Onity Group Inc (ONIT) 2009 Q3 法說會逐字稿

Welcome to Ocwen's third-quarter analyst conference call. At this time, all participants will be in a listen-only mode until the question-and-answer session. (Operator Instructions). Also, today's conference is being recorded. If you have any objections, you may disconnect at this time.

And now I will turn today's call over to David Gunter. Thank you, 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 onto our website, www.ocwen.com., select shareholder relations, then calendar of events, then click here to listen to conference call. Then under conference calls, third-quarter 2009 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 two, our presentation may contain certain forward-looking statements that are made pursuant to the Safe Harbor Provisions of the federal securities laws. These forward-looking statements may be identified by 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 filing with the Securities and Exchange Commission including Ocwen's Form S-3, second-quarter 2009 Form 10-Q, and 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 three, joining me for today's presentation are Bill Erbey, Chairman and CEO of Ocwen and Ron Faris, President of Ocwen.

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

Good morning. Before I begin, I would like to extend a warm welcome to those shareholders who have joined as a result of our August secondary offering. 79% of the investors participating in the secondary offering were new to Ocwen.

I would like to begin by reviewing our four strategic initiatives for 2009. First, separate Ocwen Solutions; second, enhance liquidity and balance sheet strength; third, win more revenue opportunities; and fourth, maintain quality while reducing costs.

We've made progress on each of the four strategic initiatives. First, we completed the separation of our Ocwen Solutions line of business on August 10, 2009, which has become Altisource Portfolio Solutions, trading as ASPS on the NASDAQ. Secondly, we raised $275 million of equity on August 18th. As a result, we ended the quarter with $408.9 million of liquidity, which is more than triple our recourse borrowings of $120.8 million. Additionally, we have $720.2 million of unused lines of credit.

With our enhanced liquidity position and the completion of the Ocwen Solutions separation, we are now focusing on our third strategic initiative, obtaining new business. We announced on August 12th that Freddie Mac awarded us a special servicing contract for approximately 24,000 loans with a total unpaid principal balance of $4.4 billion. We ordered the loans by August 31st and began to realize revenue during September.

On October 29th we were awarded $9.7 billion of subservicing which will be awarded by December 1st, and we continue to pursue more than $50 billion in additional potential servicing transactions in various stages of development.

Fourth, as to quality and cost structure, through September 1st, Ocwen was responsible for 46% of all modifications completed by the entire mortgage industry and our operating expense for dollar of UPB declined 7% from the second quarter and 15% year-over-year. We are pleased that our progress has been recognized by the market. Excluding the secondary offering, Ocwen investors at June 30th realized an additional $236 million or 27% appreciation during the third quarter. This includes the combined value of Altisource and Ocwen at September 30th.

I will now turn the call over to Dave, who will review first the impact of the Altisource spin on Ocwen's tax position; second, Ocwen's book value and adjusted book value per share; third, our operating performance; and fourth, our progress on a TALF financing. Following that, Ron Faris will review our HAMP and non-HAMP modification performance. Dave?

Thank you Bill. Our total tax expense of $65.3 million for the third quarter is comprised of $50.6 million attributable to the gain on the separation of Ocwen Solutions, of which $26.4 million is the estimated cash tax portion, $7.3 million associated with ordinary operations, and $7.4 million of valuation adjustments to deferred tax assets primarily related to an improvement in our effective state tax rate.

Going forward, we still have $129.1 million in deferred tax assets on our balance sheet. We expect that our annual projected effective tax rate will now be 32.5% and that our cash tax rate in 2010 will be 16.5% as measured against estimated pretax book income.

After the secondary offering and the separation, our book value per share is $8.59, that's total equity of $857.5 million divided by 99.8 million shares. Our adjusted book value per share is $11.08 including $0.57 per share if our deferred servicing fees were booked on the accrual versus cash basis method, and $1.92 of additional value if our MSRs were valued using our lower internal costs rather than average market participant costs.

Now, as a seque to Ron's discussion of the HAMP and non-HAMP modifications, please turn to the common side P&L on slide four. This chart represents our servicing segment results divided by our average quarterly UPB. Our revenues have remained on the low end of the 15.8 to 19.6 basis points range due to the low number of modifications completed during the third quarter, specifically servicing fees that have been deferred due to fewer current loans caused by the decline in modifications.

As Ron will cover, these are revenues deferred, not lost. Total operating expenses declined to 7.8 basis points for the third quarter as evidenced in five of seven line items trending lower.

Interest expense decreased slightly during the third quarter with the restructuring of four advance facilities permitting the pay-down of borrowings with excess cash and the pay-off of our MSR line and the note supporting our loans held for resale.

The improvement in our operating and interest expense contributed to the 0.6 basis points or 15% increase in pretax income for the third quarter. With respect to TALF, we have completed the rating agency approval process. We are very pleased with the advanced levels we are in the approval process at the Fed.

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

Thanks, Dave. As Bill has already covered our recent and upcoming new subservicing transactions, I would like to focus my comments on servicing revenue and the impact of loan modifications and REO liquidations. Revenue of our servicing segment is a function of the unpaid principal balance of loans making payments and the number of delinquent loans that resolved either through borrower payments, modifications, and HAMP and non-HAMP or REO sales.

The importance of resolving delinquent loans on our current income is heightened by our revenue recognition policies. We do not recognize delinquent servicing fees or late fees until cash is collected. The following resolution scenarios for delinquent loans described the timing of our revenue recognition. The following numbers are illustrated and can fluctuate.

When a loan is brought current via our non-HAMP modification process, we earn approximately $500 in deferred servicing fees and approximately $500 of late fees. When a loan is brought current via our Home Affordable Modification Program, or HAMP process, we earn $500 in deferred servicing fees, forfeit the $500 of late fees and accrue $1,000 in HAMP success fees which are payable by the US Treasury Department.

If we complete a HAMP modification on a current or near-current loan that was in imminent risk of default, we accrue $1,500 in HAMP success fees. However, there are little to no deferred servicing fees for loans in the imminent risk of default category.

We conceptualize the flow of loan modifications activities as a pipeline leading to modification or liquidation. The following process describes our modification pipeline. We first assess eligibility under HAMP to see if the loan and borrower qualify under the government program. If the criteria are met, the loan closed through the HAMP documentation and trial offer basis.

The three most common reasons for failure to qualify for HAMP are inability to meet the 31% debt-to-income ratio, inadequate documentation or inadequate or inconsistent income of the borrower. If the criteria to qualify for HAMP are not met, then we evaluate the loan against our non-HAMP modification criteria, which are more flexible than for HAMP and focus more on the borrower's ability to pay and maximizing return for investors.

If the criteria are met, then the loan flows through the non-HAMP documentation and trial offer phases. If the loan and borrower qualify for neither a HAMP nor a non-HAMP modification, then the loan flows through the liquidation process via either a short sale or the foreclosure and REO sales process.

For the nine months year-to-date, 4% of completed modifications have been HAMP and the remembering 96% non-HAMP. The split between HAMP and non-HAMP modifications is to be expected since the earliest the completed HAMP modifications could occur was the third quarter.

As of September, 53% of active trial plans were HAMP and 47% were non-HAMP. Completed modifications, as shown on slide five, were lower in the second and third quarters than in prior quarters due to the difficulty in collecting the requisite documentation from our borrowers and changes in the work streams required by the HAMP program. At this point, the principal process and system enhancements we undertook to implement and automate the HAMP process have been placed into production.

We completed 7,003 modifications in the third quarter of which 1,229 were HAMP and 5,774 were non-HAMP. The number of completions is 14% lower than the 8,157 modifications completed in the second quarter. The number of completed modifications correlates with the number of trial offers made to borrowers in the prior quarter, and this figure declined by 72% from the first quarter to the second quarter. Trial offers increased by 39% in the third quarter over the second quarter.

Active trial plans represent an inventory of potential completed modifications in the following quarter. We expect the 6,937 active trial plans we had at the end of the third quarter to contribute about half of the completed modifications in the fourth quarter with the remainder coming from non-HAMP modifications initiated and completed in the fourth quarter.

We expect to complete 10,000 to 15,000 total modifications during the fourth quarter, of which one-fifth to one-third would likely be HAMP modifications. Please turn to slide six. Our September production of completed modifications was 3,209, an improvement of 65% compared to the 1,943 loan modifications in August and 73% compared to the 1,851 completed modifications in July. For the month of October, we completed just over 4,000 modifications.

I hope this information helps you better understand the impacts of loan modifications and REO liquidations on our current period revenue.

Thank you, I'd now like to open the call up to questions. Operator?

Thank you. (Operator Instructions). Okay, thank you, our first question comes from Dean Choksi of Barclays Capital. Your line is open.

Good morning, gentlemen. On the road show, Bill, you were saying that $75 billion of subprime servicing was available for sale, and then in the press release that says that you're pursuing $50 billion of additional UPB and potential servicing transactions in various stages of development. Can you just talk about how the pipeline of acquisitions has changed?

When we were in the road show we had one -- we had two additional transactions that we thought were viable transactions at that point in time. I do -- I think that we were, in both cases, were conservative in the number that we put forth. There is -- there are a number of large transactions that are potential within the market. They always seem to take longer than you ever would like or anticipate with regard to that, but I think that there are at least two fairly major transactions that we would anticipate would come to market by -- before the end of the fourth quarter.

Okay, and are these servicing or subservicing?

That's what's interesting about it. I think that the -- that's -- I don't know, to be honest about it because I think that the market is changing or maturing, if you will, with respect to how people evaluate these sales. Obviously, by -- given the nature of the seller, to the extent that they have -- they can provide low-cost advanced financing, they obviously can generate a higher sales price for their assets. So I think that you could see these be evaluated by numerous institutions under both outcomes, both servicing and subservicing.

Great, thank you.

Thank you. Next question, Bob Napoli, Piper Jaffray. Your line is open.

Thank you. Good morning. Question on the servicing -- the subservicing deal that you signed, the $9.7 billion, is that -- can you tell me kind of what the source -- I don't know if you can tell me who the seller was, but what type of a seller or a -- source did you get that from and is there more behind that? I would imagine it's not Freddie Mac because you didn't -- you've mentioned Freddie Mac in the past.

Right. We can tell you that it was not Freddie Mac product with regard to that. The seller would like to have extreme confidentiality so I would just prefer not to go any further than that with regard to that transaction if I could. It is subservicing, it's not servicing.

What is the -- I guess, the -- if you look at the -- your income statement that you lay out on page four of the UPB basis points, what type of a revenue yield do you get on that subservicing?

Right, you've asked what you -- servicing is, in gross dollars, is a lot less profitable, obviously, than servicing.

Right.

You have no equity effectively put up against that transaction. Obviously, it gives you very high returns on equity, but --

Right. No, I understand.

-- in absolute dollars, it's a lot lower. I would like, at this point, just to be a little circumspect on that for just -- for competitive reasons with regard to that. It's an attractive transaction for us primarily because of our cost structure regard to the business and we can probably a little bit later on provide a little more guidance on that later on in the year.

Okay. There -- do you expect to get more subservicing out of Freddie Mac or any -- are you having any success with Fannie Mae of the FHA?

Yes, we have a very positive relationship with Freddie Mac. I think to the extent that there's opportunities which benefit them that we will be one of their preferred special servicers, but there's nothing specific in the pipeline at this point in time. As far as the other government-type agencies, we continue to pursue those opportunities but that's really about as much as we can say at this point.

As far as new purchases, do you expect -- you're looking at $50 billion, are you far enough along, do you expect to have something closed before year-end or announced before year-end?

Well, I think given that we're in November and the timeline some of these transactions take, it's -- it would be aggressive to suggest that the transaction would be closed -- any transaction would be closed by year-end. They seem to take longer than they used to just given the current market conditions out there.

Would you announce a deal before it closed? Would we get an announcement?

No, no. No, we do not.

Okay. Thank you. I'll get back in queue.

Thank you. Thanks Bob.

Thank you. Next question, Bose George, KBW, your line is open.

Hey, good morning. Just to follow up on the potential for transactions, I was curious what the major impediments are to these, to getting things done. What are the bid-ask spreads, are they wide? What keeps the transactions from taking a while here?

I'm not so certain it's -- well, I guess you could articulate in some cases as bid-ask spreads. I think the organizations and environment today have multiple issues that they're trying to deal with, multiple distractions, as we all do in this environment, and I think it just takes longer for the decision-making process to occur than it used to. There's just more people involved in that process now than I've ever seen in my business career. So they just take interminably long periods of time for that -- for those decisions to be reached.

So is it fair to say that since that spread is not very wide, it's really just a matter of time before a lot of these transaction happen? I mean, not necessarily you buying but moving from sellers to the buyers it's just -- the process is long, is that fair to say?

I think it makes -- I think, for the first time you've had in the last six months people coming to the realization that they should at least consider doing something because if you're not going to have servicing as a part of your strategic business plan, it becomes an asset that begins to lose scale over time. And it's an IO.

I mean, you have an asset that is a deteriorating asset in value. So I think more people are considering it than I've ever seen. I think it makes absolute economic sense. This industry should be consolidated so that you can efficiencies of scale that would not be afforded to operations that, in fact, are decreasing in size. And in most organizations, that's more difficult to deal with. I mean, it's much easier to get your costs in line when you're growing. It's far more difficult to maintain cost discipline when, in fact, your organizations is shrinking because you have built in a fixed infrastructure to deal with the larger size and it's hard to take that back out. But I think people are coming to the realization, there are discussions going on, that there's no -- they really should do something about it.

And, great, thanks. And then secondly, the -- I mean, are you exploring other ways to get to servicing potentially, like say joint agreements where you buy when someone else was interested in the assets that you can service or things of that nature?

We are definitely on our strategic planning process trying to identify means of generating flow business on a consistent basis in this new environment so we are -- that's very much top of mind for us, as to how to, basically, do we get flow every month in the door that can be -- that we can demonstrate consistent growth.

Okay, great. Thank you.

Thank you. Next question, Mike Grondahl, Northland Securities. Your line is open.

Yes, one question for Bill and one for David. The first one, Bill, are you any less excited about the opportunity in front of you today to grow in servicing? I mean, are the distractions too significant for sellers out there and do you think you can overcome them?

Oh, I think we can. I mean, it's just -- it's just been more -- it's taken longer than it historically has taken to close transactions in just this most recent experience. But I think there's still a lot of it out there. I think when we've gone up against other players, in terms of the servicing industry, we have demonstrated that we do have definite cost leadership over them in terms of being able to bid on these transactions. So I think we have a very -- one nice thing about it is that we appear to have a very high probability if it's actually put out for sale, and it goes to another servicer, that we have a good opportunity of winning that bid.

Okay. And, David, your operating expenses were about $53 million during the quarter. Kind of by category, are those pretty representative of what we should expect going forward, or is there still some costs that were sort of one-time as you're coming out of that because of the separation?

Think about it two different ways. If you look in the servicing segment, which is the largest part of this business, those categories are coming down five out of the seven. If you look at the corporate costs, yes, there are some costs in there related to the spin that you would not expect to continue.

And how much were those for the quarter? The corporate costs?

We'll lay out for you a little more in the queue but for the whole year, that number is roughly about $3.5 million, so there's a piece of that in this quarter and then, of course, on an ongoing basis concurrent with our strategic planning on new business we also are conducting a great deal of planning for continuing to reduce corporate costs in the two largest areas, the biggest of which is professional fees.

Okay, great. Thank you.

Thank you. Next question, Rick Shane, Jefferies. Your line is open.

Hey, guys. This is John (inaudible), on for Rick. I was just wondering if you could talk a little bit about the timeline difference between the HAMP modifications and the non-HAMP option and maybe if you've seen any ability to speed up that non-HAMP process, maybe through streamlining over the first few months of adoption? Thanks.

Well, I think one way to look at it is that the HAMP process, because if you -- on a owner-occupied property, you need to go through that process first. That, probably, more than anything, is what is slowing down the -- I'll call it the non-HAMP process. And the reason being is you have to go through that process first and go through the full evaluation process and determine whether they qualify or don't qualify before you can move on to a non-HAMP process.

Our non-HAMP modification process is generally much more streamlined than the government program and we can turn a delinquent loan into a performing modified loan much quicker under non-HAMP. But the government rules would require that we first evaluate it under the government program.

We've been through a lot of loans. With the announcement back in March of the government program there was a lot of buzz and a lot of borrowers applied for it out of the blocks. We've moved through that pipeline and I think that's why we're starting to see not only more of the HAMP loans now move into the modification stage, but we're also freeing up a lot of those loans to move through the non-HAMP process as well.

But we do, overall, expect we have a major initiative to continuously improve those cycle times and improve response times with regard to that. I think you saw that for the first time in the -- in October was for the first time since HAMP was announced, our actual percentage delinquency in the portfolio went down. We've had absolute declines, but the actual percentage of delinquent loans has declined and that's a symptom of increasing cycle time within that inventory, if you will.

And now that you have a better idea and you sort of refined those underwriting guidelines, do you -- have you guys seen any change in the amount of eligible loans in your portfolio that could qualify for HAMP, maybe this quarter compared to last quarter has there been a reduction? Could you just talk a little bit about that?

I don't think there's necessarily been a reduction. As I mentioned, there was a very big initial wave of borrowers that applied and we found that more than 50% of the borrowers that applied are not eligible and then need to move into one of our other programs. But I don't think we've seen a change in that mix. It's just we may see a slight reduction in the number of people applying for HAMP because they've already been through the process and we're moving them through non-HAMP.

Okay, great. Thanks.

Thank you. Next, Jim Delisle, Cambridge. Your line is open.

Good morning, guys. I'm joining the call a bit late, so if you've already covered this, I do apologize for re-asking the question. But can you bring us up to date on the progress of getting a TALF financing for your advances done?

Right now where we are, we've completed the step of going through the rating agencies, have received our ratings with respect to it so we have two rating agencies that provide us with triple A rated evaluations and we're in the process of -- the said had changed their process in the month of November to require further reviews of each of the individual issuances and we're in that process at the present time.

So as things advance right here, would you have-- pardon the pun-- would you expect something to be done in this quarter?

We would certainly hope it would be done (multiple speakers).

If they don't change the rules again, right?

Well, (multiple speakers).

What's that?

We would hope we get something done this quarter, correct.

All right. And what is the current financing rate? My assumption, or at least the word I hear is we're looking at somewhere in the area of LIBOR plus 175 to 200 or so in the TALF program. Is that the right range for me to model?

The last deal that went out was, I think, at LIBOR plus 200 basis points. So that, at least, tells you you're in the ballpark.

And currently, where are those, approximately what rate is being used to finance those advances?

For our advances, recent deals that we have had been anywhere in the neighborhood around LIBOR plus 600 basis points, or just under.

And you need to look at it from a standpoint that that's -- LIBOR plus 600 is -- has two component parts to it. One is an up-front payment of a fixed amount, and then you have a lower floating rate so that the actual change in rate will occur over time as lines run off, if you will. In other words, you --

What is the floating rate right -- two final questions. One, how much would you expect to be able to seque from lines into the TALF? And what would the incremental lowering of the floating rate be?

So we'll lay out for you in the queue and a couple of places you'll be able to see our outstanding facilities and you'll be able to see in those disclosures what the floating rates are and that will give it to you piece by piece.

And the amount that you expect to be able to transition?

No, we're looking initially at a number roughly around just north of $200 million.

Wonderful. Thank you very much, guys.

You're welcome.

Thank you. Next question, Jordan Hymowitz, Philadelphia Financial. Your line is open.

Thanks, guys. My question concerns ASPS. You owned it for six weeks so it's part of Ocwen for six weeks. So I'd like to specifically address those six weeks of -- that you owned them for. During those six weeks, was there anything unusual, extraordinary, or was this a normal rate for a six-week period?

Yes, there was -- two things you should keep in mind on that, Jordan, and first is that I believe there's a $2.4 million charge that we had for shuttering. We're repositioning and outsource NCI into fewer footprints because of just it's less costly to have multiple facilities. So there's a $2.4 million closure charge for that -- I've been -- they're holding up fingers, $2.3 million. I apologize for that. And, secondly, the earnings in Altisource are not linear throughout the period. In other words, there happens to be greater earnings that occur towards the end of the quarter with regard to that. So it's hard to extrapolate from the six weeks into the 13 weeks.

So but in the six weeks, if I add back then $2.3 million, again to -- and just double it because six weeks is half of the quarter, I get to an $11 million pretax number. You're actually telling me the second half of the quarter is likely higher than the first half because of the seasonality within the quarter?

Generally, we generate more revenue -- we generate more net income towards the end of the quarter than we do at the beginning.

Okay. That's it, thank you.

You're welcome.

Thank you. Next, Bob Napoli, Piper Jaffray. Your line is open.

Question on operating efficiency on page four, showing the operating expenses and improving a bit, do you expect that 7.8 basis points to continue to gradually decline?

We would hope it would be more than gradual.

Okay.

Because we're focused -- we're very, very focused on a expense of initiatives. The difficulty you had this year was that HAMP used an enormous level of resources to respond to it.

Um-hmm.

So it delayed, in fact, a number of initiatives that we would otherwise have probably been able to have executed in 2009. So we're extremely focused on that, not just because -- all those initiatives don't just simply reduce costs, they reduce variability, i.e., effects, and enhance quality. So it's really all about trying to decision those loans very, very effectively and to basically do it quicker to increase cycle times to get answers back to people, which at the same time reduces our cost. So we would hope that that would actually improve in 2010.

And you're right, Bob, you can also see on the five quarters laid out, that trend is a continuation.

Yes. Okay, on -- I mean, right now, is your best estimate of a TALF deal December? I mean, is that --

We think that. We don't have any further information other than what we told you. So I -- we -- that's the best information we have available.

Okay. The auction rate, assets, any update? I think you took a write-up there.

Yes, we had -- I think we've generated some potential additional liquidity. We've entered into a agreement with one of the investment banking firms to effectively provide us with a straddle on about $94 million of face amount. So we have -- both have put in a call. So it gives us downside protection with respect to $93 million and we get the benefit of any upside gains that occur over the next three years. So we thought that was a good resolution, given the circumstances. So we made some progress there.

Okay.

One of the other bonds is pretty close to coming and we're making very -- the whole group is making -- all the owners are making good progress in terms of effectively being able to (inaudible) those bonds and reissue them and that would generate, hopefully, in the first quarter of next year, enable us to exit one of the bonds for $70 million, $80 million worth of investment that we have at a reasonably attractive price.

Okay. And I guess, last question on HAMP. It seems like HAMP is a lot more cumbersome than what you guys thought it -- what anyone thought. Is that a fair statement? Is this going to -- does there need to be changes to the program? I mean, is HAMP really a -- is it going to be a significant net positive for you with delaying your non-HAMP modifications, which were serving you pretty well?

Well, I think you're correct in saying that it's been more cumbersome than I think anybody in the industry anticipated. I think it may also -- I think we're also finding that less people qualify for the program than maybe was originally thought to be the case.

The government has made a few tweaks to the program in the last 30 to 45 days to try to ease up a little bit on some of the documentation requirements which definitely won't hurt and could help a little bit. I think you did point out one thing, though, that it's -- you're correct, in some cases it may be delaying revenue recognition but it's not like that revenue should really go away, it's just taking us more time than earlier in the year to get loans modified, but it doesn't mean that we're not going to get them modified.

We should also emphasis that on those loans that do ultimately go through the HAMP process, the nice thing about them is that they also have an ongoing success fee, to the extent that we're able to keep those loans current, to where you can earn an additional $1,000 per year if you're able to keep the loans current. So that will be an added benefit that hopefully will build up that pipeline. But you are correct; it's definitely been more cumbersome than originally thought.

What do you -- who is -- do you have a feel, I mean, it's kind of early but what did -- what is the success rate, how many of the HAMP trials are going to make their initial three payments and keep paying?

We could probably answer the first question better than the last one, because we don't have any history --

Right.

-- going out into the --

Yes, I think our experience that we're seeing early on is that about 72% of those that enter the trial period will come out of the trial period and actually be modified. I'm not sure the rest of the industry is going to have that kind of success. They're not doing as well but that's what we are seeing so far.

The big difference in-between that is that our -- we exceeded trial mods. The purse is fully underwritten.

Okay.

So you start -- you can't take industry data and compare it to what we're doing because we're doing all the underwriting up front which is -- takes a lot of effort to do that, but we feel that it's better once you then initiate the trial mod. You have a much better chance of having a satisfied customer at the other side.

And I think as we reported earlier in a press release earlier in the quarter that we have had the most success of anybody out there in actually converting loans into an actual completed mod under the HAMP program. So we feel very good about that and that the process that we're using has a very higher pull-through rate than what others are experiencing and likely to experience.

At full disclosure, we expect that number to fall because we have less than a 1% market share in the industry. I would highly doubt that we (multiple speakers) 46% of (inaudible).

Thank you.

Thank you. (Operator Instructions). And next we do have Jim Delisle, Cambridge. Your line is open.

Thank you. Quick follow-up, guys. I see that American Home has done three TALFs so far this year and I -- granted, one of them was kind of rollover another, so two, effectively, new portfolio TALFs. Out of the billion -- $10 million worth of match funded and advances you had on September 30, how much of that might be eligible for moving over to that form of financing?

You could ultimately move most of that over. It's just a very tedious process going through ratings agencies and that's why we're doing the first step at just over $200 million.

Right. Ultimately, Dave, I think it's about $500 million because of the variability. In other words, TALF is a fixed rate -- is a fixed-term instrument for us. So the variability needs to be taken up to a [VFN] so probably another billion, you would assume about half would be able to be used in that vehicle.

Wonderful. Thank you very much.

Thank you. Next, Jordan Hymowitz, Philadelphia Financial. Your line is open.

Yes, can you just say what you mean by what your book value of MSR are, with value using internal costs, I think that was your quote?

Yes, if you look at the accounting, you use industry-average costs. Because our costs are only 42% of the industry. If you look at our MSRs and use our internals costs, that applies much more cash flow positive in the future, and that's where that delta comes from.

(inaudible) MSRs (inaudible) industry they -- I don't know how (inaudible) but the -- in all the (inaudible) banks are valuing them differently and I assume some basis of evaluation is on their internal cost.

No, the accounting piece is that you're going to use industry-average cost, but they can look at a fair value calculation and allow their number to swing. We don't use that accounting policy. We're at a lower cost or market. But theirs can swing with the industry-average costs over time.

So is what you're saying is that your 50 basis points of MSR is undervalued to a certain extent because of your cost of service and profitability on that, it should be valued more highly?

Economically, that's true.

Okay, thank you.

This just shows you some degree of the competitive difference in value of a portfolio. If you were to say that you were average you would only -- and you had the same discount rate, you would pay what it -- what we have on our books for. And if you were to look at -- or what is shows in the queue is the industry-average cost and then you would see what it is for us when we have -- when you see our cost and it's about double.

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