Onity Group Inc (ONIT) 2007 Q2 法說會逐字稿

Welcome to the Ocwen second quarter 2007 earnings conference call. All participants will be in a listen-only mode. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to 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 slides, log on to our website at www.ocwen.com; select Shareholder Relations, and then Calendar of Events, then Click Here to Listen to Conference Call. And then under Conference Call, Second Quarter 2007 earnings, select Click Here to Listen and View Slides. Each viewer will be able to control the progression of the slides during the presentation. To move the slides ahead, please click on the gray button pointing to the right.

As indicated on Slide 2, our presentation may contain certain forward-looking statements that are made pursuant to the safe harbor provisions of the federal securities laws. These forward-looking statements may be identified by a reference to a future period or by use of forward-looking terminology. They may involve risks and uncertainties that could cause the Company's actual results to differ materially from the results discussed in the forward-looking statements.

For an elaboration 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 3, 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.

Now, I will turn the call over to Bill Erbey. Bill.

Thank you, Dave. And thanks to all of you for attending Ocwen's second quarter conference call. I would like to cover three topics in my remarks today. First, an overview of our second quarter earnings, second, our acquisition of NCI Holdings, Inc. and its operating subsidiary Nationwide Credit, Inc. hereinafter referred to as NCI, and three, Ocwen's exposure to the subprime mortgage market.

As shown on Slide 4, pretax income for the second quarter of 2007 was $42 million, an increase of $24.6 million over the second quarter of 2006. Pretax income for the second quarter of 2007 includes a $25.6 million gain on the sale of unrated subprime residual securities backed by loans originated in the United Kingdom, hereinafter referred to as UK residuals. Second quarter 2007 results also include the operations of NCI from June 6, 2007 to the date on which we acquire -- the date on which we acquired NCI.

Slide 5 demonstrates the strength of our operations as operating income has increased to $27.3 million from $20.7 million for the second quarter of 2006. This 32% 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 second quarter 2007 revenues totaled $117 million as compared to $105.1 million for the second quarter of 2006. Second quarter 2007 revenues include $4.8 million from NCI. Revenue growth was restrained this quarter by the combined impact of declining prepayment speeds and rising delinquencies on our Residential Servicing business. While lower prepayment speeds lead to more revenue over the life of a servicing agreement, they have a negative short-term impact because they lead to lower float balances and float income.

Prepayment speeds have decreased dramatically from an average of 29.5% for the second quarter of 2006 to an average of 22.6% for the second quarter of 2007. We have been -- we have seen corresponding decreases in our float balances and our float income, which is a component of our servicing and subservicing fees revenue line item.

Operating expenses of $89.5 million, as depicted on Slide 7, increased by $5.3 million compared to the second quarter of 2006 largely due to the inclusion of NCI operating expenses in the second quarter of 2007. Due to the previously mentioned decline in prepayment speeds, amortization of servicing rights was flat year-over-year despite a 50% increase in the balance of mortgage servicing rights.

As shown on Slide 8, other income and expense reflected income of $14.7 million in the second quarter of 2007 as compared to expense of $3.3 million in the second quarter of 2006. Other income for the second quarter of 2007 includes a $25.6 million gain on the sale of the UK residuals. The second quarter of 2007 also reflects increased interest expense of $5.2 million, largely related to the financing of servicing advances, which increased by 49% due to the portfolio growth and rising delinquencies.

We also incurred $3.1 million of hedge losses related to interest rate swaps in the second quarter of 2007. In summary, operating income increased by 32% to $27.3 million and other income totaled $14.7 million compared to the expense of $3.3 million for the second quarter of 2006. Other income for the second quarter of 2007 includes a $25.6 million gain on the sale of UK residuals, a $5.2 million increase in interest expense related to advance financing and a $3.1 million of hedge loss on an interest rate swap agreement.

On June 6, 2007, we acquired NCI, a privately held receivables management company, for $55 million. NCI will be combined with Ocwen Recovery Group's operations. This transaction is in line with our focus on both organic and acquisition-based revenue growth for this segment. NCI's leading position in the collection market provides us with operating leverage and a platform for revenue growth. Our focus will be on integrating NCI's operations with those of ORG to take advantage of the improved execution capabilities of our global workforce. We are pleased that NCI's senior executives, Chief Executive Officer and President Patrick Carroll, Chief Financial Officer George Williams, and Executive Vice President of Operations David -- Dale Bissette are remaining with the company.

There has been a lot of news lately about problems in the subprime mortgage market. I'd like to clarify Ocwen's role as a servicer and how the current environment impacts us. Ocwen services subprime mortgages on behalf of the owners of those mortgages. Most of the ones that we service have been securitized. Since we generally do not own the loans that we service, we do not bear the credit risk associated with those loans. We do advance principal and interest payments to the trustees on the scheduled remittance date when borrowers are delinquent. However, most of our advances have the highest standing and are top of the waterfall so that we are entitled to repayment before any interest or principal is paid on the bonds. Historically, losses on advances have been de minimus.

The significant decline in subprime originations, however, has and will continue to have an adverse impact on our ability to expand our servicing portfolio. We nevertheless continue to utilize the conservative approach to value and potential (inaudible) our acquisitions despite a flattening growth curve. Likewise, our conservative approach in maintaining excess liquidity is all the more important in the current environment of rising delinquencies to ensure a continued adequate capacity to meet servicing advances.

We do have certain assets on our balance sheet that create exposure to current conditions in the subprime market. As of June 30, 2007, we have 33.8 million of subordinate and residual mortgage-backed securities and 103.4 million of loans held for resale. Together, these assets comprise less than [70%] of our total assets at June 30, 2007.

We adjust our mortgage-backed securities to market value and our loans held for resale to (inaudible) cost of market value on a monthly basis. For the second quarter of 2007, we recognized unrealized losses on mortgage-backed securities of $2 million and charges to adjust loans held for resale to estimated market value of $600,000.

We are subject to default risk associated with our loans held for resale. And the value of our mortgage-backed securities can be negatively impacted by the loss and delinquency experience of the underlying mortgage loans. Our position as the servicer of the loans that we own and those that collateralize our mortgage-backed securities mitigate some of the risks associated with these assets. We are the best in the industry of loss mitigation and our ability to keep loans performing and to return non-performing loans to performing status keeps losses to a minimum.

In summary, while the growth of our servicing portfolio has slowed due to reduced originations, we have essentially no credit risk associated with our servicing business. Our exposure to subprime assets is limited. And our role as servicer of those subprime assets helps to mitigate the risk associated with that exposure.

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

Thank you, Bill. My remarks today will cover three -- cover our three core business segments, Residential Servicing, Ocwen Recovery Group, and Residential Origination Services.

As shown on Slide 9, the pretax earnings of our core businesses is $41 million for the second quarter of 2007. This represents a 143% increase from the second quarter of 2006 results of 16.9 million and a 111% increase from the first quarter 2007 results of $19.4 million. These results reflect the continued positive performance of our Residential Servicing segment, very strong results from our Residential Origination Services segment fueled by a significant gain on the sale of our UK residuals, and a loss in the Ocwen Recovery Group segment.

Turning to Slide 10, the Residential Servicing segment generated $14.5 million in pretax income for the quarter. This represents a 20% decrease from the second quarter of 2006 pretax income of $18.1 million. This is primarily the net result of a 5.6 million or 23% increase in income from operations offset by a $5.4 million increase in interest expense and a $3.1 million hedge loss during the current quarter related to an interest rate swap.

Residential Servicing revenues were $90.3 million in the second quarter of 2007, a 9% improvement over the second quarter of 2006 revenue of 82.9 million. Servicing and subservicing fees increased by $5.2 million or 7% while process management fees increased by $1.7 million, an 89% improvement over the second quarter of 2006.

Growth in the servicing and subservicing fees is the result of a 22.7% increase in the average balance of loans serviced offset by lower float income as declining prepayment speeds have led to reduced to float balances and incomes. On the expense side, operating expenses totaled $50.4 million. This is a 2.9% increase over the second quarter of 2006.

Considering the fact that the average number of loans serviced in the second quarter of 2007 grew by 20% over the second quarter of 2006. We are very pleased with the continued progress we've made in controlling our costs which result in a lower cost per unit service.

Amortization of servicing rights totaled $27.3 million for the quarter which represents a decrease of 1% over the second quarter of 2006. This decrease is the result of slower actual and projected prepayment speeds offset by the 50% increase in the average balance of mortgage servicing rights carried in the second quarter of 2007 compared to the second quarter of 2006.

Slide 11 illustrates the loan servicing portion of our Residential Servicing segment. Loan servicing achieved $17.5 million in contribution margin for the second quarter of 2007. This represents a 10% decrease from the second quarter 2006 results of $19.5 million. A $6.2 million or 24% increase in income from operations was offset by increased interest expense of $5.4 million with (inaudible) relating to advance financings as a result of the increase in advance balances and a $3.1 million hedge loss related to an interest rate swap. This swap was purchased to protect against a decline in short-term interest rates on our excess float balances over outstanding advance balances. Since advance balances have increased and average float balances have declined, we closed this swap position during the quarter as it no longer served its original purpose.

Slide 12 shows the trend of prepayment speeds over the past several years. Prepayment speeds at 22.6% in the second quarter of 2007 are well below the 29.5% average for the second quarter of 2006 as well as the quarterly averages for the last five years. Slower prepayment speeds have led to lower average float balances and in turn lower float income.

Slide 13 shows our average float balances of $719.5 million in the second quarter of 2007 which represents a 28% decrease from just over $1 billion for the second quarter of 2006 and is significantly lower than our average float balance from the previous two years. Since float income is a component of our servicing and subservicing fees revenue line item, lower float balances and float income offset some of our portfolio growth driven revenue.

Turning to Slide 14, delinquencies have increased over the last year. This is a result of the effects of an increase in the average age of our portfolio by two months, the poor industry performance of 2006 origination, increases in the number and level of ARM Resets, increased subprime mortgage rate, slowing out in price appreciation, and other factors in the subprime origination sector.

The balance of performing loans serviced represents 82.6% of total unpaid principal balance at June 30, 2007. This compared to 88.7% at June 30, 2006. When we consider loans for which borrowers are making scheduled payments under a repayment plan, loans that are cash flowing represent 88.9% and 93.6% of total unpaid principal balance at June 30, 2007 and 2006 respectively.

Increasing delinquencies and slower prepayment speeds as well as portfolio growth have combined to significantly increase our servicing advance balances, as shown on Slide 15, compared to the second quarter of 2006 and the averages over the past two years. For the second quarter of 2007, our average advance balance was $768.5 million compared to $599.4 million in the second quarter of 2006. This increase in average advance balances has led to higher interest expense related to advance financing. It is the primary driver of the $5.4 million increase in interest expense compared to the second quarter of 2006.

As demonstrated on Slide 16, loan servicing unpaid principal balance at the end of the quarter was $53.1 billion, a 3.8% decrease from our first quarter-end balance of $55.2 billion and a 14% increase over 2006 second quarter yearend unpaid principal balance of $46.4 billion. As of June 30, 2007, we were the servicer for 455,000 loans as compared to 481,000 loans at March 31, 2007. Our second quarter 2007 mortgage servicing rights balance of 20 -- $221.1 million represents a 2.5% increase over the first quarter 2007 balance of $215.8 million. This change is the net result of purchases of $32.7 million worth of mortgage servicing rights and amortization of $27.3 million during the quarter of -- during the second quarter of 2007.

As previously discussed, amortization has slowed to reflect decreasing prepayment speeds as we expect to earn servicing income over a longer period of time. Although there are no guarantees, our expectation for the remainder of the year is that prepayment speeds will remain low, delinquencies will remain high, and the volume of new subprime originations will be significantly below 2006 levels.

As shown on Slide 17, Ocwen Recovery Group, our unsecured collection segment, posted a pretax loss of $1.3 million in the second quarter of 2007 as compared to pretax income of $120,000 for the second quarter of 2006. As we have discussed on previous calls, our focus for ORG has shifted to growing revenues since we have accomplished our cost reduction and productivity goals.

The NCI acquisition provides an opportunity to quickly obtain revenue growth. Our challenge and our focus will be on integrating the operations of NCI and ORG to take advantage of NCI's strong customer relationships and ORG's global infrastructure.

Slide 18 shows our Residential Origination Services segment second quarter 2007 pretax income of $27.8 million, this compared to the second quarter of 2006 pretax loss of $1.4 million. This improvement is primarily due to a gain of $25.6 million on the sale of the UK residuals that occurred during the second quarter of 2007. As a result of this sale, other income increased to $28.6 million in the second quarter of 2007 as compared to $1 million in the corresponding quarter in 2006.

The segment's second quarter 2007 revenue of $17.4 million is essentially flat when compared to the second quarter of 2006. Operating expenses have decreased by $1.2 million primarily due to the shutdown of our subprime loan origination business and the discontinuation of certain services which were unprofitable.

Moving on to Slide 19, our Residential Origination Services process management fees generated revenue of $16.9 million in the second quarter of 2007 versus 16.7 million in the second quarter of 2006. Despite the fact that revenues were basically flat, the aggregate pretax contribution from our fee-based loan processing businesses was $4 million dollars, which is a 19.6% improvement over the second quarter 2006 amount of $3.3 million.

In summary, our Residential Servicing segment continues to produce strong operating results. We continue to improve the profitability of the fee-based loan processing components of our Residential Origination Services segment and the NCI acquisition provides the revenue growth we have been seeking.

Thank you. I'd now like to turn the call over to Dave Gunter. Dave?

Thank you, Ron. I would like to focus on three areas this morning -- changes in our balance sheet since yearend; the operating results of our corporate segment; and our effective tax rate for the first 6 months of this year compared to the first half of 2006.

Total assets increased by $102.9 million during the first 6 months to $2.1 billion at June 30, 2007. Other assets increased by $69.3 million during the same time period. The majority of the increase in other assets is from intangibles arising out of our acquisition of NCI.

We acquired NCI for $55 million on June 6, 2007. The acquisition is being accounted for as a purchase, and accordingly, we are allocating the purchase price to the assets acquired and liabilities assumed based on their estimated fair values.

Since this acquisition closed in June, our purchase price allocation is preliminary. We are working with a third-party appraiser to complete the allocation which we expect will occur during the third quarter. We anticipate that the majority of the purchase price will be allocated to customer relationships and amortized over the expected life.

Also included in other assets at June 30, 2007 is our $25 million investment in Ocwen Structured Investments, LLC, which we will refer to as OSI. Our ownership interest in OSI is 25%. Accordingly, we account for our investment in OSI under the equity method of accounting whereby we record our share of profits and losses each period.

Our share of income is not significant. As mentioned in our press release this morning, we expect our investment in OSI to reach $75 million. Mortgage servicing rights increased by $42.8 million during the first half of 2007 as purchases of $102.6 million exceeded amortization of $59.8 million.

Subordinates and residuals decreased by $31.5 million primarily due to the sale of the UK residuals. Advances and match-funded advances grew by $21.4 million, totaling $918 million at June 30, 2007, compared to $896.8 million at December 31, 2006.

We increased our overall liabilities by $74.7 million, reflecting an increase of $68.8 million in our match-funded liabilities. A decrease of $132.3 million in servicer liabilities was partially offset by our increase in lines of credit and other secured borrowings of $121.8 million, mostly due to advanced financing.

(inaudible) mortgage servicing rights purchases and borrowings to partially fund the NCI acquisition. As a result of these changes, our equity-to-assets ratio is relatively unchanged at 27.7% at June 30, 2007, compared to 27.8% at December 31, 2006.

As of June 30, 2007, our overall borrowing capacity in lines of credit and advance financing lines was $1.3 billion and we had unused borrowing capacity of $288 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.

Finally, on May 1, 2007, we purchased 1 million shares of our common stock from two entities controlled by a member of Ocwen's board of directors, at a price of $14.52.

As always we are focused on the efficient utilization of capital. Alternatives that we may consider include strategic investments like our 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 20, our corporate segment reported pretax income of $0.9 million in the second quarter of 2007 as compared to a pretax income of $0.5 million for the second 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.

We continue to evaluate strategic alternatives for those businesses which do not yield acceptable returns.

I also want to touch briefly on our effective tax rate. Our second quarter 2006 results excluded a tax benefit of $141.7 million primarily due to the reversal of $145.2 million of the valuation allowance on our deferred tax assets that we had established in prior years.

Our effective tax rate of 21.73% for the first 6 months of 2006 excludes the impact of the reversal of the $145 million evaluation allowance, but includes a reduction of 12.91% for the anticipated use of tax credits during the year.

No such benefit is included our effective tax rate for the first 6 months of 2007, since we released the valuation allowance against our deferred tax assets during the second quarter of 2006.

Our effective tax rate of 34.81% for the first 6 months of 2007 does include a benefit of approximately 0.86% associated with the recognition of certain foreign deferred tax assets during the quarter.

In summary, our balance sheet is strong, as evidenced by our equity to assets ratio of 27.7%; our $311 million of cash and investment-grade securities; and our $288 million of unused borrowing capacity. And we are evaluating various alternatives to effectively utilize our capital to maximize shareholder value.

I would now like to open the call to questions. Operator?

Thank you. We will now begin the formal question-and-answer session. (OPERATOR INSTRUCTIONS). Bob Napoli, you may ask your question.

Thank you. Good morning. A couple of questions; first on -- I wasn't sure I -- I think I missed a part of the conversation, the loan servicing, the UPB declining during the quarter from $55.2 billion to $53.1 billion. Did the sale of the residuals have anything to do with that or is there -- are we looking at a -- in the environment, a declining UPB?

Ron, would you like to answer that?

I mean, it really is just a function of the decline in origination volume and therefore less product for us to go after at this point in time. Once -- towards the end of February when originations -- underwriting standards were changed significantly as well as other factors, volume dropped off significantly and really was what resulted in the decline in our ability to acquire a product during the quarter.

Okay, so the decline -- it seems like prepayments -- that much of a decline, seems pretty strong given the slowdown in prepayment speeds. Is that -- there is nothing unusual in that number or there are -- there was no sale of any assets or anything as --?

No. I mean there are -- when we are looking at just points in time, there are points in time where loans -- we borrowed loans on an interim basis and sometimes they get transferred to another servicer depending on the transaction that whoever owns the loans strikes, going into securitization. So there may have been some movement along around the books at the end of the quarter that then got transferred away, but that's normal course. There was nothing -- there was nothing special about the quarter from a deboarding standpoint or sale of assets or anything like that.

Okay.

Bob, I think you are -- what I think you are seeing in the environment is there is a tremendous -- there is a reasonable degree of backup in the system, that a lot of loans that originated are still being held at home on format, that are not being securitized.

Okay.

So I think you have the conversion that you would normally see from the level of loans that originated has not, in fact, worked its way through into securitization volume at the same rate.

Okay. With regards to the acquisition in Ocwen Recovery Group, I mean you -- I mean, the acquisition makes a lot of sense on the surface now. I think it was the thought that that would be initially modestly accretive and then as you integrate it, it could -- would be much more accretive, I guess, as you move some of the collections into offshoring.

This is Dave. Let me check take that if I may. For NCI, think about NCI being integrated into ORG. We finished that transaction on June 6th of this year. So you have 25 days in June, and understandably now that we have finished the transaction, all management attention is turned back to the integration.

I would not take the June results of MCI and consider them as being indicative of the go-forward number nor would I tell you to assume that you have significant accretion for the year. Our purpose this year is to grow the revenue base and then convert that cost structure over to ours.

So you should -- you should assume that we'll continue the integration and have an insignificant bottom line impact for this year, and growing thereafter.

Now is NCI, I mean, what -- can you talk about profit margins at NCI prior to your acquisition? What kind of EBIT margins or pretax margins does that, did that company -- I know margins are relatively narrow in that business and your strategy to take the reduced cost base by offshoring is what would make it an attractive business. What kind of margins did that business have before you acquired it?

Think about that business running at very low double digit margins.

Low double digit pretax margins?

10%.

Yes. And now --

And then what kind of a pretax margin do you think you can get on that business that once it's fully integrated?

That would be a perspective forward-looking statement. So we'll be careful about that, but we can tell you that the plan going forward is to make that cost structure look like the Ocwen cost structure.

We'll also recall from our Form 10-K in our previous earnings release announcements, that we had worked on the ORG cost structure and platform to prepare it. So again the revenue growth here from NCI is significant, but we can't promise you or the public on a go-forward basis an exact pin point of that margin going forward.

Okay and what is your cash tax rate, what is your running cash tax rate?

Do you mean the cash that we would pay if you think about how we file our returns?

Yes, when you are using a GAAP tax rate at 35%.

Yes, the GAAP tax rate, as you heard, as we opened up today was just a few basis points under 35. You would think about the cash tax rate as much closer to the low 20s, just about all come in.

Okay. And on the credit side in your servicing portfolio, I mean how -- I mean, obviously the markets are extremely volatile and credit spreads have lightened, and they have a number. It's -- not a day goes by where you don't get some very bad news in this sector. What do you, the underlying -- given your delinquencies and non-performing assets are going up and not unexpectedly, but what type of trend -- are you seeing acceleration of deterioration in the credit at this point?

Ron, would you like to take that?

No, I wouldn't say there is any sort of acceleration. I mean the -- the 2006 origination, as everybody is aware, have performed very poorly with delinquency levels out of the gates being significantly higher than prior-year originations. So there is still that book of business which is significant flowing through and getting more delinquent each month although our expectation would be that a lot of those loans that are -- will go bad early and then at a point in time that will flow down, and they -- what pays through the first year or so will then perform more normally to how other product has performed from the past.

You do hear a lot of press about the ARM Resets, I mean it's -- there has always been ARM Resets. There is a lot of them still going on. The issue is that many times now loans are resetting 2.5 to 3% -- three points above the initial rates whereas maybe a year-and-a-half, two years ago, they would have only reset at 75 to 100 basis points above.

So it puts more stress on the borrowers and they don't have the ability necessarily to refi at that point in time, but we are still having good success in working with those individuals, keeping them paying. If they get a little bit delinquent, we get them out of payment plan. So I don't think there is any sort of like acceleration or anything going on beyond sort of the normal stuff and especially the 2006, as it just ages on.

Okay and I understand that the advances are senior to the triple A securities, but what -- at what point do you get repaid those advances because you are paying interest expense on those advances?

You get repaid either at the time when you collect it back from the borrowers so if you get a borrower to pay off their loan or repay their delinquency or on a forbearance plan you are going to chip away at it every month, or you get paid at the time of liquidation of the asset. So if you do a discounted payoff or you sell the REO at that point of time, then you would get all your advances back.

Right, thank you.

And Bob, to answer your -- another way of trying to answer the question on -- I can tell you that our current margins pre-overhead to our Indian operations in ORG are somewhere around 40%.

40%?

Yes.

And that would be the goal to get the quite an entity.

Right, I am trying to be helpful here. You can't drag me into a forward-looking statement, okay?

All right, thank you.

Thank you.

John Hecht of JMP Securities, you may ask your question.

Good morning. Thanks for taking my questions. David, can you give me -- I guess, you are estimating the NCI goodwill -- excluding that, the total value of goodwill and intangibles at 06/30/07?

John, you are asking for the value of the goodwill and the intangibles?

Yes, excluding what you are estimating the NCI goodwill and intangibles to be at the June 30 period end.

Okay, how much are our intangibles without NCI?

That is very good, hang on. Our total category for intangibles is approximately $[60] million at June 2007, and back in December that number was only $7 million. So most of the intangibles here are NCI for us.

Okay. You guys particularly in the servicing business --?

Just a minute, just be to be clear John, the intangibles haven't really -- other than NCI really haven't changed materially and they are about $7 million.

Yes, that was clear from David's response. The cost in the servicing business, you guys have done a very good job of leveraging unless you drew your UPB base and holding costs down -- flattish or down. There was a $4 million quarter-to-quarter increase in compensation and employee benefits. Was most of that related to the NCI? In other words, trying to assess what our quarterly or monthly run rate would be given that you just integrated that in June or is there something else going on there?

Yes, most of it NCI.

Okay. Looking at, I guess, going more to some of the commentary about the purchasing market for MSRs, are you -- I mean, given that we've all read and there's nothing new that the 228 product in terms of its -- the amount of people offering it is -- is understood your pressure. So given that it's somewhat obvious that the opportunity to purchase MSRs some new securitization is at least tighter than it has been, is there other methods for you guys to purchase MSRs through residuals or things of that nature?

We are now looking -- go ahead, Ron.

No, go ahead, Bill. Go ahead, Bill.

We are looking at -- we formed an asset management view called OSI, and we are also looking at other areas where we can leverage our servicing expertise in that area. So I think you are going to see -- we are not very sanguine about the prospects of getting large amounts of new servicing business in the short term here. I do think though this -- in the intermediate-to-long term that this rupture in the market will put a greater focus in terms of the quality of the servicer and what -- basically the business that you can get and the fees that you can attain for it. So in a short term, the disruption source almost freezes the amount of opportunities. But I think as this continues to get a little bit more difficult out there, hopefully we are going to see more volume coming in. We just need to be, I think, disciplined here on the marketplace to pick our shots where we invest our capital.

So would that be -- obviously, the new opportunities are going to come from new securitizations and the fact you guys have a higher than average -- certainly much higher than the average servicing rating up there. But, I mean, you are seeing disruption where the current servicers are being forced to put book of business back on the market, or you might get some opportunity or you are finding opportunity by purchasing other residuals or there may be disruption in the value enabled to tear up the servicing on that.

Well, there have been additional servicing shops put on the market. In some cases, those have been purchased by new entrance in to the business such as hedge funds who would have -- who have described a higher value to them that we would describe to those servicing platforms. We would look at them simply as a means of generate MSRs or topline UPB, and would describe negative to zero -- zero to negative value for their actual servicing platform and performance.

So I -- there could be opportunities from time to time in that regard, and historically we have grown through acquiring all platform -- broken platforms and putting them as part of our servicing groups. But those tend to be -- they tend to be a little discontinuous in terms of the how you actually -- those deals and how you actually close them.

But I think -- happen to think in the short term here, you are going to see less securitizations, and but long-term if you look at any of our performance matrix, I think that our ability to get loans back cash flow and in performing will in fact create real sustained value, and that will be recognized. If you look at the Moody's standard where they take a -- take loans that are 90 days or more delinquent and look forward 12 months what cash flow is generated off those securities, I believe that we generated about 66% of the potential cash flow, which was 34% better than the highest rated Moody's servicers.

And ultimately if this business shifts more towards people who are principles, they'll begin to realize that there is value there and they'll pay for that. But in the short term here, there's -- I think there is a lot of -- there is inactivity simply because of the shock that's occurred in the marketplace.

All right. Thank you very much for the color.

Rick Shane of Jefferies & Company, you may ask your question.

Thanks guys. The first question, I suspect you probably not going to have an immediate answer to, but perhaps at something we can look at going forward. Can you stratify the unpaid principle balances by vintage? Can you give us what percentages '07, '06, '05 and then '04 and earlier?

I mean, we don't have that information available right now. We can evaluate whether it makes sense to provide that information going forward. So we'll discuss that.

Great. Yes, and again I realize it's probably not a question you can answer on the fly, but given pretty big distinctions between how the vintages are performing, I think that will be helpful to everybody. Next question, I want to clarify something that John raised. The -- what was the -- what is the SG&A run rate at NCI? Is it $4.1 million per quarter, should we see a hot -- or is it actually higher because of the timing of the acquisition?

Well, remember the timing at the acquisition only gave you 25 days in the month of June. So the total operating expenses approximated $5 million.

For the month.

For the month.

$5 million in a month. So it's $15 million a quarter?

On that run rate.

Right, I mean, NCI has revenues of close to $80 million a year.

Yes.

Okay.

They are the fifth largest asset -- receivables management company depending on which list you look at. Let's say they are squarely in the top ten. Our view of why it was interesting is very simple, we were able to pay less -- we were able to pay less than $1 on the dollar to buy revenue that we believe we can increase the margins fairly substantially once we are able to get it integrated within our existing India operation.

Got it.

There would be however -- there are costs associated with doing that in short term, and there was obviously the transaction itself because I think a little disruption in the performance of the NCI for the month that, I think as a long-term value we are very optimistic about it.

Okay. And last question and this is going to be a little bit more conceptual, but we are basically seeing delinquencies or non-performings go up about $1 billion a quarter at this point. Can you help us understand the difference between servicing cost on a loan that's performing and a loan that's not performing from quantitatively, and then also sort of qualitatively, can you help us understand what you do differently once the loans becomes delinquent, so that we can sort of think practically about what's involved because ultimately the question I think everybody is facing here is, does the benefit from lower amortization expense is that more than offset by what could be higher servicing cost related with harder work to service underperforming loans?

Ron, let me high level cut at it and maybe then you could pitch in. I just wanted to give one or two points across. If that's okay, then I'll let -- like to have you still in. I mean, I think, Rick, from just standing back from a perspective, if you look at the growth of our portfolio over the past say three years, and you are seeing the growth and delinquencies within the portfolio putting aside the interest cost associated with advances, I think you've seen over that whole period of time a flat cost of operations and certainly a fairly significant reduction in the unit cost of servicing mortgages over that three-year period.

We can -- I think we can go -- I am not sure what extent we wanted to give you individual differences in costs by assets, but it's status of the asset, but you I think you've seen over that period people have been concerned about that, I think the number speak for themselves that in fact has not been the case.

Hope and do I agree, I mean look there's been a tremendous amount of operating leverage in the model over the last three years. And a lot of that has -- a lot of that has to do with increased operating efficiency, and shifting operations. But that is certainly, and again I would describe that as occurring in a very static environment, a favorable environment, but a static environment.

So admittedly, it's sort of an apples-to-apples comparison. But now we are moving into a more dynamic environment, where the percentage of loans that you are servicing that are harder to service is going to increase. And so what we are trying to understand is on a unit basis how much more cost intensive it is to do that? I -- again, I recognize that you guys have done a ton on an apples-to-apples basis to lower for unit costs, but now we are moving to an environment where that apples-to-apples isn't going to make as much difference. I just want to understand that better.

So your estimate of what do you think will happen to delinquencies compared to where they are today?

No, I am not even concerned. We can make our own projections about delinquencies. Everybody can do that. I just want to know how much more expensive it is for you to service a loan that is in delinquency?

Yes --

Let me --

Okay, go ahead, Ron.

Yes, I don't think we are going to -- we are not going to disclose our cost structure because that's proprietary and something that we would use in our pricing. But let me just maybe -- why don't I just put it this way? If you -- if we had to hire an additional 100 people doing collections-type work, which -- a 100 would be a lot, okay.

Give you some idea, Rick -- I mean, Ron, today we have backend collectors, the most experienced, best people we have, we have how many of those?

About 70 of those.

Right, just to get some perspective as to what the size of the number is.

But let's say I added about a 100 and I'm able to do most of that offshore, let's say my [all-in] costs -- I'll just go crazy and say my all-in cost is $20,000, which is high. That's only a $2 million annualized increase. Now, if you are somebody in the U.S. doing that work and your all-in cost was going to be close to a $90,000 to $100,000, it's a much bigger impact.

The interesting thing, Rick, that I think is -- I mean, our strategy again for next year is going to be that we are going to continue to beef up and be well-staffed in our people that are collectors, that touch and produce the quality of product that we deliver. We bring a value to the market because we are the best out there at collecting. We are not going to anyway scrimp on that.

However, a large component of our workforce in fact are people that process stuff, and we are continuing to not only move those jobs to lower-cost areas, but more importantly, our focus is going to be on significantly reducing the amount of non-customer contact positions.

So Ron is very much aware that his -- that the cost structure -- we will continue to improve our cost structure and at the same intend to -- continue to add more resources than our competitors can add to get -- basically keep delinquency down.

But as Ron said, if we doubled the size of our entire workforce that deal with delinquent loans, you wouldn't add more than a couple million bucks to the -- to expenses.

Which would be 2% of the total operating structure.

Right.

And are there other -- obviously we understand the interest expense, but are there other expenses associated with that -- that show up in the P&L that maybe ultimately get reversed but -- foreclosure expenses or --

No, those don't go through expense -- I mean, it really -- this is all about the interest cost on the advances is really where you are going to see the impact.

Okay.

That is clearly the driver that -- if you're going to see any negative impact at all.

Okay. And finally to circle back to Bob's original question, and when you see that reversed, how long is it from first delinquency when you start making advances to foreclosure typically?

Dave, you might know this better than me but I think historically we recover an advance in a -- on average in about 14 months.

It's 12 to 18 months is the number. That interchanges a little bit from time to time.

That's right.

Okay, great. Guys, thank you for taking our questions.

Thank you.

Jordan Hymowitz of Philadelphia Financial, you may ask your question.

Hey, guys, a couple of questions. One, from your commentary on the principal balances, how much do you think they'll be down this year? A couple of million bucks from the $53 billion today?

Yes, we're not --

Well --

That's -- I'm sorry, sir, we can't -- that would be a forward-looking statement.

Well, you said you don't expect them to grow from here so I'm just trying to figure out, are we seeing less than 10%, what type of -- what's the farthest range you think -- you know what I'm saying? Because you've already kind of implied they're going to be down from here.

Yes, I don't think that statement was made -- this is Dave. What we do know for the first six months of the year is that we are actually up $1 billion in unpaid principal balances. And then we have relayed the fact that there is fewer securitizations in the market, but no, we couldn't give you a pinpoint estimate for that.

Could you give a gray estimate, like it's gone from 55 to 53, do you think it will plus or minus a couple of million from that number?

No, I can't back into a forward-looking statement. I -- because I don't have that knowledge.

Okay. Second question is on your delinquency slide, I am having trouble quantifying that delinquency slide that shows 82.6% current, 14.7 non-performing with what you guys disclosed as far as in the -- non-performing in their release which last year said 14.3 which is 90 days and over. So help me put the two together on a same basis. In other words, 6/30 last year the slide says 10.1, but in the Q it says 14.3 so --?

Okay, so what we are looking at when you see that slide on slide 14, you can see the performing for 2006 was 88.7.

Yes.

And for 2007 was 82.6.

Yes.

If you go to the Press Release and look down in the bullet points near the bottom of page one --

Yes.

You are going to see that we lay out for you the unpaid principle balance. In order to tie to those numbers, you need to go to the slide 14 and take the two smaller categories, Non-performing and REO, and add them together to get to the numbers in the Press Release.

But even that would add up to 13 -- 11.3 for last year and your Q had 14.3 last year for second quarter '06. Your Q for this year isn't out yet. Well, let me put this way --

I think the issue may have been in the prior year that VA assets were included in the delinquency percentage and these numbers do not include that because they are really not related to the traditional subprime servicing portfolio.

The VA assets come over as REO. So you can look at it both ways.

So I think we -- I think that -- I think the answer is that we kind of -- and I think maybe we do a better job of footnoting into some other places than we did here, but I think last year at the time we were including the VA assets, but we've excluded those and excluded them in both years. So it's comparable because they are not really a function of what's going on in the servicing book or the subprime market.

And can you give then the number for the first quarter of this year, since we wouldn't have them?

We'll refer to your to the Form 10-Q for the first quarter and we will lay them out clearly for you and the public at the same time in the second quarter 10-Q which will come early in the month of August. So fair enough for a request.

Okay, thank you.

Tom [Munster] of Second Curve Capital, you may ask your question.

Hi, that was a great quarter, that I completely understand the difficulty in adding UPB in this environment. Just a couple of quick questions on that topic. The first was, can you give the UPB additions and runoffs that you give in the Q?

We will in the Q.

In the Q, okay. And then on OSI it looks like -- I saw one transaction that you closed, it looks like it was Lehman issue deal, the structured asset security core series 2007-OSI, and based on the size of that deal, it looked like the size of that deal and the dollar amount that you said you've put towards OSI this quarter. It looked like there is likely two transactions that you have done. Is that --is that correct or is it just the one transaction that you did with Lehman?

We did two transactions. We also did transaction with Bear.

With Bear as well?

Yes.

Okay, great. Those were my only questions. Thanks for your time.

Yes, welcome.

We have no further questions at this time.

Very good. Thank you everybody for attending. Have a great day. Bye.