Onity Group Inc (ONIT) 2008 Q4 法說會逐字稿

Welcome to the Ocwen fourth quarter and year end 2008 earnings conference call. (Operator instructions). Today's conference is being recorded.

Now I will turn the meeting over to Mr. David Gunter, Executive 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 to on our website at www.ocwen.com, select shareholder relations, then calendar of events then click here to listen to conference call, then under conference calls fourth quarter 2008 earnings, select "click hear 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 reference to a future period or by use of forward-looking terminology. They may valve risks and uncertainties that could cause the Company's actual results to differ materially from those 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 & Exchange Commission, including Ocwen's 2008 Form 10-K.

If you would like to receive our news releases, SEC filings and other materials via email, 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 Asset Management; and Bill Shepro, President of Ocwen Solutions. And now, we'll turn the call over to Bill Erbey. Bill.

Good morning, everyone, and thank you for joining us today. Our management team and our Board of Directors have spent considerable time planning for the time when the economy would be difficult for businesses and consumers alike. Early on we saw the potential for a downturn in the economy and planned for the time when home price appreciation would halt, when credit would become scarce and consumers would come under pressure. We have executed on our plans to expand our liquidity resources to right size our business to available financing, control delinquencies and advances, lower our cost of servicing and further develop our fee for service service model. Our focus on liquidity has resulted in cash balances that have increased in each of the last four quarters. With great pride I can now tell you that our cash balances were $201 million and our unused borrowing capacity was $267 million at December 31, 2008.

Our advance financing renewals in December and January of $300 million and $200 million demonstrates our continued ability to attract and retain financing relationships. Our ability to control advances has given the banks confidence that Ocwen will be a survivor. Furthermore, we are currently developing other liquidity sources including advanced financing facilities with new private sector providers and participation in an industry coalition which seeks government guarantees of advances as well inclusion of AAA rated securities backed by servicing advances within the TALF program. On March 3, 2009, the treasury announced it is considering extending TALF to include securities backed by servicing advances.

We applaud the strong government actions recently taken, such as the making home affordable plan announced in detail on March 4, 2009. As a leader in loan modifications, we intend to be an active participant in this plan by providing the financial incentive to servicers to appropriately modify qualifying loans. This plan will have an material impact on our revenues and profits. While we will not provide a forecast, Ron Faris will provide operating statistics which you may incorporate in to your valuation models.

Ocwen was also selected as a special servicer for Freddie Mac high-risk loan pilot announced February 3, 2009. We are actively working with government-sponsored enterprises and other institutions which will benefit from our highly scalable servicing platform. One particular benefit of these special servicing arrangements is that they do not require us to finance advances and purchase PMSRs. As we become more comfortable with stable long-term financing exists for advances, we will look to acquire existing service platforms, leveraging our low operating cost and ability to reduce advances.

Now let me update you on our plan for this spin of Ocwen Solutions and our related business plans for the year. On November 12, 2008, our Board of Directors authorized a plan to separate to a tax-free spinoff most of Ocwen Solutions business operations in to a newly formed publicly traded company. We made the decision to spin based upon a favorable determination for each of the following, first, Ocwen Solutions would be better positioned to pursue business opportunities with other servicers. Second, the spin would allow existing and potential investors to choose between the contracting business models of servicing versus business process outsourcing. Each business model is valued differently by the equity markets. Third, the spin will allow Ocwen Solutions the flexibility in creating its own capital structure and would allow for a subsequent capital raise when equity markets recover and, finally, Ocwen Solutions would have the option offering its stock as consideration to potential acquisition targets.

We are still on track to complete the spin during the second quarter and are expecting significant earnings growth from the mortgage services and financial services segment this year in line with our emphasis on fee-based income. Finally, in 2009, we have initiated our most comprehensive set of process improvements in automation in the history of the company with the objective of enhancing quality and reducing costs through the elimination of variability. Our goal is to reduce unit costs by 30% by the end of 2010. Now, Dave Gunter will review our financial highlights, and then Ron Faris and Bill Shepro will provide an overview of Ocwen Asset Management and Ocwen Solutions results. Dave.

Thank you, Bill, I would like to discuss three key items with you. One, our current liquidity position. Two, minimizing balance sheet exposure and, three, the strength of our core operations. Our liquidity position remains strong. At year end cash balances were $201 million or 24% greater than the September 30 balance and 76% greater than one year ago. The increase in cash is due to retaining profits earned in 2008, limited acquisitions of mortgage servicing rights, selling or financing non-core assets including our investments in CMOs issued by Fannie Mae and Freddie Mac, loans held for resale, real estate and commercial MSRs held by GSS Canada, and collecting long-term receivables from the sale of affordable housing partnerships.

Our unused advanced financing borrowing capacity was $267 million at December 31, 2008, on total lines of $1.2 billion. Our consolidated balance sheet with assets at $2.2 billion has continued to contract as we reduce advances and work to eliminate non-core assets. During 2008 we raised $84.7 million in cash by selling or financing non-core assets including investments in Fannie and Freddie securities, loans, real estate owned, our investment in GSS Canada, residuals and affordable housing partnerships. We will continue to dispose of non-core holdings during 2009. Our primary areas of focus in 2009 will be our holdings and auction rate securities and whole loans. We continue to hold auction rate securities, or ARS, with face value of $267 million.

During the fourth quarter, we booked further unrealized losses of $13.6 million. As a result, our ARS portfolio is marked at 89.4% versus 94.5% at September the 30. Our loans held for resale are booked at the lower of cost of market. Given the decrease in property values, we booked $6 million in losses against this portfolio during the fourth quarter. Our loan balance at December 31 was $49.9 million, a decline of 10.3% since September 30, and 33.7% since December 31, 2007. Our advanced receivables of $1.2 billion continued to decline as well and were 15.2% lower than one year ago as we reduced delinquencies throughout the year.

In addition to strengthening our balance sheet, we worked very hard on increasing the efficiency and effectiveness of our core operations to produce strong operating margins and a platform for growth as liquidity returns to advanced financing market. Ocwen's cost to service delinquent loans and ROE is 60% less than the industry average according to the [Stratmore] study as commissioned by the MBA, and we believe the only servicer to reduce delinquencies in this challenging environment. Additionally, our technology platform affords us unparalleled scalability.

Our management and operations team delivered our highest revenue year ever at $492.1 million, an increase of 2.4% even while our servicing portfolio was contracting. At the same time, we aggressively lowered our cost structure. Our total operating expenses were $323.4 million and $76.6 million for the year and fourth quarter respectively. The last time we incurred quarterly operating expenses of $76.6 million was the third quarter of 2003. While operating expenses were similar, $75.2 million for the third quarter of 2003 versus $76.6 million for the fourth quarter of 2008, our revenues in the fourth quarter of 2008 were $111.4 million versus $84.6 million in the third quarter of 2003. As a result, our income from operations of $34.8 million for the fourth quarter of 2008 is $25.8 million higher than the $9 million of income from operations in the third quarter of 2003.

Referring to Slide 4, we see that annual income from operations in 2008 is 577% higher than it was in 2004. This comparison reveals two fundamentals of our business model. Number 1, we have diversified our revenue stream as evidenced by $31.4 million of process management fees in the fourth quarter of 2008. This reflects continued momentum in our fee for service model. Number 2, our costs are the lowest in the industry and will continue to go lower as we drive cost out of the business via automation and process improvements.

As Bill indicated, for 2009 we have developed the most aggressive program in the history of the company. Our performance for 2008 was lead by our loan servicing segment which produced $340.7 million in revenues and $100 million in pre-tax earnings for the first time in the history of Ocwen. During a year where our loan servicing revenue decreased by 1%, our operating expense decreased by 25.2%, our average unpaid principal balances decreased by 16.1%, and our pre-tax income increased by 54.2%. This represents exceptional operating performance in a difficult environment.

Our Ocwen Solutions line of business also contributed significantly with 2008 revenues of $177.9 million or 36% of consolidated revenues. Ocwen Solutions revenue grew 17% during 2008, EBITDA, supported by strong cost controls, grew even more rapidly at 39%. Our technology products segment generated income from continuing operations of $3.6 million despite the $5.7 million loss associated with unrealized derivative losses and an unconsolidated entity. The operating performance of Ocwen Solutions should enable it to be an independent growth company.

As for Ocwen Financial Corporation, we will continue to dispose of non-core assets. This will leave the most operationally efficient servicer with the ability to grow by attracting special servicing contracts and acquiring loan servicing platforms in the future. Thank you. I now want to turn the call over to Ron Faris.

Thank you, Dave. My remarks today will focus on four key aspects of Ocwen Asset Management. One, servicing operations key drivers. Two, President Obama making home affordable program, new business, and, finally, other investments. As Bill as Dave already discussed, the Ocwen Asset Management business performed extremely well in 2008, including the fourth quarter results. For the year, pre-tax income increased by $19.4 million or 34% over 2007. I am very proud of what we have been able to accomplish. Three key drivers of the loan-servicing business that I would like to address are prepayment speeds, delinquencies and advances.

As is noted on Slide 6, in the fourth quarter of 2008, prepayment speeds decreased to 24% as compared to 26% in both the second and third quarters of 2008. Voluntary prepayments continue to decline, dropping from 10% in the first quarter to under 5% in the fourth quarter. The increase in the involuntary rate is a positive sign because it has a favorable effect on our advance balances. The involuntary prepay rate should eventually decline as the portfolio continues to age and the level of delinquent loans continues to decrease.

Moving on to Slide 7, delinquencies have stabilized due to our loss mitigation efforts. Contractually delinquent loans and ROE service decreased by approximately 30,000 units from December 31, 2007, to December 31, 2008. This decrease in delinquent assets is a result of our effective loss mitigation processes which involves prudent loan modifications combined with efficient foreclosure and REO resolution practices. We continue to refine and improve our approach to repayment plans, loan modifications and REO sales and marketing by systematically analyzing historical performance data and instituting appropriate enhancements to our models and systems.

As shown on Slide 8, during the fourth quarter of 2008 the loan servicing advance balances slightly increased by $6 million or 0.5% as compared to a decrease of $138 .7 million in the third quarter and a decrease of $91.5 million in the second quarter. During 2008, our advanced balances decreased by a total of $192.9 million, successfully reversing the rising trend in advanced balances that occurred in 2007. During the first two months of 2009, we have seen our advanced balances decrease by approximately $92 million or 7.7% from December 31, 2008.

Turning to the president's new initiatives. On March 4, President Obama announced the details of his new making home affordable program. Included in this plan is the home affordable modification program. In short, the program establishes guidelines for modifying first lien owner-occupied home loans that are in default or where default is eminent. As part of the program, the United States Treasury is partnering with servicers to reduce qualifying homeowner's monthly mortgage payment down to no more than 31% of their gross net income. As part of the program, Treasury will provide incentive to the borrower, investor, and the servicer. The servicer incentives include an upfront fee of $1,000 for each eligible modification completed, a pay per success fee awarded monthly for up to three years of $83 per month or $1,000 per year as long as the borrower stays current, current being defined as less than 90 days delinquent. And an additional $500 upfront fee for modifications made on loans where the borrower at risk of imminent default is still current.

During 2008, we modified approximately 61,000 loans, helping families stay in their homes and obtaining a better outcome for investors than the alternative of foreclosure. Approximately 39,000 of these modifications were on first lien owner-occupied home loans. During the first two months of 2009, we completed just over 15,000 modifications of which approximately 9,000 were on first lien owner-occupied home loans. Our overall re-default rate in 2008 as measured at 6 months after modification was 28% which compared very favorably with the re-default rate of 37% reported in the Q3 2008 OCC and OTS mortgage metrics report. The modification re-default rate on our first lien owner-occupied portfolio is even better at 27%.

To the extent we are able to continue to successfully modify loans in our first lien owner-occupied portfolio, the Treasury program will add a meaningful amount of additional revenue which will ramp up and compound over time as the pay for success fees are awarded. The program does require that to the extent an eligible modification is completed, accrued late fees that might have otherwise been recognized as income must be waived. We anticipate that this new program, although similar to our existing program, will result in more borrowers being eligible for a qualifying modification as a result of the maximum 31% DTI requirement and the government's subsidy to the investor which further improves the value of the loan modification to the investor or owner of the loan. There are, however, as part of the Treasury program, certain enhanced documentation requirements with which some borrowers may be unable or unwilling to comply with which would make those borrowers ineligible.

Moving on to new business. As Bill said earlier, we are pleased with the actions being taken by the government, including the new homeowner affordability and stability plan. We believe that we have been very successful over the past six months in getting our message out and significantly improving our brand recognition with key constituents. We are working with the GSEs and other institutions to increase our special servicing portfolio. With our highly automated, artificial intelligence-driven technology platforms and global work force, we can quickly scale up to handle multiples of current volume with modest infrastructure addition. With our proven loss mitigation abilities, we are uniquely positioned to assist these institutions and other investors in the current volatile environment. During the first quarter of 2009, in addition to the special service loans transferred from Freddie Mac as announced by them in February, we also added a $2.6 billion portfolio of seasoned auction ARM loans.

Finally, we continue to manage our two mortgage--related funds, Ocwen structured investments, or OSI, and Ocwen non-performing loans, or ONL. The environment for any mortgage asset class was very difficult in 2008. For the year, our investment in these vehicles resulted in a pre-tax loss of $9.8 million. Despite the losses, our results were better than most. We made no new investments in to OSI in 2008 and have reduced our investment from $37.2 million at December 31, 2007, to $15.4 million at December 31, 2008. At ONL, we made only small investments in new loans in 2008 and none since May. Our investment in ONL has declined by $23.4 million, down to $10.2 million at December 31, 2008. We will continue to examine opportunities to raise investor capital for new funds where we believe we have an asset management advantage and where the market conditions are favorable. This includes looking at servicing platforms that are or may be for sale in the future. Thank you. I would now like to turn the call over to Bill Shepro.

Thank you, Ron. Currently, Ocwen Solutions faces two primary challenges. First, the mortgage services segment needs to expand its product offerings to support loans in default in order to address the decline in loan originations. Second, the financial services segment must address declining collection rates on the receivables we manage, primarily for credit card issuers. We are very pleased with the progress that we have made in the fourth quarter.

Turning to Slide 23, Ocwen Solutions fourth quarter 2008 revenue was $39.3 million, a 2% increase over the third quarter. In addition, our pre-tax income increased $3.8 million over the third quarter to $4.8 million. This is noteworthy in light of the fact that from a seasonality perspective, you would expect fourth quarter revenue and earnings to be lower than the third quarter. For the full year, revenues increased 14% from $144 million to $164.1 million, and pre-tax income increased 47% from $10 million to $14.7 million exclusive of the impact of BMS in both years.

Our mortgage services segment is addressing its challenges by pursuing a plan to diversify our revenue base by rolling out new products and services primarily related to delinquent loans and real estate so that we are less dependent on origination cycles. New services recently launched includes default processing services, property inspections, property preservation, real estate sales, title services and homeowner outreach.

As shown on Slide 24, our mortgage services revenue increased $2.9 million from the third quarter driven in part by these initiatives. We expect this trend to continue throughout 2009. In our financial services segment, we are addressing the decreasing collection rates by remaining focused on the execution of key initiatives in the areas of technology and customers. On the technology front, we are encouraged by the rollout of our scripting technology to a limited number of our agents and its ability to improve agent performance. We will continue to enhance the scripting technology and expand the rollout throughout 2009.

With respect to customers, we have ceased accepting new placements from certain nonprofitable clients in order to improve our earnings and better serve our more profitable clients. Despite the decline in collection rates for our most important customers, we continue to be a top performer. Overall, financial services fourth quarter operational results reflect the benefits of these initiatives in the form of lower compensation and technology expenses, which help drive improved performance at the pre-tax income level at shown as Slide 27.

We continue to rely upon the technology product's segment to develop solutions that support the new products being launched principally by mortgage services as well as enabling process improvements and increased automation for both mortgage services and financial services. Utilizing our technology product segment, we will improve the profitability for both our customers and ourselves.

Finally, we have made significant progress on the separation of most of the Ocwen Solutions businesses into a new public company. Recently, we have enhanced our senior management team, aligned our organizational structure to be more consistent with a stand-alone company, and are well on the way of completing the necessary regulatory steps. We anticipate filing the Form-10 with the Securities & Exchange Commission soon, and to give you some perspective on Ocwen Solutions historical performance, from 2006 through 2008 revenues grew 66% and pre-tax income grew 108%. We believe the separation will have many benefits, including furthering our ability to diversify our customer base. I now like to turn the call back over to our Chief Financial Officer, Dave Gunter.

Thank you. Operator, we are now ready to take questions.

Thank you. (Operator instructions). Our first question comes from [Douglas Cast] with Seabreeze Partners.

Thank you, good morning, Bill, how are you?

Good morning.

In 2008 you answered three of the questions I had, but I have one last question. In 2008 you modified approximately 60,000 loans, I believe.

Correct.

Of those 60,000 loans, what percentage are going to be eligible for remodification from the new program?

Ron, correct me if I'm wrong, but believe almost all of them are eligible for remodification.

Thank you, Bill.

You are welcome.

Our next question comes from Bob Napoli with Piper Jaffray. Your line is open.

Thank you, good morning. When does -- will you be operating under that plan? When will actually the revenue generation from the Obama plan begin?

Ron, would you like to answer that?

Sure. Basically the -- from March 4 forward, the efforts that we're taking will qualify. However, there's a process obviously of going through and gathering the correct information and qualifying the borrower and completing process. The plan also requires that there is a three-month trial period in which the borrower must make their first three payments before the servicer incentive payments would be paid. So it will still be a few months out before we start seeing direct revenue. However, the efforts have already begun to qualify borrowers under the plan.

Okay. And of the modifications that you made last year, what percentage of them made the first three payments? What would you expect? What do you expect out of -- ?

Well, I think the numbers that we gave you, the 60, 61,000, that for the most part, most all of those did complete three payments.

Okay.

The President's plan, Bob, is quite, shall we say inclusive in terms of people being able to make their payments.

Yes.

A 31% DTI, debt to income ratio, and even [usability] in certain cases were necessary to go below that is what would qualify for an agency or prime mortgage. Somebody there would only have to spend 31% of their gross margin for housing which is generally considered to be quite affordable across the -- most demographics.

Yes. Okay. On the test with Freddie Mac and the -- I guess other government agencies, I would imagine you are talking to Fannie Mae and others, when -- what is the potential for that relationship? I mean, I'm -- reasonably well, I think -- you are working on Alt-A for Freddie Mac, they must have $250 billion of Alt-A securities. What is the target of the Freddie Mac portfolio, and when do you -- how is the test going and when would you expect to hear whether it was going to be expanded ? Hello?

Ron.

Yes, I think unfortunately we're somewhat constrained in the details that we can provide about that relationship. I think that in Freddie Mac's press release they sort of hinted to the fact that they wanted the pilot program to go a couple of months at least so that they could evaluate it and then decide on expanding it. So I think we are a couple of months away from their evaluation. I mean, we have every reason to believe that our performance will live up to or even exceed their expectations. It is difficult though to project after the end of the couple of month pilot period what exactly that will mean from that point going forward.

Okay. And do you expect to have any announcements of other pilots or other tests? Are there other tests going on that haven't been announced?

We're a little reluctant discussing any of the -- any of our relationships with -- other than in the press releases because of people's concerns about confidentiality, so we would like to answer those questions, but we really can't, Bob, I'm sorry.

Okay.

Or the answer would be an answer that none of us want to have, because they would be upset with us.

Okay. The TALF program, where do you stand? I imagine you are having conversations with people and what are the -- what is the likelihood that advances will be included under TALF and is this something that could take six months, a year. We started talking about TALF, the government did last year, and maybe we're getting close to doing some deals.

I can -- obviously I can't talk about everything --

Yes.

-- but I think it was meaningful or significant that they chose to have an announcement that would include that as an asset class.

Right.

They certainly did not do that, I do not believe, randomly.

No, yes, so -- so it should be okay to talk about where you are and what your discussions have been with them. I think that's --

I really can't discuss discussions with them, but the press release if you would like, we can second it to you. I believe the inference in the press release was it would be able under TALF 2.0, which I believe is a May rollout.

Okay.

That does not -- I can't guarantee --

But it is not far enough along where you are actually preparing to do it. Several of the credit card companies months ahead of time were working -- were open with discussing with people on what they were working on putting together transactions under TALF.

I think two things, one of which is the initial ramp up for TALF, the original asset classes were announced a long time ago.

Right.

And when they got the mechanics in place. This was the first time that this was in fact a public announcement as to they are considering doing servicing advances. Now with respect to that, we have been internally in discussions and with bankers what we would like to do there. But there are still issues to be worked out but if it comes to pass, it would be quite beneficial really to our business.

Yes. No, it's -- it seems like it would be. The -- you said you bought option ARMs in the quarter, $2.6 billion of servicing for option ARMs; is that right?

Yes, that's correct.

Is -- are you feeling good enough about our liquidity even without TALF that you are going to start acquiring additional servicing in a meaningful way or not?

I mean, I would they we're going to be -- we're going to continue to be cautious about how we spend our capital, if the opportunities make sense, then we will definitely consider them. So I wouldn't want you to read in to it that we're going to be back in to the, going to be acquiring at the same levels we were historically, but we will evaluate opportunities that make sense.

And I know you have the convert that is due in I think in August about $80 million. What other -- and I know you did the $500 million of advanced fundings. What other fundings are there to do this year?

You mean rollout -- you mean renewals?

Yes. Or other commitments.

We have one renewals that comes up in April. We are discussing as I said with another -- we are in the final throws of closing another line with a new investor -- or rather lender. So it's pretty much, we're -- once April -- if we're successful in April, you really don't have another meaningful set of renewals occurring until December of '09. We -- and at that time we expect our advances to be materially below where they are today.

Yes.

So that we would be in a position at that time too actually lose one or two lines and still basically have advanced lines in excess of our advances.

Yes. Okay. A question on the auction rates, I mean -- you are suing the city, I guess it was publicly announced yesterday or the day before, and I mean what -- can you tell me what -- has anybody began any liquidity or student loan auction rates, right?

Yes, these are government guarantees, Department of Education guaranteed student loans are the underlying collateral for these securities.

But what are the steps from -- I mean is there any liquidity in that market at all? I mean, have you written it down to a value where there have actually been trades or what is the remaining risk in that?

Hi, Bob, it is Dave.

Hi, Dave.

It is not written down to trades. There really are no trades that we can use as marks. There is simply FAS 157. We're looking out to see what other market participates are using, and it has taken a lot of work to find out what they have because we're quite transparent in our Form 10-K which will be released today and previous Form 10-Q, but, no, it is simply moving the mark to a place that makes sense compared to all market participants. You're right, these are the [FELP]-back paper the government guaranteed. It's high quality. The underlying assets are quite good. As to liquidity, obviously we have one line through the first half of the year and are working on alternatives to that line and expect to have liquidity on a go-forward basis, but we can't say in the future just when we would have liquidity coming back from any of the parties that you mentioned.

What is going on right now in the market, particularly as it relates to -- there are several initiatives with respect to auction rate student loans or SLARs that occurring, and I think as a result you are not seeing people execute on trades, because I think their expectation is that liquidity will resume in the market fairly shortly due to two actions the government has taken. One is the -- is obviously TALF, there is a very good article out by Barclays out there that shows the yields and spreads required on auction rates on all of the different asset classes, and certainly student loans are the most attractive because the haircut is only 5% for the equity piece. The other is the creation of straight A funding which is the liquidity provides a conduit, the liquidity provider for that entity is the federal financing bank.

So there are two fairly strong liquidity initiatives by the government, both of which are now just commencing in the month -- in the next 30 days to kick in to the market. Our expectation is the -- no guarantee, is what will happen is the existing securities will in fact be bought back in, broken up out of their existing structure, and put back in to asset-backed securities either financed through the conduit or through the TALF program. So there has been a lot of work being done by the government behind the curtain, if you will, in terms of providing liquidity to student loans. Also, the DOE has said that if you break these up, you can deliver certain student loans that are from 2007 forward back to the DOE for their guarantee fee, which would provide additional liquidity to the market.

Okay. Last question. On the servicing revenues in the quarter, while the portfolio didn't decline as much as we thought, and I guess because of the option arm, the servicing revenue did come down faster than I thought. Is there anything unusual in the service revenue number, or is it that kind of the trend? Is that just -- ?

Yes, I would like --

Late fees? Less late fees collected or what is in that?

I would like to clarify one thing. The option ARM portfolio was a 2009 event.

Oh, okay?

Okay?

Yes.

So that was not a 2008 event.

Okay.

The revenue is more a function, Bob of less of a decline of the UPD and more the level of modifications or reduction in delinquency. Your fourth quarter is your most difficult quarter both for servicing as well as for Bill Shepro's operation in NCI, because your poorest collections occur around the holiday season.

Yes.

That starts to ramp up dramatically in the first quarter. So your revenue and our earnings are very dependent on the level of modifications that are actually conducted or rather the reduction in delinquencies, because when you reduce the delinquency you have potential historically to collect not only late fees, but you also reverse, if you will, or bring in to income deferred servicing fees.

Yes.

Which are quite meaningful as you see the delta in delinquencies quarter-over-quarter.

Yes.

So it's more the seasonality if you will of the business.

Okay. And you are seeing through -- I mean, we're in March now, are you seeing traditional first quarter seasonal trends? First quarter is usually one of the better quarters, isn't it?

First quarter is generally a very good quarter, and as you saw the modifications Ron has told you about, they are up materially from last year's run rate. Certainly in NCI, collections on a seasonal basis are up -- are doing very well in the business.

Okay. Great. Thank you very much.

Our next question comes from Jordan Hymowitz with Piper Jaffray.

It's actually Philadelphia Financial. Hello?

Hi, Jordan, how are you.

Good, and yourself?

Fine, thank you.

I have several questions, first of all, how much fee income loan fees was in the numbers in the -- both -- either quarter or the year? You said delinquent fee income which would not get if you modified the loan.

We'll show you. We are going to release the Form 10-K today. This is Dave. In the very back of the footnotes we provide a breakout, and you'll be able to see the late fees compared to servicing fees, so we might just ask you to check that today.

Okay. Okay. Second question is, you modified 60,000 -- 61,000, almost loans in '08, but wouldn't you hypothetically only get paid on the loans that did not default or about 73% of those loans?

Sorry, say that again, please.

Well, if the program was in effect last year, you are not getting paid on loans you modify, you are getting paid on loans you modify that do not re-default in three months. So, instead of the 60,000, wouldn't it be closer to 45,000 loans you got paid on for about 25% default in three months?

The number we gave you was six-month default rate. As Ron was saying before, most of those that are under that program did, in fact, pay that three months.

Sorry, say that again, please.

The re-default rate that we quoted to you was a six-month re-default rate. What Ron was saying before was the majority -- preponderance shall we say, not majority, the preponderance of those loans that we modified did in fact pay their three-month period.

Okay, but the thought process is the same. You have to multiply the number of loans modified by the re-default rate to figure out what you get paid on, correct?

Yes. There are two different types of fees. You get paid an additional fee of $1,000 which, as Bill pointed out, most of those would been eligible under that because they would have made the three payments, and then you receive a fee kind of equivalent to $1,000 a year for each loan that continues to perform. So, yes, loans that do not perform long-term you will eventually stop receiving the success fee, but a high percentage will perform and as we tried to point out, if you go -- as you continue to kind of do the program and build on it, you kind of get a compounding benefit effect of the loans that you modified. You are going to be able to get that success fee going out three years for the loans you continue to pay.

And what is the three-month rate as opposed to the six-month rate? Instead of preponderance, could I get bigger?

To some degree that the 60,000 loans and many of those are already -- we don't even count them until after the three-month period, so in a way we said the six-month re-default rate in some ways it is actually a nine-month rate, so the 60,000 loans that many of those have already completed three months of payment before we even counted them in the 60,000 so there were others that we may h ave attempted to modify but they only made one or two payments. We never even counted those in the 60,000.

Yes, Jordan. This industry standard is it is not a mod technically, totally until it pays for three months. So the re-default rate, as Ron said, is later on. The re-default rate, we believe, ramps up obviously to about the six-month level. If you look at the industry data it ramps up in the front end of that and flattens out fairly quickly so it does not continue to rise as you get further out. Once people start paying for a while, they tend to keep paying.

Okay. Last question is the loan servicing slide on slide number 15, can you explain this to me, please.

Yes. Basically what we are looking at there is a number of 30 plus day delinquent loans so anything that is more than 30 days delinquent, including ROE that we currently manage and if you look back in December 2007, the number actually was increasing but now it has been decreasing.

And would be the way to say that your portfolio is getting smaller, too, is the actual underlying credit quality improving or is the number of loans you are servicing is declining and has accumulative change and delinquent loans are slowing down?

Your portfolio is -- the following characteristics -- the portfolio has the following characteristics, it had a very high proportion of seconds. Those tend to default earlier and Ron was saying in his presentation that he would expect that the portfolio will get improved over time as a result of that. Secondly, all of your investor-owned property tends to default much earlier on within the process, so you would tend to scrape those out of the bucket. The president's plan on top of that basically permits servicers or requires servicers in another sense to go back and re underwrite all those loans as if they were prime loans. Now, many of these loans were originated, just to give you some sense, with debt to income ratios that conceivably were well north of 50%, i.e., the people were expecting to pay well north of half of their gross income for their mortgage payment. The new plan will reduce it down to at a minimum -- at a maximum 31% of today's income. So those are two fairly meaningful adjustments in terms of the underwriting standards and the required payments that the borrower would have, so if someone wishes to maintain their home, they have an opportunity to significantly reset, if you will, their obligation which, by its very nature, would increase the quality of the portfolio.

Got it. Thank you.

(Operator Instructions) Our next question comes from [Steven Tannenbaum] with Greenwood Investors.

Hi. My question is I understand the 60,000 loan and that they all qualify for the program, but what is your expectation on the timing for the receipt of the initial payment and the ongoing payments?

Well, Ron, correct me if I am wrong. You're not going to see any -- I think the government has done a very good job of rolling out which when you actually get down to detail is a very complex set of operations that need to occur. They are going to go and start basically signing contracts up. Once the contract has been signed, you are eligible for the payment assuming that the borrowers have in fact paid for 90 days, so you are probably not going to see much in the way of payments occurring until basically the third or fourth quarter of this year.

Okay. And everything that -- all the 60,000 and anything that is modified until that point qualifies for both initial and regular monthly payment?

That is -- we have been verbally told that multiple times by various people through administration as have almost every other major servicer out there.

Thank you.

You're welcome.

(Operator Instructions) As this time, there are no other questions.

Thank you, Operator. We are ready to conclude the call and thanks to all for participating.

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