Onity Group Inc (ONIT) 2009 Q4 法說會逐字稿

Welcome to the fourth-quarter and year-end 2009 results conference call. All lines have been placed on listen-only until the question-and-answer session. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the call over to Dave Gunter. You may begin.

Thank you. Good morning, everyone, and thank you for joining us today. Before we begin, I want to remind you that I slide presentation is available to accompany our remarks. To access the sides, log on to our website at www.Ocwen.com, select Shareholder Relations, then Calendar of Events, then Click Here to listen to conference calls, then under Conference Calls Fourth-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 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 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 Form S-3, third-quarter 2009 Form 10-Q, and 2009 Form 10-K. If you would like to receive our news releases, SEC filings, and other materials via e-mail, please contact Linda Ludwig at Linda.Ludwig@Ocwen.com.

As indicated on slide 3, joining me for today's presentation are Bill Erbey, Chairman and CEO of Ocwen and Ron Faris, President of Ocwen. And now, we will turn the call over to Bill Erbey. Bill?

Thank you, Dave. During 2009, we focused on three key initiatives to reinforce our competitive strengths. First, liquidity and balance sheet strength; second, revenue opportunities; and third, quality and cost structure leadership.

Our success in these three initiatives led us to our strategic priorities for 2010. First, establish predictable and sustainable revenue growth in our servicing operations; second, improve efficiencies to continuously reduce cost and improve quality; and third, reduce asset intensity. These priorities support our long-term goals for return on equity and earnings per share growth.

As for sustainable revenue growth, we have a three-pronged approach. First, acquisition of existing servicing platforms. We are evaluating four servicing acquisitions, two of which, totaling $35 billion, are nearing final decisions.

Second, special servicing opportunities. We continue to pursue opportunities with government-sponsored entities to grow our special servicing portfolio. And third, flow servicing. Our goal is to develop flow FHA servicing. The economics of FHA servicing closely matches our existing business model.

The latter three 2010 priorities, improve process efficiencies to reduce costs, improve quality, and reduce asset intensity, are interrelated, reflecting our belief that continual process improvement leads to higher quality and lower cost, both operational and financial.

Our primary lever to accomplish these three priorities continues to be the result more loans faster. We will focus our resources on first call resolution and self-serve applications. Customers are far happier when their issues are resolved in a single interaction.

Furthermore, our growing proportion of our customers would prefer to self-serve, particularly if they can choose the timing and it results in a satisfactory outcome. By resolving more loans faster, we improve quality as perceived by our customers, reducing the level of advances, i.e. reducing asset intensity and reducing costs.

I will now turn the call over to Ron, who will review our accomplishments in the servicing business, the success of our modification program, guidance for Q2 modifications, and Q4 results. Following that, Dave will review our liquidity position, the strength of our balance sheet, and tax expense for Q4. Ron?

Thank you, Bill. Our servicing business had a successful year as we grew our UPB under management by $9.7 billion or 24%. At the same time, we held delinquencies to 25.6%, and as shown on slide 4, reduced advances by $233.6 million.

We improved the quality of our servicing operations, as measured by customer satisfaction scores, promises kept per hour, and completed loan modification offers.

Over the two previous quarters, we reported that our modification flow had decreased as we changed our procedures and our technology to match the administration's home affordability modification program or HAMP. In Q4, we made substantial progress with HAMP and non-HAMP modifications. Our 15,677 modifications, shown on slide 5, were at the top of our expected range. And our 4,296 HAMP modifications were 27.4% of the total.

For the first quarter 2010, we expect to complete between 12,500 and 17,500 modifications with HAMP representing 30% to 40% of the total.

The increase in modifications and the addition of sub-servicing and special servicing transactions resulted in improved financial performance.

Q4 revenues of $72.3 million were 15% higher than the third quarter. Therefore, as shown on slide 6, income from operations of $41.9 million was 33% higher.

When measured by basis points of UPB in a common size format, as per slide 7, revenues [were] 16.5 basis points, resulting from a greater proportion of sub-servicing and special servicing, which, due to their lower capital intensity, result in lower revenue.

Expenses of 7 basis points were at the low end of the expected range, while income from operations and pretax income of 9.5 basis points and 6.7 basis points were at the high end of their expected ranges.

We expect continued improvement in our financial performance this year as we acquired new business, further reduced our cost structure, continued our quality initiatives, and complete modification so that we can keep more borrowers in their homes.

Now I would like to turn the call over to Dave Gunter. Dave?

Thank you, Ron. During the global financial crisis of 2007 and 2008, we made liquidity our top priority. We view liquidity as unencumbered cash balances plus unused, collateralized advanced financing capacity. At December 31, our liquidity was $292.1 million, compared to $201 million one year ago.

To strengthen our liquidity, we completed TALF notes of $210 million for 30 months at 4.14% in December and $200 million for 24 months at 3.59% in February. Our February TALF offering was 7 times oversubscribed with both TALF and cash buyers.

The improvement in the tenor and lower interest rate of the TALF financing is a significant benefit. First, we minimized our dependence on 364-day financing, significantly reducing our rollover risk. We limited our TALF issuance $410 million to our projected advance balances on existing collateral at the maturity date of the notes as the TALF program does not permit new collateral to be added to support the notes; and second, we became asset sensitive, which means that we benefit from rising interest rates.

With the sale of the TALF notes, we have $894.3 million in excess lines to support servicing and sub-servicing acquisitions, and a high level of interest from multiple financial institutions to provide additional financing should it be required.

While it is expensive to maintain such financing in terms of upfront fees and non-use fees, we believe that it provides us with a competitive advantage in acquiring portfolios.

We also continued to reduce our asset intensity. At December 31, 2009, our balance sheet is 21% smaller than the previous year end. As Ron mentioned, reduced advances by 19.5%. The decrease in cash of $110.1 million is reflective of our strategy to minimize advanced borrowing.

Our exposure to loans held for sale, subordinates and residuals has been reduced by $17.3 million or 32%.

We eliminated goodwill and intangibles via the separation of Altisource Portfolio Solutions. And since September 30, 2009, auction-rate securities with a carrying value of $124.4 million, were sold at a $1.4 million loss and the investment line was repaid. As a result of the sales and changes in fair value, holdings of auction-rate securities are currently $124.6 million. Of the auction-rate securities remaining on the balance sheet, $86.5 million were financed by $75 million of nonrecourse debt with a maturity in October 2012.

As a result, our matched funded liabilities and lines of credit have been reduced by $557.3 million or 51.7%. And with the repayment of the investment line, our equity is greater than our liabilities.

With the decline in liabilities, interest expense of $12.8 million for quarter four is 20% lower than quarter three.

Finally, we incurred a 66% tax rate for Q4 as we booked a valuation allowance related to our former advanced financing vehicle. This deferred item does not impact current cash taxes. We hope to bring this process to conclusion in the near future.

For 2010, we estimate that our effective tax rate will approximate 34.6%.

To summarize our performance, 2009 revenues were $380.4 million with margins of 38% for income from operations compared to 34% one year ago and 24% on a pretax basis compared to 6% last year.

Thank you. We would now like to open the call up to questions. Operator?

(Operator Instructions). Bob Napoli.

Thank you. Good morning. Question on the page 7, the common sized income statement, the profitability of you getting some very good scalability. But what would be your target or your goals for the pretax income as you continue to grow the portfolio?

So we said previously, especially in August when we were on roadshow, that that had been in a range, 4% at a low and 7% to a high. And now you can see the highest number in that five-quarter series. So, we are certainly headed towards 7%. And we will continue to monitor with each portfolio as to how much higher we could push it. But we are certainly headed for 7%.

Okay. With regards to the acquisitions, are these all purchases of servicing rights as opposed to sub-servicing deals? And what -- I know you are in negotiations and competitive bidding for these portfolios, but if you could give some color on how you would finance a very large transaction as far as equity and debt capital.

Certainly. Each of the transactions are slightly different. One transaction is where we not only purchased the MSRs, but we also basically financed all the advances on our lines.

A second and larger transaction is where we purchased MSRs and where there's financing being provided by the seller. So we certainly have, as Dave pointed out, close to $900 million of excess advanced financing. That's after we reduced some of the requirements that we have with a few of the players because it was -- it's expensive to maintain huge amounts, but at least our hope and our thought is we can go back and upsize those back to at least their prior level.

And we have close to $300 million of excess cash to provide the equity component if you will of the purchases. And we are continuing to liquidate other assets that we have that we could in fact redeploy within those new acquisitions.

I think the other thing that's out there for even beyond these acquisitions is the high-yield market has started to reopen. And after these transactions, which we have enough financing for, we could in fact reload with a moderate amount of debt, we still would basically be no more -- virtually not much -- well, with the new advances. But we certainly could I think reasonably justify adding a fairly good portion of high-yield debt in the market today.

Okay. The GSEs -- and obviously a lot of discussion about them buying assets out of their securitizations -- buying delinquent loans out of the securitizations. And the presentation you guys made in front of Congress showing your performance yesterday, Ron's presentation, what is holding up getting additional sub-servicing? And I know you've done a nice job in growing the sub-servicing, but it's nowhere -- it's not even scratching the surface over what should be available. What is holding up your being able to achieve a much higher penetration rate of those GSEs?

Well, we think we are getting more than a fair share with respect to one of the GSEs. We are in the process now of going through the approval process for a second GSE, and we can't -- we don't have a judgment as to the timing, but hopefully pretty sanguine that we will ultimately get approved there. So, I think we will be reasonably well positioned with regard to the GSEs.

What is it going to take for them to I guess pull more servicing from current servicers on delinquent loans? What is timing? What are you hearing? I don't know if you've --?

We don't hear anything that -- any information that probably you see. The GSEs do not reveal any indication of what their actions or activities are going to be to us. You certainly have an environment where they're going to be buying more out of the pool, so we are hopeful that in fact that would lead to more placements of special servicing or servicing. So, but again, we don't have any insight as to (multiple speakers)

Last question, Bill, is, the FHA flow, the goal is to generate flow FHA product. What kind of strategies are you embarking to make that happen?

Two. We're looking at being a simple -- basically being able to get product and deliver it through to Ginnie and keep the servicing. And we're also trying to evaluate and are evaluating activities with regard to Lenders One, which was purchased by Altisource, to provide more value to their customers. In other words, if you look at the -- there's a substantial pickup in terms of an originator being able to do mandatory versus best efforts. And an even greater pickup if one were to deliver directly to the agencies in terms of more than doubling their margin. So we wish to work with them and be in a position where we can actually deliver that product through to make their loans worth more, and in certain cases, put us in a position to be the preferred bidder if you will on the servicing.

Thank you.

Rick Shane.

Good morning. A couple different questions here. First of all, the ratio between HAMP modifications and overall modifications, it's about 25% or 30%; and you're describing that you think it will go to about 40% will be HAMP modifications in the next quarter. What is different? I mean presumably given the economics that you are offered by the government to do a HAMP modification, you would, all things being equal, be interested in doing the HAMP modification. What is the impediment between the industry modifications and the government modifications? And can you work with regulators to narrow that gap?

There are a number of differences, one being the government program is limited to owner-occupied properties, and so, that's one limitation.

The government program also has very specific criteria for who qualifies. They have their own net present value calculation. So you first run your owner-occupied borrowers through that process. If they don't qualify, then you look at the other programs that were being used historically. And our programs that we used historically focused more on overall affordability looking at both revenue and expense and determining affordability and coming up with a modification that fit that individual borrower.

So, whether it will make any movement, there will be any movement by the administration, as Bob mentioned, I testified in front of Congress recently. And at least they asked me to propose some ideas on how we would improve things. And one of those was to either reduce the debt-to-income ratio requirement or make it more of a sliding scale based on number of dependents so that we could get more people into the program.

Whether or not there will be any movement on that front, again, you have as much information as we do. But, regardless, if they don't qualify for HAMP, we have programs that they can fit into. And there still are benefits for both the borrower and us and the investor to pursue those.

Got it. And what I'm really trying to figure out is what is that primary factor. You mentioned owner-occupied. But to be honest, I have a hard time believing that such a high percentage are either rental or second homes, that that's making the difference. Is --?

But, I think as I point -- I think (multiple speakers)

It's more on the debt to income side.

Yes, I mean a lot of borrowers are already at or below the 31% debt-to-income level. And so, yet they -- maybe based on the number of people living in the household and other circumstances, are still struggling to make their mortgage payment, and that's one of the reasons why we recommended that consideration be given to lowering the debt to income number below that. So yes, there are a lot of fallout because of that.

And do you find that that 31% number is statistically significant? Or can you go back to the government and say, hey look, if you go to 29%, it's not you are recidivism rates cliff because of it or spike because of it.

Yes, that wouldn't drive recidivism rates up by doing that. The problem you have, Rick, with that number is that since time immemorial, since I've been in the mortgage business for 30 years. The standard underwriting logic that in fact upon which the mortgage industry is based is a 31%, 38% number. So to go below that number is really a tremendous psychological hurdle, I believe, within the mortgage industry. Now, we actually generate -- correct me if I'm wrong, Ron, on our mods, we generate about a $50,000 to $60,000 savings per mod over having not modd'ed them -- net present value for the customer. So there is value there.

I think the other problem that you're faced with, Rick, is that this program is designed so that the maximum number of servicers can actually execute upon it. And obviously there are some challenges that you are seeing, that the industry is seeing there under the current program.

In order to do more sophisticated modifications, that probably would strain the operating capacity of most of the other servicers because they do not have the embedded models or logic to be able to execute on it.

Okay. That helps.

The simple thing would be to go below 31%, but that is a huge psychological barrier.

Okay. But it's something that you have been willing to do?

Yes because --

Okay. I just wanted to be clear on that. That was my understanding but then when you made the case about 31% being historically the number, I just wanted -- that was my understanding, one of the big variances between your program and HAMP. Okay.

Second question, and again, I apologize. We were unable to read the slides on our Web browser for some reason today, and so we're a little bit of a disadvantage. And if this is covered, I apologize.

My understanding is that the UPB growth is a function of sub-servicing and that's why we actually saw the MSR balances down modestly while UPB numbers were up. And the idea being that actually buying the servicing rights is more capital intensive, so it shows up on the balance sheet in a bigger way.

My recollection is that when you guys raise capital, there was a -- I believe the number was about $75 billion that you were looking at, of UPB. And, obviously I think you guys have been incredibly price disciplined in terms of approaching that market.

Do you think what's happened is that what made buying servicing rights as attractive for you made it less attractive for sellers? And that pricing has moved and you are just maintaining your price discipline?

No, because they're not trading yet. And we're working on the same transactions we were working during the roadshow. They're not going away. It has taken a while for it to work through the process. But, whether it's a sub-servicing or a servicing bid relates to the cost of capital of the two relative entities. But it's not that they are trading away from us, and it's not that they are not looking at the current transactions at servicing deals. So, I don't think there's been any change in the market in terms of adverse consequence.

As a matter of fact, if you think about it environmentally, there is today, 13 million seriously delinquent loans. That's $175,000 per loan. You're looking at $2.3 trillion of seriously delinquent loans that are growing at the rate of $3.6 million per year. Or another -- that's probably another $600 billion of delinquent loans.

So, I think it takes a while, unfortunately, we see in all these areas, much longer than in fact we would ever expect it to take. I think we're making -- good -- we're extremely busy right now. Let's put it that way, working on transactions. And the backlog is just growing. It's just -- you can only hold the water behind the dam for so long. So you're talking today, let's say what, $2.3 trillion; you're adding another $600 billion. You are probably, in advances for the industry, is somewhere around $75 billion and growing.

So at least the overall environment is creating a lot of opportunities. It's a question of how long it takes individual entities to bring it to market.

Got it. And then last question in terms of the transactions you've been looking at. You've been engaged on these, it sounds like for a long time. And again, I've never sat in your seat, so I don't know what the deal points are. I'm assuming that the deal points are fairly straightforward and that the delay has to -- the biggest issue has to be related to price.

No. That's not a correct assumption.

Okay. So help us understand what the deal points are that need to be resolved. Because that's important to me. If it's pricing moved, and you guys need to get everybody to the table and narrow the gap, that's one thing. But if it's other stuff that we just, frankly, from these seats don't understand, help illuminate that for me. I would be really appreciative.

Sure. I think there are two primary drivers, and I invite Ron and Dave to come in. In some cases, it's operational issues that relate to making certain that the loans are properly -- the escrows are properly accounted for. So that's something that is -- we have to be laser-focused on account management. And that is in certain cases, certain firms never had to be and are not as focused on how does one manage that whole process.

I think the other element of it is, and you can say it's price. I don't think the price has been different. It's been a -- I think a belief of not bringing it to market because they would take losses. I think that people will see once the trade occurs here that is not the case. That in fact, prices will execute that are attractive for the buyer and will be similarly attractive to the seller in terms of where they have marked them.

And I think a third element of it is that institutions have become far more -- far more levels of approval have to be achieved in order for a transaction to occur. Most of these transactions go all the way to top of major multinational corporations for approval, which in the past I do not -- that was never in our experience -- never -- did you have that level of approval to get a transaction done. So that obviously elongates the process when you have several dozen approvals on every step of the transaction.

And it may be someone's taking a loss, and it's a little bit harder to approve a loss than a gain?

Well, I think they thought originally they would be taking losses. I do not think that that is -- I think the people will be surprised -- pardon me, when a ticket prints. I think that there's been some activity just as the result of the sub-servicing bid we did in the fourth quarter when -- I don't know how those things get around. But I think people were -- sellers are pleased with some of the levels that we're reflecting out there in the marketplace. And those levels meet our requirements and our objectives.

Thank you. I've taken enough of your time. I appreciate your patience.

Bose George.

Let me just start with the one quick follow-up on this purchase issue. I was just wondering if you have a feel for how many other bidders are there on some of these transactions and any color on that would be interesting.

We think the universe is relatively small. Your a couple to few in most cases. So generally the transactions we're looking at, that's the neighborhood that we are talking. There have been some others that have been out there that have had maybe a slightly wider range of bidders, but the ones that we are talking about generally is pretty small.

Okay, great. Just one more issue on that. The res. cap portfolio -- is that being marketed -- the MSR in that portfolio?

We really can't comment on that.

Okay, no problem. Thank you. And let me to switch. I've got a couple of other things as well.

One is just on the fees related to the HAMP modifications. So you guys had about a little over 15,000 by the end of the year. So you effectively waived the $500 -- the late fee component of it. I just wanted to make sure when the cash flows from the government -- the timing of the cash flows on the HAMP modifications.

First off, of the 15,000, I think it was 27% or so were HAMP. So it wasn't the full 15,000; it was that 27%.

And generally, once the loan is modified, the government -- you usually receive your payment definitely within 60 days. It all depends at what time during the month that you modify the loan as to whether you get it in say 30 days or 60 days. But it's not a long process to get paid.

That 60 days to get the $1000 payment and then a year from then you get the next one?

That's correct.

Okay, great.

One of the things that we've been pleasantly surprised at is the recidivism rate on the HAMP program has been very, very low so far.

Great. Thanks. And then just actually one last thing. In the first quarter I guess your numbers will reflect FAS 166, 167. Is there any potential meaningful impact on equity or is it just you will have slightly higher level of assets?

You will see a slight gross up. We will make that clear in a certain disclosure. So as those securitizations come on board, you will have a gross up. But I don't think you'll find that material.

On 166, 167, we won't -- from an equity consumptions perspective, will impact regulated entities; it won't impact us.

Okay, great. Thanks.

DeForest Hinman.

I had a few questions. I don't know if this was disclosed, but can you talk about the current balance of loans that are under trial mods for both HAMP and non-HAMP?

So the trial mods that we put out in the fourth quarter are just a little under 20,000. And the quarter previously, I think that number was about 15,000. So that will probably sound like a rational number to you, knowing that we just did mods in Q4 of 15,677.

Our forecast when we tell you what we think in the next quarter, it's because there are trial mods out there and we assume some fallout.

Okay. And can you just give a little bit more color on that fourth-quarter tax item?

Yes, this is Dave. On that item, we simply created a new financing structure when we brought aboard the TALF notes, the $210 million in December and the $200 million in February, and so we are winding down the former structure. And until that process is complete, we simply placed a valuation allowance on the impacts and expect to finish the process and reverse that in a future period.

Okay, that's helpful. And, can you help me get a better understanding of where we see the most amount of principal coming from for these auctions? Is it mainly government, or is it banks?

Can you elaborate, which auctions are you speaking about? I'm sorry?

Well, you talked about there's $[45 million] of opportunities.

No, those are -- no, that's in one of the three prongs, those are private market transactions, not governmental. Governmental would be different.

Okay. All right. Thank you.

Mike Grondahl.

Bill, could you help us think a little bit about incremental margins if you were to acquire a new mortgage portfolio, servicing portfolio? And then secondly, could David just repeat -- I think you gave a number of expected loan mods in 1Q. Could you just repeat that? I've missed it.

Yes, we're guiding to a range of 12,500 at a low to 17,500 at a high, where somewhere between 30% and 40% would be HAMP modifications. Compare that to the 15,677 that we announced for Q4, of which 4,296 or roughly 27% were HAMP.

Great. Thank you.

To answer your other question, I think there are two elements that you have to take a look at. And I don't want to disclose our pricing strategy given where we happen to be.

But, there are two elements that are very important in terms of your valuation, where we have a competitive advantage, vis-a-vis any other bidder. First of all is our operating costs are 40% below the industry. And that's been substantiated with at least two studies that are public. 40% of the industry were 60% below the industry average. That has been important and is important in a low interest rate, low delinquency environment.

What even is more important going forward with respect to us is our ability to reduce advances by basically getting the portfolio more current. So it's really the financing cost, if you will, not only the interest expense, but the imputed cost of equity that's important.

But when you come to our marginal operating costs, it's very, very low. Our cost structure tends to be, because of our technology and our infrastructure, tends to be a higher proportion of fixed costs than it is variable cost. So, volume is very profitable to us because the margin doesn't require us to add a lot of expensive personnel to process the loans.

We tend to -- we bring our unit costs down every single year and intend to continue to do so. Even with the increased issues that have occurred with more delinquencies and with HAMP and all of that, we have -- as you've seen, we brought our operating costs down by 14%. We will continue to do that, which in fact then affords us -- unless we over bid, it affords us basically much greater returns on our equity than what another competitor would have.

And I think most people understand the general servicing market, but when you describe the sub-servicing market, are you paying more or less for that sort of per unit of income? Or how do you pay for that when you buy it? How should we think about that just generically?

We don't pay for -- we don't generally pay for sub-servicing. There's three buckets -- and think about it this way. You either pay for the MSR or you don't. And you either finance the advances or you don't. In other words, and also people can provide the financing where you actually do provide the advances. So there is a whole different -- each of these transactions, the most capital efficient transaction that will generate you the highest returns on equity because there aren't any -- there isn't any equity, would be obviously a transaction where we make no advances and you don't buy the MSRs. Then it begins to cascade down from that particular point.

In terms of more equity, higher gross profit dollars, but also more equity embedded. And what's becoming interesting is that more and more of the equity is becoming embedded in the advance equity, you know, the haircut money.

I was talking not only about bringing advances down, but we have a significant competitive advantage when you have to bid on financing it yourself. Our advance rates are substantially superior to the second best firm out there. In other words, including haircuts, we were slightly over, a smidge over, 80% advance rate. So on $1 billion, we had to put up $200 million.

We believe the other competitor, strong competitor, is probably within a 73% pre-haircut and the haircuts probably took them into the 60%s. So, that gives you something like $300 plus million worth of equity into a $1 billion of advances or about 60% more than we put up, even assuming we have the same level of advances.

That is a huge difference in terms of returns on equity simply because, obviously, you're going to put a much higher yield on equity than anything else, and their equity is probably, per UPB, coming close to double ours. So that's why quality is critical in terms of absolutely getting these loans modified and current as quickly as we possibly can. Cycle time is essential.

Right. That makes a lot of sense. And then, your prepayment speed, or the runoff, as I kind of think about it in the fourth quarter actually dropped from 20% down to 19%. What's driving that?

I mean, there is a small component relates to the voluntary prepayments, which has remained very, very low. And then the other component is related to how many loans actually get liquidated, say through the REO process or through discounted payoffs. I think in the fourth quarter, the raw number of REO that we liquidated was down a little bit from prior quarters. So that may have a small amount of what to do with it.

How should we think about that runoff going forward?

I think we've remained in a relatively narrow band over the last number of quarters. I think our expectation would be that the voluntary number will continue to be low, based on the fact that borrowers don't have a lot of equity in their property and there's still a fair amount of credit issues in the market, and in our portfolio as well. So it will be more a function of actual defaults. Since we do such a good job of being able to keep people in their home and modify the loans, that keeps our runoff lower than maybe some others in the industry. And we're going to obviously continue to focus on that.

We've mentioned that one of our strategies is continuing to reduce we call asset intensity. What we would like to look at is if for those borrowers who can and should be modified, we make that happen very quickly. And for those that for whatever reason are not going to be able to enter into that program that we move through the actual liquidation process as fast as possible, and we will be focusing on that this year. But I wouldn't expect that you will see -- I would expect that you will see more of what you've seen over the last four, five quarters, it should be fairly similar.

To the extent, as Ron said, we can shorten the time to resolve an asset. If you go from an asset, I think something off the top of my head that is 90 days delinquent to something that's 180 days delinquent, the recidivism rate, if you do a modification, jumps 60%. So the ability to reduce -- to resolve the asset first of all reduces your asset intensity on the front end and then also makes certain that the asset does not in fact redefault with a high probability.

Okay. Hey, thanks for taking the questions, guys.

[Brian Dunn].

Thanks for taking my questions. Just two quick ones. Last quarter, you guys gave a number that you said for your book value was being underreported by I think it was like $1.50 last quarter. Has that number changed much to the fourth quarter?

It's very similar, and there were two components. So you could think of us in the $11 range. The one was deferred servicing fees, which was $57 million a quarter ago and it's $55 million now.

And then the other that got you between book value that you would calculate compared to roughly $11 was the difference in our mortgage servicing rights. Remember that Bill said we are 60% lower in cost than the average participant in the industry. If you were to take our mortgage servicing rights and calibrate them based on our internal costs rather than the market external costs, you would have a much higher MSR. And in fact, that's descriptive to you of how the economics work and how we drive cash. So those are very similar numbers to what we had one quarter ago.

Okay, great. And then last question, you guys talk about how you are the low-cost servicer and you have tons of verification and your numbers are obviously proving it with your operating expenses continuing to trickle down. But help us understand how just the most recent transactions have kind of hit my radar of how someone like EverBank, who is a sub top 20 servicer, can acquire a portfolio that I would be thinking that's right in your ballpark with the $10 billion Flagstar deal that closed late last week, at least from the information I have.

Well, the Flagstar portfolio is going to be more of a prime portfolio. And, so I wouldn't call it right down the pipe for what we look at. We generally look at portfolios that are -- that do in fact require more operating cost component to them, those that are more delinquent, require more personnel, higher cuts. The more operating costs that you need to put at a portfolio, the more advantage that we have. A prime portfolio has much less of that and, therefore, makes us less competitive in that environment.

Got you. Thanks for taking my questions.

Robert Schwartzberg.

Good morning. A couple questions. One, I think you've mentioned a couple times that you anticipate a higher percentage of HAMP modifications as a percentage of total mods. Could you just review for me again what would be driving that? Is that something that is because of something specific to the Company? Or is that something because of rules changing within the program? Or what do you see as the principal driver of that? And then, how might that affect your servicing margin?

Maybe -- this is Ron. I'll try to answer the first part. It's not due to any sort of changes in the program. The program, as it has matured, you had to ramp up into it. The borrowers had to be on trial plans for three months prior to becoming officially modified. So it's just sort of the majority of the program I think is what's driving the fact that as we increase the number of loans that are in trial plans, then we will have more loans coming through into ultimate modification. As for margins, Dave, I'm not sure it's going to make a substantial difference in the margin overall.

No. The driver in the margin overall is simply the continued growth of the portfolio. And remember that this portfolio grew 24% over the last quarter. So the 38% and the 24% different margin measurements that we gave you, we would expect to get better as we grow the size here.

No, I saw the -- I saw a great margin improvement, and that's part of why I ask that question.

Then I just --

The margin improvement occurs from really three issues. Obviously, modification income was $4 million or $5 million for the quarter. You basically have more top-line revenue, and we have a significant operating leverage. And on top of that, we've reduced our operating costs in the same vein by 14%. So, it's a combination of all three -- those elements plus interest expense went down. So, every item went in the right direction.

Right, no; I noticed that. And this kind of goes back to something you mentioned about I'm going to call it capital allocation. I think I heard about a $900 million of capital to support servicing growth. And there was discussion about acquisition of servicing versus sub-servicing. It seems like you had a fairly major improvement in servicing contribution without having to go out and buy MSRs.

So maybe, can you tell me a little bit about how much again the $900 million would support if all you did was just go out and expand via sub-servicing arrangements?

Well, those -- the $900 million is excess lines that we have available to support advances. So you would divide that number by 0.8 to arrive at the dollar of advances that we could support today without upsizing our lines.

Right.

Okay. So that would give the idea about $1.1 billion or $1.2 billion without asking for any more financing from either our existing lenders or from new lenders.

And I thought very -- just to keep in mind what Dave talked about may not -- it may have just -- I like to reinforce the last TALF transaction actually had buyers that didn't need TALF to do term financing. That is a return of a market that was a very important market to us historically in terms of our financing because we could term finance -- we were at LIBOR plus 35. And term financing basically reduces your interest rate risk. It reduces your rollover risk. So we think there's plenty of, knock on wood, financing today to take advantage of the opportunities, or some of the opportunities, we see in front of us. But not necessarily -- certainly the $35 billion, but there are other things that would require us to get more lines.

And I think -- we were very excited about the sub-servicing transactions that we were able to execute during the year and in particular in the fourth quarter in that they do provide income growth without us having to really deploy any capital. And if those opportunities continue to arise, we will definitely continue to pursue them.

It's just not every transaction that is going to be available in the market is going to be available for sub-servicing. Some are only going to be available on an acquisition basis. And we are -- we have advantages I think because of our excess capacity on the financing side, along with our operating cost advantage to be very competitive on both sub-servicing and on MSR acquisitions. And we will -- again, we will pursue whichever is available in the market, as long as it's the kind of product that fits what we are looking for.

Right. Just final follow-up, and I appreciate you taking the time. So with the advance capacity and $1.2 billion, what I'm really asking is what is the max amount of growth in the portfolio that you are able to support given your current capacity? In other words, if you won the two deals that you are nearing completion for $35 billion, would that entail additional debt or equity financing?

No.

Okay.

Because one of the deals -- they're providing the financing.

Great.

For the -- you know, they are providing advanced financing.

Okay. That's perfect. Thank you very much.

That's more than enough capacity on advanced financing to do all those deals.

Thank you.

Bob Napoli.

A couple quick final questions here. The cash tax rate, Dave, is it still 20%?

Think of it as just a little over. Let's call it 22% just to be safe for state taxes. But yes.

Okay. And Bill, the FHA -- have you built -- are you looking at building a little -- an infrastructure to originate loans in addition to what you might do with Altisource subsidiary?

Yes, we are examining basically being a broker, if you will, on loans where it's non -- where we're not putting them on our balance sheet. And with the intent of trying to ultimately do stuff that we can deliver to Ginnie and basically keep the servicing, obviously, so it's balance sheet light.

And are you doing some of that now? And would that be -- does that fit best in Altisource or in Ocwen?

We have an embryonic little operation in a beta site with respect to it and it basically -- it would not fit within Altisource because Altisource truly is a capital -- it's the most capital-light organization I've ever seen in terms of its business model. So, and this would be as well. We're not intending to, nor will we intend to, have a large balance of loans on our books at any point in time.

The only thing we're looking for is the stuff that we can originate and initially, best efforts deliver. So the next step would be mandatory. And then the last step would be to do it so we deliver straight through to Ginnie Mae and securitize the loans that keep the servicing.

Is that -- that would not probably be material in 2010, that origination?

Right. We are not considering it to be material at all in 2010.

Okay. Then, you are looking at growing your servicing portfolio pretty significantly. The employee availability I guess and the ability to have trained employees ready to go if you were to put on in another $30 billion of servicing over the next few months -- can you explain how you will be able to accomplish that?

Sure. I mean, I think the totally unique feature that Ocwen has is our ability, given our systems and processes, is to be able to, with 90+% certainty, to hire an individual that meets our intelligence and our psychological profile, give them the necessary technology tools so that within three months, they are as effective as our most experienced players or within 95% as effective. That's really -- we're probably the only firm in the industry that can do that.

But we obviously need time to ramp up and hire people and you need that three-month cycle with regard to that.

Our longest lead time, quite frankly, if we were to $100 billion is really the physical facility time to basically lease and sit out the facility. The second longest time would be if there were a huge step change function, which these transactions would still be within our current infrastructure capabilities, would be the data center upsize, which is probably a two- to three-month timing to do that.

So those are your three main elements. You have got to find a place to house the people. You have got to put technology on their desk. And you have to make sure those people are fully functional and capable of doing the work.

And the availability of people that have the capabilities you need are -- there's no question, and it's all through -- it's still being done through India -- all incremental hires?

We do the vast majority of our hires in India unless it's for government-related work, which is in the United States. We do Spanish-speaking [queues] out of Uruguay. There appears to be more than sufficient numbers of people to meet our requirements. That has not been a problem.

You said HAMP revenue was $4 million to $5 million this quarter. Is that right?

That's right.

And what -- can you break down how -- is it all on the -- $4 million to $5 million seems a little bit bigger than I would expect given -- how do you get to that? Is it all $1000 per loan for each one that modified and paid for three months?

That's right. That's the piece that you are looking for.

We did 4,000 --?

4,296.

Okay. And right now your target for mods in the first quarter was (multiple speakers)?

12,500 to 17,500 and 30% to 40% HAMP.

Okay. And what kind of ramp up do you see? Is that -- the momentum you have going into the first quarter -- as you're getting better at this, would you expect a higher percentage of HAMP in the second quarter?

No. We are the industry leader in HAMP conversions. It is not that there aren't any HAMP loans we are not processing or going after or executing on. It's simply a composition of the portfolio. To the extent you have more eligible borrowers who default, the number will be higher. To the extent you have lower, it will be lower. So it's not a -- we are -- we believe we pulled through 82% of all eligible HAMP mods.

Thank you.

We would not expect that percentage to go down.

Right, okay.

Rick Shane.

Sorry. You may have answered this when I was queuing back in and I missed it when you were talking with Bob. But, given the 4,000 and change HAMP mods, $1000 a modification, and our understanding was that you had to wait several months to collect the success fee, we've modeled it based on suggestions from you of having those ramp in over the next quarter. What's the difference here? Are you recognizing the HAMP revenues faster up front than we previously thought?

Yes. You can just accrue the government incentive, and as you heard from Ron, it comes very quickly.

Those are closed -- the 4200 loans we did were completed HAMP mods in the fourth quarter.

So those are borrowers that made their three payments and were officially modified under the program during the quarter, and we were either -- had received the payment from the government in the quarter or received it shortly after the end of the quarter.

Okay, got it. That makes sense. Thank you.

And I -- the one question too, I mean I think that's important is the fact of those loans are surprisingly staying current at the very, very strong high level of currency.

We have no further questions at this time.

Thank you very much. I appreciate everybody's interest and questions. Have a great day.

This now concludes today's conference. You may disconnect at this time.