situation for everybody.

And I just think a lot of people woke up to there's a lot of delinquencies out there -- oh, my God, what are we going to do about it? That seems like a really easy way of trying to solve the problem. I'm not sure that's going to do it for everybody.

And then last question, just to wrap up, is, at what point are you guys sort of on the hook for advancing P&I? I've heard -- what people think is quote-unquote recoverable -- what exactly does that mean? At what point do you guys say, you know, this guy's not going to pay; we're either going to not modify him or not advance P&I. At what point can you just sort of -- you know?

Hardly anybody ever loses any money on an advance. You are always obviously on the hook for an advance, and you will continue to make those advances so long as you believe that they are recoverable. It's de minimis the amount of money that anyone ever loses with respect to making an advance.

Just think about it, for example, if you have a house and a mortgage. How many payments do you have to be delinquent on your interested principal to equal more than the value of your house, plus interest and taxes -- insurance and taxes?

It does occur. As some points, it's an infinitesimal number, primarily related around to some sort of clerical error, or something of that nature.

But advances are superior to the AAA. And they trade as such. In other words, they are -- advances gets paid before the AAA bondholders get paid in all of these structures. So those assets are AAA-prime.

And the 40 and 82% you were referring to before, could you just remind me what those statistics were referring to? You guys were at 82%, and the industry was at 40%?

That's pre-foreclosure resolution rate. Those are loans that are 90 days or more delinquent we were able to resolve one way or the other without foreclosing.

(OPERATOR INSTRUCTIONS). And at this time, I'm showing no further questions.

Thank you very much. This concludes the question-and-answer section of our call.

Thank you so much for participating in today's teleconference, and have a good day.