Onity Group Inc (ONIT) 2007 Q3 法說會逐字稿

Welcome to the Ocwen Third 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, then Calendar of Events, then Click Here to Listen to Conference Call. Then under Conference Call, Third 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; Ron Faris, President of Ocwen; and Bill Shepro, Senior Vice President in charge of Ocwen Recovery Group. 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, we will turn the call over to Bill Erbey. Bill?

Thank you, Dave. And thanks to all of you for attending Ocwen's third quarter conference call. I would like to cover three topics in my remarks today. First, an overview of our third quarter earnings; second, the reduction in our non-core assets; and third, the development of our asset management vehicles.

The past quarter epitomizes the saying, that which does not kill us makes us stronger. We had strong operating earnings for the quarter, including growth in balances in residential servicing. However, due to the disruption in the credit and capital markets, other income and expense was negatively impacted particularly by non-core assets. As a result, as shown on Slide 4, pretax income for the third quarter of 2007 was $9.8 million, compared to $26.4 million for the third quarter of 2006.

Slide 5 demonstrates the strength of our operations as operating income increased to $31.3 million from $25 million for the third quarter of 2006, which prior to this year was the largest operating income in the history of the company. This 25% increase in operating -- 25% increase in income from operations was driven by our Residential Servicing segment and the fee-based loan processing businesses included within our Residential Origination Services segment. A $6 million increase in interest expense associated with advances offset increased operating income and contributed to the above mentioned decline in pretax income.

While Residential Servicing and Residential Origination Services had strong operating results, Ocwen Recovery Group did not meet our expectations. We have a plan to expedite the NCI integration and improve results. Bill Shepro will lay out our planned action steps later in this call.

Slide 6 show third quarter 2007 revenues of $125.5 million, an increase of $15.3 million over the third quarter of 2006 reflecting the inclusion of NCI in our 2007 results. Excluding NCI, revenue was actually down slightly despite growth in our Residential Servicing portfolio. Revenue has not grown at the same rate as our portfolio for two reasons. First, declining prepayments have reduced our float balances and float income. Second, certain components of our servicing and subservicing fees including servicing fees and late fees are recognized when they are collected.

Increasing delinquencies have resulted in lower collections relative to the size of our portfolio. Delinquencies affect the timing of servicing fee revenue recognition not the ultimate collection of servicing fees, because servicing fees have priority over any interest or principal payments on the bonds. As of September 30, 2007, we have $38 million of uncollected delinquent servicing fees that have not been recognized as revenue, an increase of $6.9 million from last quarter.

Operating expenses of $94.1 million as depicted on Slide 7, increased by $9 million compared to the third quarter of 2006, largely due to the inclusion of NCI's operating expenses in the third quarter of 2007. Amortization of servicing rights decreased by $5.1 million reflecting a decrease in prepayments fees to 21.6% for the third quarter of 2007 compared to 31.5% for the third quarter of 2006.

As shown on Slide 8, other income and expenses reflects expenses of $21.5 million in the third quarter of 2007 as compared to income of $1.4 million in the third quarter of 2006. The current liquidity environment had a significant negative impact on other income expense due to a $6 million increase in interest expense associated with advanced funding requirements and $14.6 million of losses related to the disposition and write-down of non-core assets.

Additionally, our efforts to reduce our investments in non-core, primarily subprime mortgage assets have resulted in lower interest income compared to the third quarter of 2006.

In summary, operating income increased by 25% to $31.3 million and other expenses totaled $21.5 million reflecting the turmoil in global capital markets. Notwithstanding the significant negative impact of the liquidity crisis, we believe that our 18th consecutive quarterly profit clearly differentiates the business model of a servicer from that of an originator.

As discussed previously, an environment of declining prepayments and rising delinquencies does constrain our revenue growth due to lower float balances and float income, delayed recognition of servicing fees, and slower recognition of late fee revenue due to slower cash collections. These conditions also lead to increased interest expense related to the funding of servicing advances.

However, lower prepayments also lead to lower amortization of servicing rights as the period in which we collect servicing fees is extended resulting in greater total revenue over the life of a given pool. Additionally, we incur less compensating interest. These counterbalancing effects are illustrated by third quarter 2007 operating income and pretax income of $34.9 million and $21.9 million respectively for our Residential Servicing segment as compared to $31.3 million and $23.9 million for the third quarter of 2006.

Our fee-based businesses within Residential Origination Services are balanced between resolution and servicing of loans as well as origination. As a result, we have seen a relatively stable earnings pattern despite the significant decline in origination activity this year. Our fee-based businesses generated pretax contribution of $5 million for the third quarter of 2007 as compared to $5.8 million for the third quarter of 2006. Contribution from these businesses totaled $12.9 million for the nine months ended September 30, 2007 compared to $11.4 million for the same period in 2006.

Over the past year, we have made a concerted effort to reduce our investments in non-core assets with a particular focus on reducing our exposure to subprime mortgage assets. To that end, we have reduced our investment in loans held for resale and subordinates and residuals to $116 million at September 30, 2007 compared to $164.3 million at December 31, 2006 and $259.8 million at September 30, 2006. This reduction in investments has, however, resulted in a $7.2 million increase in interest income compared to the third quarter of last year.

For the past year, Ocwen has focused on developing asset management vehicles that benefit from our superior servicing and loss mitigation performance. These vehicles afford Ocwen a controlled source of supply of servicing and more importantly enable Ocwen to generate higher returns for our superior loss mitigation performance.

This will enable Ocwen to de-commoditize its Servicing business, as most servicing today is awarded to the servicer willing to pay the highest price for the servicing rights, i.e., willing to work for the lowest margins. One such investment is OSI, Ocwen Structured Investments, which is funded 25% by Ocwen and 75% by third party investors. Total committed equity by investors is $300 million. OSI invests in mortgage servicing rights, and the related lower tranches and residuals of residential mortgage-back securities, the credit risk of which is hedged with single name credit default swaps on the ABX Index. We manage OSI's portfolio and sub-service the mortgage servicing rights that are acquired by OSI. OSI started operations in May 2007 and has net assets totaling $148.2 million as of September 30, 2007.

During the third quarter, we recognized $1.2 million in equity and earnings of OSI and we earned approximately $200,000 in management fees. We recently created a second venture that will leverage our servicing capabilities. During the third quarter we invested $18.1 million representing our 25% interest in an [MD] that purchases and resolves non-performing loans. Again, committed equity is $300 million of which Ocwen is a 25% investor.

We plan to carefully consider other strategic vehicles that leverage our asset management capabilities and allow us and our partners to benefit from our superior servicing and loss mitigation capabilities.

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

Thank you, Bill. My remarks today will cover our Residential Servicing and Residential Origination Services segments. As shown on Slide 9, the Residential Servicing segment generated $21.9 million in pretax income for the quarter. This represents a decrease of $2 million or 8.5% from the third quarter 2006 income of $23.9 million, but an increase of $7.5 million or 51.7% from the second quarter 2007 pretax income of $14.4 million. The decrease compared to the third quarter of 2006 is primarily the net result of a $6.2 million increase in interest expense related to increased advance funding requirements, which offset the $3.7 million or 11.7% increase in income from operations.

Residential servicing revenues were $86.9 million in the third quarter of 2007, a 0.6% decrease over the third quarter of 2006 revenue of $87.5 million. Servicing and subservicing fees decreased by $2.7 million or 3.2%, while process management fees increased by $1.7 million, a 65.2% improvement over the third quarter of 2006. The decrease in servicing and subservicing fees is primarily the result of lower float income as declining prepayments have led to reduced float balances and income. Servicing and subservicing fees have not grown in proportion to the 12.4% increase in the average balance of loans serviced as rising delinquencies which impact the timing of revenue recognition have constrained revenue growth.

On the expense side, operating expense totaled $52 million. This is a 7.5% decrease over the third quarter 2006 results of $56.2 million. Considering the fact that the average number of loans serviced in the third quarter of 2007 grew by 6.2% over the third 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 to service.

Amortization of servicing rights totaled $21.8 million for the quarter, which represents a decrease of 19.3% over the third quarter of 2006. This decrease is the result of slower actual and projected prepayment fees offset by the 36.7% increase in the average balance of mortgage servicing rights carried in the third quarter of 2007 compared to the third quarter of 2006.

Slide 10 illustrates the loan servicing portion of our Residential Servicing segment. Loan servicing achieved $23.2 million in contribution margin for the third quarter of 2007. This represents 8.6% decrease from the third quarter of 2006 results of $25.3 million. A $3.2 million or 9.1% increase in income from operations was offset by increased interest expenses of $6.2 million related to advanced financings as a result of the increase in advanced balances.

Slide 11 shows the continuing slowing of prepayments fees. Prepayments fees at 21.6% in the third quarter of 2007 are well below the 31.5% average for the third quarter of 2006, and have continued to decrease from the 22.6% average for the second quarter of 2007.

Turning to Slide 12, delinquencies have increased over the past year. This is a result of an increase in the average age of our portfolio by four months, the poor performance of 2006 originations, an increase in the number and level of ARM resets, a slowdown in home price appreciation, amongst other factors. The balance of nonperforming loans serviced represents 85. -- the balance of performing loans serviced represents 85.4% of total unpaid principal balance at September 30, 2007. This compares to 92.8% at September 30, 2006. Performing loans include loans for which borrowers are making scheduled payments under forbearance and bankruptcy plans. Slower prepayment speeds have led to lower average float balances, and in turn lower float income.

Slide 13 shows our average float balances of $594 million for the third quarter of 2007, which represents a 42.6% decrease from just over $1 billion for the third quarter of 2006, and a 17.4% decrease from the $719.5 million for the second quarter of 2007. Since float income is a component of our servicing and subservicing fees revenue line item, lower float balances and float income result in revenue growth being less than the growth in our serving portfolio.

Increasing delinquencies and slower prepayment speeds as well as portfolio growth have combined to significantly increase our servicing advance balances as shown on Slide 14 compared to the third quarter of 2006 and second quarter of 2007. For the third quarter of 2007, our average advance balance was $899.8 million compared to $637.8 million for the third quarter of 2006, and $760.2 million for the second quarter of 2007. This increase in average advance balances has led to higher interest expense related to advance financing. This is the primary driver of the $6.2 million increase in interest expense compared to the third quarter of 2006.

As demonstrated on Slide 15, loan servicing unpaid principal balance at the end of the quarter was $55.7 billion, a 4.8% increase from our second quarter-end balance of $53.1 billion and an 11.2% increase over 2006 third quarter end unpaid principal balance of $50.1 billion.

As of September 30, 2007, we were the servicer for 455,000 loans as compared to 447,000 loans at June 30, 2007. Our third quarter 2007 mortgage servicing rights balance of $205 million represents a 7.3% decrease from the second quarter 2007 balance of $221.1 million. This change is the net result of purchases of $5.7 million of servicing rights and amortization of $21.8 million during the third quarter of 2007.

As previously discussed, amortization has slowed to reflect increasing 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.

Slide 16 shows our Residential Origination Services segment's third quarter 2007 pretax income of $0.8 million compared to third quarter 2006 pretax income of $5.6 million. The decrease is primarily due to a $6.5 million reduction in interest income and $2.5 million of losses on loans held for resale.

Slide 17, however, demonstrates the solid revenue performance of the fee-based businesses included in Residential Origination Services despite challenging conditions during the quarter. Revenue totaled $19 million for the third quarter of 2007 versus $20 million in the third quarter of 2006. Our balance of servicing and resolution-related services along with origination services has allowed us to maintain strong revenues despite the significant decrease in origination activity compared to last year.

Slide 18 shows that we have been able to maintain strong contribution margins in these businesses as well. Contribution totaled $5 million for the quarter compared to third quarter 2006 contribution of $5.8 million and $4 million for the second quarter of 2007.

In summary, our Residential Servicing segment and the fee-based businesses within our Residential Origination Services segment continue to produce strong operating results.

Thank you. I'd now like to turn the call over to Bill Shepro.

Thank you, Ron. My remarks today will cover three areas -- first, a brief overview of Nationwide Credit; second, NCI's financial performance for the third quarter; and third, Ocwen's action plan to improve performance.

Nationwide Credit, Inc. is the seventh largest company in the accounts receivable management industry with approximately $75 million of annual revenue in 2006. NCI's primary business is continuancy collections for credit card issuers and other consumer credit providers. Approximately 67% of NCI's annual revenue comes from credit card-related collections, 14% is from other consumer credit collections, 12% from first-party customer service solutions, and the remaining 7% of NCI's revenue is from student loan collections.

NCI primarily serves large credit issuers and enjoys a blue-chip customer list. NCI serves its customers from five call centers in the United States and one in British Columbia, Canada. In addition, NCI has a six-year relationship with a strategic alliance partner in India through which NCI has gained significant experience in providing service to its clients from an offshore location. As of September 30, 2007, NCI and Ocwen Recovery Group combined had a staff of 1176 collectors and managers and a support staff of 115 people. In addition, approximately 410 collectors provide offshore services from NCI's strategic alliance partner.

As shown on slide 19, combined NCI and ORG revenue for Q3 2007 was $16.9 million, a decrease of $1.8 million compared to combined Q3 2006 revenue on a pro forma basis.

As showed on slide 20, the combined pretax loss of $3 million represents a $2.6 million increase compared to the ORG pretax loss for the third quarter of 2006. The Q3 2007 loss includes approximately $615,000 of amortization of intangible assets, $500,000 of depreciation, and $550,000 of interest expense.

While NCI's third quarter 2007 financial performance was below our expectations, we continue to perform well for our customers and are seeing a substantial increase in placement volume from our clients. We also developed a plan to improve NCI's financial performance, which revolves around three main issues.

First, NCI was understaffed by 65 collectors for our key clients. As shown on Slide 21, the number of accounts placed in the third quarter of 2007 was 12.7% greater than the number placed in the third quarter 2006. At the same time, headcount in the third quarter of 2007 was 13.8% lower than headcount in the third quarter 2006.

If NCI had staffed appropriately, NCI would have generated approximately $1.7 million of additional revenue and $560,000 of additional contribution for the quarter. To address this issue, management has developed and implemented a new staffing model to continuously monitor staffing needs and the performance of collectors against their goals in order to maximize collections on the increasing account inventory.

A second reason for NCI's poor performance in the third quarter 2007 was the slower than anticipated build-up of NCI's largest first party outsourcing client. This is primarily a result of uneven call volume from the customer. To address this issue, NCI management has negotiated a new contract with this client which will result in a 14% fee increase beginning on January 1, 2008. In addition, the client has agreed to place all of its vendors on the same pricing method which should result in more reliable call volumes. The fee increase should improve revenue and contribution by approximately $240,000 per quarter.

The third reason for NCI's poor performance in Q3 2007 was due to approximately $504,000 of start-up costs related to the opening and staffing of a new facility in India that produced little revenue during the period. Although it is still early in the development of our staff, the preliminary indications on collector performance are in line with our expectations. We target our offshore, [full goal] collectors to generate approximately $3000 to $6000 of variable operating profit per collector per quarter. For most of our products there is a seven month training period for our new collectors to reach full goal status.

In acquiring Nationwide Credit, Ocwen recognized NCI's extensive industry experience, its blue-chip customer base, and the opportunity to substantially increase its profitability through Ocwen's global operations. To improve NCI's performance, in addition to the items that we previously discussed, the management team has developed a very specific integration plan.

First, management will increase earnings by migrating some of the collector jobs from NCI's strategic partner based in India to Ocwen's India facilities. We expect that this will increase margins on the transfer of jobs from the current 15% level to approximately 30%, ultimately increasing earnings by $120,000 per quarter by the fourth quarter of 2008.

Second, management will increase earnings by eliminating redundant expenses and migrating primarily through attrition US-based collector and administrative positions to India. This will save approximately $1.2 million per quarter once fully implemented by the end of the first quarter 2008, offset slightly by additional costs in India.

In summary, while both the third quarter revenue and earnings were below our expectations, we remain optimistic that the performance improvement and integration claims that we have put in place will substantially improve NCI's financial performance. These initiatives will also allow us to improve performance for our customers, which in turn will lead to more account placements and the continued growth of the company.

I'd now like to turn the call back over to our Chief Financial Officer, Dave Gunter. Dave?

Thank you, Bill Shepro. I would like to focus on three areas, changes in our balance sheet since year-end, operating results of our corporate segment, and progress that we have made in increasing our borrowing capacity since year-end.

Our balance sheet reflects portfolio growth, the impact of rising delinquencies and declining prepayment, the effects of the liquidity crisis that occurred in global capital markets during the third quarter, our acquisition of NCI along with increased investments in unconsolidated asset management vehicles and progress in our efforts to reduce our exposure to subprime assets.

The growth of the Residential Servicing portfolio as evidenced by our $3.6 billion or 6.8% increase in unpaid principal balances from yearend, has resulted in a $26.9 million increase in our balance of mortgage servicing rights as purchases of $108.7 million have exceeded amortization of $81.8 million.

Despite an increase in UPBs of $2.6 billion or 4.8% from the second quarter of 2007, our balance of mortgage servicing rights decreased from the previous quarter by $15.9 million or 7%, because amortization of $22 million exceeded purchases of $6.1 million. Portfolio growth combined with rising delinquencies and declining prepayments has contributed to a $240.3 million increase in total servicing advances which totaled $1.14 billion at September 30, 2007. We have increased borrowings to fund portfolio growth and our increased advanced funding requirements. Borrowings under match-funded advance facilities and lines of credit totaled $1.11 billion at September 30, 2007, an increase of $279.7 million from year-end.

Lower cash collections have contributed to a $131.3 million decrease in cash and investment-grade securities which totaled $180.2 million at September 30, 2007. Our efforts to reduce our exposure to subprime mortgage assets are reflected in our balances of loans held for resale and subordinates and residuals, which totaled $116.0 million at September 30, 2007 compared to $164.3 million at December 31, 2006, and $259.8 million a year ago.

Other assets have increased by $94 million during this year. At September 30, 2007, other assets include approximately $50 million in goodwill and intangibles from the NCI acquisition, $37.3 million for our investment in OSI, and $18.1 million representing our 25% interest in an entity that purchases and resolves non-performing loans.

Our balance sheet also reflects the significant impact of the liquidity crisis that occurred in the global capital markets during the third quarter. This impact is evident in our asset valuations as we have recorded lower of cost or market adjustments on loans held for resale and unrealized losses on trading security totaling $5.9 million in the third quarter. We also liquidated certain discount certificates of deposit during the quarter that we had intended to hold to maturity.

During our peak advanced period in August, we learned that the sub-servicer for certain Pooling and Servicing Agreements for which we are the servicer had declared bankruptcy. This was the only contract where we as servicer were required to fund servicing advances that would normally have been funded by the sub-servicer. We elected to liquidate the certificates of deposits to ensure that we were able to meet our obligations under those Pooling and Servicing Agreements. The termination of those certificates of deposit resulted in a pretax loss of $8.7 million.

As shown on Slide 22, our Corporate segment recorded a pretax loss of $9.9 million in the third quarter of 2007, as compared to a pretax loss of $2.8 million for the third 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. The above mentioned loss on the liquidation of certificates of deposit is included in our corporate results as this is the segment in which the investment balance and associated interest income had been reported.

The third quarter of 2007 also includes $1.7 million of losses on CMOs in our trading securities portfolio. These losses are somewhat offset by $2.4 million of equity income from our investment in BMS which we account for under the equity method. BMS had significant hedge gains during the quarter driven by declining interest rates.

As of September 30, 2007, our overall borrowing capacity was $1.35 billion and we had unused borrowing capacity of $282.7 million. This compares to total and unused borrowing capacity of $1.175 billion and $356.3 million respectively at December 31, 2006. Effective October 19th, 2007 we have increased the funding available under our Greenwich advance funding facility from $90 million to $140 million bringing total borrowing capacity to $1.4 billion.

Since year-end we have taken the following steps to increase our borrowing capacity -- increased the variable funding notes included in our Barclays advance facility from $100 million to $200 million, increased availability under our secured line of credit with JPMorgan Chase from $300 million to $355 million, added a $200 million advance finance facility with JPMorgan Chase and added $50 million in capacity to our Greenwich advance facility as discussed above and developed additional advance facilities which are in various stages of review with ratings agencies. While we have added $405 million of capacity to our advance funding facilities and our secure line of credit, we have reduced our borrowing capacity related to mortgage loans reflecting our reduced investments in these assets.

In summary, we've achieved portfolio growth, reduced non-core assets, and greatly expanded our borrowing capacity even while the market has been impacted by the global liquidity crisis.

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

Thank you. (OPERATOR INSTRUCTIONS). Bob Napoli with Piper Jaffray.

Thank you. Good morning.

Good morning.

Lots of questions, I'll just ask a few I guess. The portfolio growth -- the UPB growth versus the MSR decline, is that because -- what is -- can you explain that?

Yes, this is Ron. The growth during the quarter was driven largely by two things, one related to the investments that OSI made. Since OSI actually purchases the servicing rights and then sub-services to Ocwen, you do not see servicing rights on the books related to that. In addition as Dave mentioned, we ended up taking over -- there was a little over $2 billion in servicing rights related to an entity that had filed bankruptcy, we did not pay for those servicing rights either. So it just happened that in the quarter we were able to generate a lot of new volume without having to pay for the servicing rights.

The $2 billion that you took over, is that -- you know, since you didn't pay for it but you had to take on the advances, is that a net positive for you guys?

We are -- except for the immediate need of having to make the advances which was at a difficult time in the market, we are very comfortable with taking on that portfolio.

Okay. Looking I guess --

That actually is servicing, Bob, as opposed to subservicing.

I am sorry, what was that, Bill?

That's actually servicing as opposed to subservicing.

That's what I thought, yeah. Your non-performing assets declined according to your press release quarter-over-quarter, I was kind of confused by that. It says the UPB of non-performing loans and REO was $14.8 billion this quarter, 14.6%. That's down from last quarter. Did you sell assets or how does that work? Looking at last quarter the --

I'll take it, Ron. It's Dave. Our whole loans which you see as loans held for resale, which we have placed in a liquidating trust, we have liquidated some of those loans.

Okay. Okay. The uncollected servicing fees, I am sorry I missed that statistic, how much was that and when does that -- when does the timing kind of catch up on the revenue side and the cash collection side?

That was -- for the quarter it was $6.9 million, it catches up when either that loan becomes either current or is liquidated.

Now on NCI, when do you expect that NCI will be generating bottom-line profits for Ocwen or that segment?

Well, we have, without doing the forward looking statement with regard to that, there is actually, in the presentation we gave, copies of which you can get, give you a fairly detailed reconciliation of what our plan is and by what period. So if I could refer you to that, Bob, that would be --

Okay.

We would be more comfortable approaching it that way. That assumes a reconciliation with basically no new business and just action plans that were within our control.

Okay. Fed rate cuts, are they actually good now that the float balance is as low as it is and your servicing advances are much higher? Is that actually an incremental positive to earnings? I doubt that prepayment speeds are going to pick up.

I would agree with you. Net -- just on the -- putting prepayment speeds aside, and without doing a forward-looking statement, I can't disagree with what you said on prepayment. Yes, that would be -- a rate cut would be very positive for us because we have far more liabilities now, interest-sensitive liabilities than we have interest-sensitive assets.

Question on -- last question, and I'll let somebody else ask questions. Now with your stock trading below book value, still generating, you know, very good cash flow, you know, why not have a repurchase -- I'm not saying aggressively go out there whole hog in this environment of tough liquidity, but why not, you know, do some accretive share repurchases gradually over time?

Hi, Bob. It's Dave. That's one of the things that we look at, but in the current market at least for the time being we've chosen to keep our powder dry, and as you can see we've had growth in UPBs, so again it's one of the things that we think about but we're growing the core business as well.

And then last question, any signs -- any signs at all do you guys see of a restart in the secondary market and what do you think it takes and when do you think that happens?

I think it's going to take a little while for that to occur. I believe that, you know, the subprime industry will come back as an originator, but it's going to take basically a contraction of the credit risk spreads that are out there today in the market for that to occur.

Thank you.

Tom Van Buskirk with McMahan Securities.

Hi, could you just take a moment and go over the liquidating trust and at what kind of pace you would expect that to continue to work itself down going forward?

Hi, Tom. It's Dave. I'll take that question. The idea of the liquidating trust is that now that we are no longer adding to our loans held for resale, we've taken those loans which are an aggregation of performing loans, non-performing loans, and REO and we've placed them into a bankruptcy remote vehicle, which is called a liquidating trust, the idea of which is as we collect any principal payments, we turbo down that deal. Those loans are approximately 60% performing and maybe 7% to 8% REO, the rest being non-performing and so it is simply our way of looking at this as a non-core asset and winding it down as rapidly as possible.

Okay. And then I'm sorry I missed your discussion of the availability on your various liquidity facilities, if you can just go over that again quickly?

I can refer you to the transcript, but what we said near the very end of the presentation, the brief recap, was during the quarter we had increased our JPMorgan syndicated facility from $300 million to $355 million. We had also picked up an additional $200 million facility from JPMorgan. In addition, following the close of the quarter, we increased our Greenwich advance financing facility by $50 million and then our last talking point that we went through was that we have many more arrangements in the pipeline under various stage of review with the ratings agencies.

That's what I was looking for. Thanks.

Very good, thank you.

Rick Shane with Jefferies & Company.

Hi, thanks for taking my questions. I apologize in advance, I have a bunch. Dave, you had talked about the borrowing capacity and you talked about the $405 million increase in borrowing capacities, is that year-to-date or is that in the third quarter and through the last month?

The context there was in comparison to the most recently audited balance sheet, which was year-end so that's nine months year-to-date. Most of that increase did come during the quarter. The one item that we had picked up prior to quarter three was a $100 million increase in the Barclays variable funding note, and the one item that happened subsequent to the end of the third quarter was the $50 million increase in Barclays. Everything else happened during the third quarter.

Got it. It looks to me like the advances in the last two quarters are you have increased about $350 million, so it seems like a lot of that $405 million is already absorbed. What is your additional capacity? You talked about what the delta is, but what is the actual, additional capacity on those facilities? Where are you versus the actual available for draw?

When you go back through the transcript, you will see that our unused borrowing capacity was slightly under $300 million. That range has been consistent for each of the last three quarters. And so remember, coupled with that was quite a list of items that we currently have under ratings agency review. So, we are sufficient for now and we have stepped forward with various stair-steps of incoming facilities that will take care of our future growth.

Great. Okay. Next question and this is for Bill, you talked about being understaffed by 65 collectors for one account. How many collectors does that account have? And is it true that you basically allocate -- you dedicate collectors to specific accounts? That's the way to interpret that comment?

Yes we do, some of our clients require that we dedicate specific collectors to their accounts. For that particular client we probably have close to 270 collectors today and the shortfall reflects really the substantial increase in placements both quarter-over-quarter and this quarter -- the third quarter 2007 versus third quarter 2006.

Got it. And, it sounds like a strange question, but what was the account's response when you came back to them and said, "Gee, we understaffed you guys"? I mean, obviously that cost them money. How do they feel about that or how does impact the relationship?

We're still performing very well for the client. I believe that most of providers for this client were faced with a substantial increase in placements at the same time. So we were not the only group that was -- or the only provider that was understaffed. We are still performing well on the client's score card, although there is a very meaningful increase in placements, so I think this was something that was impacting across the providers for this particular client.

Got it. It was basically just a lag issue.

You look at it, I think it caused everybody in the industry surprise. The credit card delinquencies have exploded across the industry. And I think it gives us somewhat of a competitive advantage because we actually do train people and can bring them up to speed more quickly. But there are more accounts out there right now to service than the collector base -- the collector base is not sufficient to service all the available product that is out there today.

Got it. Thank you. Just two more questions. The second issue that you addressed at NCI was -- I just didn't have any idea what this meant. A slower build-up of a first party client, what's -- what do you mean by a first-party client and describe maybe in less shorthand what happened here so we understand?

Sure. First party is really where we are collecting, doing customer care work or early stage collections in the name of the client as opposed to in the name of Nationwide Credit for example. With this particular client we get paid per active minute of talk time and many of the other vendors were getting paid on a fixed basis, really either per hour or per month for full time equivalent employee. Because we were all not on the same pricing plan, when their call volume shifted they had an incentive to place those calls with the providers that were really on a fixed basis and not to us. So, we were at a disadvantage.

We've addressed that disadvantage by doing two things, one, getting a fee increase of roughly 14%; and two, beginning January 1 -- in both cases on January 1, all of the -- I think it's 11 or 12 providers are going to be paid based on the same methodology which should even out the call volume between all the providers.

Got it. And then the last question on the servicing advances, when I look at the end-of-period numbers versus the average for the quarter, it looks like the average is lower than I would have expected sort of on a point-to-point basis looking at the advances at the end of the second quarter versus the end of the third. Was there a surge in delinquencies and advances in September because that's one of the things we've heard that delinquencies really -- you know, as bad as they've been picked up meaningfully in the month of September?

Delinquencies have continued to increase, you know, each month, but I think what you are seeing is more driven by the fact that when we took over the $2 plus billion of servicing on this bankrupt entity, that was an aged portfolio and so we took on a big chunk of advances and delinquencies kind of, you know, a little more than mid-way through the month. So, I think, you know, the jump that you are seeing related to the average has more to do with the fact that there was kind of a one-time increase in advances related to that portfolio.

Okay. So, based on that we should expect to see the borrowing cost associated with those serving advances rise a little bit more, in addition to whatever else happens just mechanically in the fourth quarter?

Well, you would have it for the full quarter and the fourth quarter, so that's true.

Okay. And then I apologize, last question. What is the actual cost of the borrowings on the servicing advances, ballpark?

Let me lay that out for you in the Form 10-Q. I can just tell you that the very lowest facility that we have is that LIBOR plus 40 and 50 basis points respectively, that's a little close to half our capacity. The highest numbers we have on two other facilities are at LIBOR plus 150 or 155 as a spread and so you should imagine roughly LIBOR plus 1 just on a rough weighted average.

Okay. So, you really do get credit for the quality of those assets with low borrowing costs?

Not as much as we think we should compared to comparable credits because they along with treasuries are the only two asset classes that have zero credit risk assigned by the rating agencies. So, we need to spend more time and effort going out and educating. This is a complex asset class for the investors to understand. We need to educate them better because we truly believe they should sell through credit cards which have a far different credit exposure than these assets might.

Okay. Thank you guys.

We are paying, we think, over 100 basis points more ultimately than we should pay for that credit.

Yeah, I think we should point out as well that as we've expanded our lines, there are many times upfront commitment fees that need to be paid that get amortized over the life of the line. So, the actual borrowing costs can be even higher than the numbers that Dave expressed.

Great. Guys, thank you for indulging all these questions.

John Hecht with JMP Securities.

Good morning guys. Thanks for taking my questions. Most of my questions have been asked, just a couple additional ones. One is obviously the boost in the UPB this quarter was related to the, you know, bankruptcy with the subservicing arrangement. I guess the question is, you know, where are you seeing if at all a potential surprise coming from? Are there some dislodging from some other serving platform that might give you a subservicing or special servicing arrangement? Or, is there any other market for which you could continue to grow your UPB and your servicing rights?

Well, I think the way we look at it is that there is about the same number of subprime loans out there today as there were yesterday. So, the real question is, how are those loans allocated amongst players. To the extent that there is high prepayment rates, Ocwen is at a relative cost -- relative disadvantage in gaining -- maintaining and gaining share since we don't have origination capability.

However, I think that where we do see the product coming from as we've said, there is opportunities for platforms that get, you know, there are many platforms out there today that are either for sale or probably will be for sale because they are no longer economically viable because the origination platform they were attached to doesn't work anymore.

The one thing that we have starting with our asset management vehicles however, is there is still product out there, there is not as much, but to be able to buy the residual pieces of securitizations, we're one of the few people left standing that has capital and cash to be able to do that. So, our asset management vehicles over a period of three years at their, you know, reasonable projected growth rate, maybe four years would actually generate sufficient servicing to replace all of the third party servicing we have today. That's not to say we won't look for third party servicing, but we now have a much better control over our source of supply than we ever had historically with respect to that.

So, our decisions now are less that, you know, are more -- where do we deploy our capital within this stack of assets where it's most -- where it's at the lowest volatility and the highest rate of return as opposed to having a loan asset to go after which is just servicing. So, it gives us a more diversified selection pattern of that investing in our equity.

Okay. I understand that. But in thinking about that, given your discussion that there may be less buyers you're servicing [up that are albeit] less servicing altogether, are you seeing, you know, prices and returns become more favorable where you are able to buy that asset class in the market today?

I mean my belief -- and Ron please jump in -- I think that the last couple transactions we have looked at have been at pricing levels that are very comparable to what we saw previously. So, I don't see much difference in the way of pricing. I think there are far fewer bidders today and, so -- you know I don't see much of it -- we don't see much of a change in market price today.

Okay. And last question. When you think about CPR rates in context of potential rate changes and if you look out at your portfolio and understand where resets are and aging of the portfolios, how much further down do you think we have in CPR rates to go?

Well, I've been surprised recently that CPRs have remained at 20% in the last quarter primarily because there is such a limited set of originators out there to originate the product. But, having said that, we certainly went through a period of tremendous dislocation in the market and eliminating a large number of the originators. So, I am not -- this is a forward-looking statement that, you know, we will disavow, is that I am not looking forward to seeing -- I don't believe you are going to -- at this rate, you're going to see a whole lot further decline in prepay speeds. I don't know, Ron, what your view is of that point.

I would tend to agree with that.

All right. Thank you very much.

Bob Napoli with Piper Jaffray.

Just you guys, I guess, have $600 million through the two funds then. Can you leverage that at all?

Yes.

What approximately what -- one-to-one, or how much leverage can you get out of those funds?

Well, on OSI the maximum leverage we probably will have is 40%. Today we've been generating very nice returns with less than -- 15% or less leverage.

Okay.

And ONL, which is where we're dealing with non-performing loans, I think it's to be determined given the dislocation in the market today. We are certainly seeing indications of available liquidity in the market to leverage, but it's certainly not nearly as robust as it was just even three months ago. On the other hand, you are seeing some rather decided changes in pricing levels too that are reflective of that lower leverage available within the market.

Now, is OSI -- OSI is not buying, so OSI is buying performing securities?

Yes, it is buying -- if you think about what we are trying to do here -- I'd just like you step back for a moment -- Ocwen has some degree of exposure to prepayments and interest rates associated with its purchased mortgage servicing rights, it's an IO. Where one looks at the lower tranches of a mortgage-backed security, they perform something like a PO, so in fact from an interest rate and prepayment perspective, they, over most scenarios which we've constructed, there is very low volatility in that combined asset.

However, you also are picking up credit risk. So, our strategy with regard to this is to attempt, and there is always basis risk, to hedge or go short, mortgages -- securities that have underlying mortgages that look like the mortgages that are underlying the residuals that we've purchased. And the way we make money is to rely upon the fact that -- the studies that have been out there show that when we service a security we have 50% lower losses than the competition or the average servicer. So, if you had losses in the old days of 4% our securities, look back historically, we had losses of 2%. So, that's a fairly meaningful impact when you are owning the lower pieces of these deals.

Similarly, as losses continue to increase, let's say they go to 10% -- people are projecting far higher than that -- if our losses were to remain at 50% of that, we would make 5% of the total principal amount of the full stack of mortgages which is obviously a far greater percentage of the residual. So, it's an attempt to minimize the exposure we have to interest rates and pre-payment risk to try to hedge out the credit risk and rely strictly on our servicing advantage as a means of generating, if you will, the alpha in this transaction.

And as a result, it's a way in which we can get paid -- you know, we can earn returns for our superior servicing, far greater than if you are just out there bidding on servicing where quite frankly it's sort of like, I can name that tune. If you pay more, you get it, i.e., if you are willing to work for lower margins you will actually -- you'll win the business. That's -- we're trying to change our business model away from a bidding contest.

Now, you've ramped -- you had $140 million that you've put to work out of the [parsed] fund?

That's correct.

And are you seeing opportunities to put the remainder of that to work over the next -- in the market today?

Yeah, I mean we are trying to do it in a very cautious manner, to do it as a dollar cost averaging. So, we feather it in over a period of 12 to 15 months, that first tranche of equity and we seem to be reasonably on a timeline to achieve that.

Is the game plan longer term to do more of those types of funds?

You know, the game plan is to create other vehicles that rely on servicing expertise that we have where we can demonstrate an advantage in terms of our servicing capability and also to continue to grow the existing vehicles.

And the second vehicle that you mentioned that buys non-performing assets, I forget what it's called.

Non-performing loans is a very creative name.

Oh yeah, okay. Now, I mean have you -- when did that close and have you put any of that to work yet? Is that the same type of a structure Ocwen is getting, kind of a GP fee?

As of September.

September. And has any of that money been put to work yet or are you seeing significant opportunities to put that to work yet?

If you're buying nonperforming loans if you agree as to valuation, it's a target rich environment. I mean, it's -- there is billions upon billions of dollars worth of production out there. Obviously, one needs to be concerned about where home prices are going et cetera, but it's not that there is not an available supply. There is an endless supply today, the question is do your price expectations meet the seller's.

Are there any of the same investors in both funds, or has that--? Last question, on NCI, that industry has kind of befuddled me over the long-term, it just seems like that the margins in that industry have always been lower than they should be and I am not exactly sure why that is, but I hear you guys talking about some fee increases. Is that a sign that the industry is getting more rational or am I reading too much into that?

I think you are reading too much into it. For this one particular first-party client, we were able to negotiate a fee increase. Generally speaking, the fees are staying roughly the same. You know, our strategy is to really take a look at the lower margin business that Nationwide Credit has in the US and over time migrate that to our global operations in order to substantially increase the margins.

Right, that's really where we're going to change the game, is to move it -- to be able to do collections offshore at the same level of efficiency and effectiveness that we're able to do in the United States through our training and development programs that we have for those people. But you are seeing, I think, though, Bob, today, without giving any projections, for the first time people are just putting product back if it isn't good enough at the pricing levels to receive it, because there is a very, very large amount of nonperforming credit card product out there today. So, I think the supply/demand situation has shifted significantly the other way, to put it mildly.

Thank you.

Rick Shane with Jefferies & Company.

Thank you. Bill, on the OSI business, is there a tracking issue associated with single-issuer credit default swaps or with the ABX in that those instruments have become big speculative plays as opposed to hedging plays?

Well, yeah you certainly have issues -- you know, rightly or wrongly we have been -- lucky or not, we've been successful in the first four months of being pretty well hedged in those movements. But you certainly have to be mindful of that, that there is a very large speculative play within those instruments and you need to be thoughtful about particularly the ABX when you use that instrument. So, the ABX has the greatest liquidity with respect to that.

Got it. And I guess the question is, who is naturally long the ABX? I mean, if players like you are inclined to be short it and the speculators have been short it, who takes the other side of that?

Well, a lot of it was used basically to construct like things like CDOs et cetera.

So, the assets were actually put into the CDOs and so that's who's the long?

You could synthetically use them for that and I think other people were using them just to be long synthetically. It's an effective way, if you want to be long in the market to use that in your position.

So, is it fair to say that given the tracking error issues, that so far you've outperformed because the collections have been -- your residuals have performed in line with your expectations and the hedges have outperformed?

No, I think that we have made a return that's fairly close to what our expectations were. The hedges in fact were very much in line with the movements in the physical or the underlying bonds. And our servicing advantage in terms of returns will only show up at the end when in fact we recognize that cash flow out of those bonds. So, for example, bonds today, we can purchase bonds today that are assumed to miss their triggers, and this is probably beyond the scope of this conversation here. But the concept of a residual is, you either pass the trigger or you fail the trigger. If you pass the trigger, a large amount of cash comes back to you at month 36, 37.

So, it is in fact -- your servicing performance is critically important because of your discount rate to recapture all of your cash within the first three years. That adds value to that security significantly, because you are buying that security at a significant discount to that cash flow. So, most of that income recognition will come -- if it comes, not to give a forward-looking statement, if it were to come, it would come closer to the back-end of it. These securities are priced today probably at about a 22% yield which is a -- by its very nature if you manage not to get, you know -- if you manage to maintain that yield just by itself, it's not a bad way to buy, you know, buy -- it's not a bad investment. The challenge is to make sure you make that return.

And do you account for them on a level yield basis or on a cash flow basis?

We mark them to market.

Okay. Great. Thank you, guys, very much.

Thank you.

Sir, at this time I show no questions.

Very good. Thank you for participating in today's call.

This concludes today's conference. Thank you for attending.