Onity Group Inc (ONIT) 2010 Q1 法說會逐字稿

Welcome to the Ocwen Financial's first-quarter 2010 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. I will now turn the call over to Dave Gunter. Thank you, 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 onto 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, first-quarter 2010 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, and 2009 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?

Thank you, Dave. In the process of raising equity last year, we committed to acquiring new business, increasing loan modifications and issuing TALF financing. With the completion of our recently announced acquisitions, we acquired $23.5 million of servicing and subservicing over the past four quarters, one of the highest 12-month periods ever. We led the industry in HAMP modifications and we issued two TALF securities.

At present, our servicing portfolio is $55.1 billion, an increase of 35% since March 31, 2009. This performance has enabled us to generate pre-tax income 35% greater than Q1 2009, even though last year included our former Ocwen Solutions line of business, which separated in August of 2009 as Altisource Portfolio Solutions. The key to the servicing business is to convert the maximum number of loans from nonperforming to performing status. This process increases revenue and reduces operating expense, interest expense and required equity capital. This enables us to be the leading bidder for servicing portfolios.

First, our industry leading cost structure allows us to target attractive returns while being the highest bidder. Secondly, we are the low-risk solution for sellers, given our able to improve portfolio performance. And third, we have ready access to capital to close deals, which Dave will cover later on the call. Even with the $20 billion-plus of servicing transactions that we have closed over the past year, we have a substantial pipeline of transactions that we are pursuing.

I will now turn the call over to Ron, who will review Q1 results and the servicing business and the success of our modification program. Following that, Dave will review our liquidity positions and our balance sheet gross-up related to recent changes in accounting standards. Ron?

Thank you, Bill. We have made a commitment to reduce asset intensity in 2010. This means we will reduce gross advances by minimizing the amount of time that a loan remains in a nonperforming status. From December 31, 2009, the ratio of advances to unpaid principal balance where Ocwen has responsibly for advancing, declined from 3.01% to 2.94%. This decrease is significantly greater than the reduction in the unpaid principal balance of our portfolio.

On a net advance basis, we've achieved a 33% reduction during the first quarter of 2010. As shown on slides five through seven, in the first quarter, our servicing business grew revenue by 4%, while expenses were stable. This resulted in a 7% improvement in income from operations over the fourth quarter of 2009. The revenue lift reflects the $9.7 billion subservicing deal that we signed in Q4. We have yet to recognize any revenue from the $6.9 billion servicing transaction boarded in the second quarter, which should generate greater revenue and earnings, given the capital intensity of the transactions. Turning to slide eight, the common-sized format measures our performance as basis points of UPB. Our pre-tax income of 6.9 basis points is the best quarterly performance since we began tracking results in this format.

Slide nine shows Ocwen completed 19,612 modifications during Q1, exceeding our previous guidance of 12,500 to 17,500. Of these completed modifications, 32% were HAMP. We are proud of this performance as the Congressional Oversight Panel recognized us for leading the industry in total dollars of HAMP incentive, as of February 2010. The number of HAMP trial mods in Q1 declined to 4,805 compared to the 7,093 in Q4. We expect total completed modifications in Q2 to decrease between 12,500 and 15,500. However, we are beginning to see results of some new operating processes, having completed over 2,000 new HAMP trial mods in April alone. Now, I would like to turn the call over to Dave Gunter. Dave?

Thank you, Ron. We issued a second TALF note of $200 million at a fixed rate of 3.59% on February 12, 2010. This additional borrowing increased our cash position to $300 million at March 31, 2010, and our total unused maximum borrowing capacity to $1.03 billion as shown on slide 10. We continue to eliminate nonservicing assets from our balance sheet. This allows us to allocate more resources to the servicing business.

Since December of 2009 auction rate securities with a carrying value of $122.88 million were sold at a $284,000 loss. This enabled us to repay the remaining balance on the investment line on February 17, 2010. We deployed, however, $160 million of cash in the $6.9 billion May servicing acquisition. We adopted statements of accounting standards 810 and 860 effective January 1, 2010. As a result, we identified four securitizations where we are the servicer and hold a residual interest. We have recorded incremental assets of $76 million and liabilities of $73 million, with the difference being booked to operating equal.

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

Thank you. (Operator Instructions). One moment while we get our first question. Our first question will be from Mike Grondahl of Northland Securities. Your line is open. You may ask your question.

Yes, thanks for taking my question, guys. Quick question, last quarter, Bill, you kind of gave us an overview of some of the acquisitions you were evaluating. I think there were four of them, two of which totalled $35 billion. Could you give us an update on kind of where you stand in that process, please?

Yes, I'm really surprised you asked that question, Mike.

I believe it.

Yes, I mean the-- there is a very strong pipeline in the-- that we're evaluating. The-- we closed on of the two transactions that comprise the $35 billion, the second transaction. These transactions are never closed until they're closed. We're in negotiations on documentation. We will soon let people know when, in fact-- if and when we, in fact, are able to complete those negotiations. But we're obviously optimistic about that.

There is-- I mean, I think the-- there is, at least in the industry a recognition that fails need to occur. They are probably the most difficult transactions I've experienced in close to 40 years of business. But there is a very large-- there are a large number of portfolios that, in fact, are either in discussions or further along than that, in terms of trying to move those transactions along. They have a remarkably long gestation period for the transactions to occur.

So I think there is just one thing economically, I think there needs-- a number of portfolios need to be sold. They, in fact, are noneconomic platforms that are shrinking with economics that make it difficult to make money; they are not strategic any longer to many of the businesses. So I think there is an overall positive outlook for transactions occurring.

I think we're the undisputed price determiner within the industry, and we provide low-- very low-cost servicing and very high-quality servicing is what enables us to get that price as well. So I-- I'm long-term optimistic. It just takes a while to close each of these transactions and-- but we have a very strong pipeline and I think we're in good shape.

Would you say the pipeline is growing?

No, I think it's more just a realization that these things are circling out there. There are large numbers of, and I should say this, more than a handful of transactions, they come and they go in a-- sort of a-- there is an interesting pattern of them getting active and then inactive and then active again. So I think that there is a large opportunity set. It-- there has to be this confluence of basically pretty much the seller's desire to sell at a particular point in time.

Got you. And then just lastly, your pre-tax income per UPB, you commented that it was 6.9. That's a very strong number. Directionally, where can that number go? I mean, I assume you're still making progress as you add-- as you're layering in new servicing.

Yes, the biggest drivers I-- alluded to in my remarks is, in this business it's all about basically getting more loans current in the portfolio. It's reducing, if you will, the inventory of nonperforming loans, because those loans drive all of your costs and your capital consumption within the business. They are-- they drive your operating cost, which is less of a variable for us. They drive, particularly, your interest expense. They drive your overall capital intensity and the amount of equity required within the business.

We've done a better job than anyone in the industry. I think we can do still better yet with regard to reducing the cycle time that a loan is in nonperforming status, primarily through getting it back current and maintaining that intercurrent status without re-defaulting. That's why that-- putting our operating costs aside, which are important, that's one of the largest single determiner-- determinate of why we can put out effective bids, as we are just that much better than any other servicer at getting a loan current and we intend to get a lot better still.

Got you. And then one more thing, I noticed your prepayment speed, or your CPR fell to 12%. It had been running 19%, 20%, 22%. I mean, that's a pretty significant drop and it means the portfolio is a lot stickier. What caused that drop?

Well, it-- if you look at our historical prepaids for the last year or so, it's been primarily because of involuntary prepayments, i.e. through foreclosure. It's another indicia. I mean, you-- all these elements that you look at come back to how well do we take a borrower that is not paying and figure out a way to come up with a solution without foreclosing. So we're able to improve those-- the performance of getting more people to take a loan-- to take a resolution and maintain that resolution, you will not only drop your interest expense, your operating expense, the amount of equity capital you dedicate to the business, you also reduce your amortization expense. It's a very-- when you cut through this business, it's a very complex business but there's a very simple rule; keep your nonperforming loans down.

Well, you're obviously doing it. Thank you.

Thank you.

Thank you. Our next question will be from Bob Napoli of Piper Jaffray. Your line is open.

Thank you. Good morning. So on the-- I guess-- I know these deals take time to close and, I mean, is there-- I mean, how is the competition right now in bidding and-- from the bidders that I know of, I mean, you should easily be the most competitive but I'm-- are there new bidders emerging? I guess you had IBM come out of nowhere on one transaction. What is going on in the competitive market for these transactions?

Yes. I mean, I think that there's really effectively only one bidder for a-- for any-- for servicing. There may be a second one or so for subservicing. But, again, that's just straight-- that just really revolves around our straight cost structure, which that's a pretty difficult-- we're a very difficult competitor for people in that place. Yes, we lost to IBM. We were the high bidder in that contract. We were in negotiations with them at that particular point in time and IBM came in and took a platform that we had signed a negative value to and they paid, I don't know the exact number, but the-- at least the rumors that I've heard, $80 million or $90 million for the platform to get into the business.

Well, we're-- we can't do that. And they picked up a platform that was costing money to run. So if there are other bidders like that, we will lose. But if there is a normal solution set of bidders that we normally are familiar with, we don't lose.

On the larger transactions that you're negotiating, the larger one, I guess, if you did the math it's $28 billion or so. Is that-- I mean, what would prevent that from closing and, I mean, would you expect that, and I know these things generally take longer and you probably hate to put an exact date on it, especially-- on-- but would you look at-- I mean, should that close this month, in the month of May?

Let's put it (inaudible). The people that actually we're negotiating against are listening on the phone, so I would prefer not to answer that question. I'm not the brightest guy in the world.

All right. On the modifications, when you have a tick down in modifications for the second quarter, where you talked about a new process, I mean, are we working through-- I mean, are more moving to foreclosure? Is there-- I mean, have you-- are the amount of loans that are-- can be modified under the HAMP Program diminishing and therefore more of them are moving towards foreclosure? What is going on, why is-- why the drop, and maybe talk about the foreclosure trends, if you could.

This is Ron. I think-- first off, I think we did board the large subservicing deal in the fourth quarter and I think that there's always a little bit of a period of getting your hands around a portfolio. And so I think now, where we stand today, that now is a kind of a, I'll call it a slightly fresher portfolio for us to mine for new modifications, although the prior servicer was also aggressive in their modifications prior to transferring it to us. So I think to the extent that we bring in new portfolios, that helps kind of provide a bigger population to go after and get more modifications. The first quarter I think-- we had a really good fourth quarter, as far as getting new loans onto payment plans that resulted in better than expected completed modifications. In the first quarter, I think maybe that partly was the result of why we saw a few less in the first quarter, because we kind of did a good job in the fourth quarter.

But there were-- we continue to look for ways to improve our process, speed up the process, as Bill said, it's all about moving things through and getting them out of that nonperforming category. So we've put in-- some new things in place, which I think will help, shorten our timeline for when we talk to a borrower, start to gather information and actually close the trial plan process, and I think we're starting to see that-- results of that in April by putting on a pretty good number of trial plan HAMP mods, which then should fare well for us going into the third quarter.

So we expect a little bit of a dip here, but with the new portfolio coming on and some of the process changes, we should, hopefully, see that improve as we hit the following quarters.

As delin-- as foreclosures or delinquency bucket-- the severe delinquency bucket has been consistently coming down so-- and obviously that's something we want to focus on and make it come down even faster than it currently is.

Okay. And then last question. The-- have you made much process to date on trying to develop a flow business, and I understand it's a longer-term strategy, but wondered if you had any updates on trying to develop a, I guess it would-- today would be an FHA-related flow business.

Yes, I mean, I think we're looking at that. We are having some discussions with our-- with Altisource. Altisource has purchased Lenders One, which represents about-- somewhere around 6% of the-- all residential originations in the United States. We have a second relationship in place that we're putting in. We'll pick up another 2%. We think that there's some interesting opportunities to provide real value to those-- to our members of those-- that cooperative, and by enabling them to get better price execution on their product by delivering directly to the agencies and to the FHA. Obviously Ocwen is approved to do that and be able to help them with the servicing on the front-end of that. So that is a strategy that we're developing jointly with Altisource, and I think our expectations are to-- are seeing some production through that methodology by the end of this year.

Great. Thank you.

You're welcome.

Thank you. Our next question will be from DeForest Hinman of Walthausen & Co. Your line is open.

Hi. Could you just help me better understand these restricted loans for securitization, both on the asset side and then the corresponding liability?

Hi, it's Dave. That's a new accounting standard that came in. So what you see would be four securitization trusts, where we're the servicer or subservicer, and we hold a residual interest. And we've listed for you, as separate line items on the balance sheet, the assets and the liabilities that you see in the low $70 millions of dollars. And it is simply in conformance to that accounting standard. The reason that they're separate line items is that we don't have access to the cash in those trusts nor do we have a overly large exposure to them. And yet the new accounting rules simply say to bring it on.

And just to be clear, were those in place in the fourth quarter as well?

Yes.

They've been in place for years. This is probably, to be rather impolitic about it, probably one of the worst drafted pieces of accounting re-- literature ever drafted. When you start to see what it will do for the banks is going to be breathtaking. These are assets and liabilities that have absolutely no impact on Ocwen. Yet, the way the literature reads, you have to basically consolidate them. So there's-- all it does is just bulk up the balance sheet to no effect.

All right. And the last question on those, is that kind of a runoff-type business at this point?

Yes, it's been in runoff for years.

All right. Thank you.

You're welcome.

Thank you. And our next question will be from Dean Choksi of Barclays Capital. Your line is open.

Good morning. Can you just provide an update on the Freddie Mac special servicings trial and then kind of where you are with Fannie Mae, signing them up?

Yes, we continue-- on Freddie Mac, yes, we have two, we did a pilot program with them and then we also took another very large portfolio, the Taylor Bean Portfolio of nonperforming loans with Taylor Bean, had financial trouble. We continue to receive a flow of business out-- from the Taylor Bean Portfolio, from the servicer that services all the performing loans as they go nonperforming. They continue to flow into us. So there is an ongoing pipeline of business that comes to us.

We continue to have positive discussions with Freddie Mac and look to work with them as they further develop their special servicing strategy and I think that they are making progress with that. And as they progress with that, we would expect that we would be one of a select group of servicers that will be participating with them in that strategy. It's very difficult for us to gauge at what levels and at what the timing is on that. Fannie Mae has been more challenging. We have had positive discussions with Fannie Mae, but at this point, have not been designated to-- by them to do any particular special servicing. So I think it's-- there's really no way for us to forecast any meaningful business from them at this point in time because we just haven't seen any to date and it's unclear what their strategy is or where we fit into it.

But I think with Freddie Mac we are part of their strategy. It's just a matter of ultimately what that strategy is and when it's rolled out and how much that means for the special servicers that they select.

Yes, you mentioned that the Taylor Bean Portfolio was generating incremental growth, are there any other contracts that are kind of generating incremental growth? Can you quantify that with what the organic growth in the portfolio is?

At this point, there really is no other material, organic growth or flow business that's coming into the portfolio.

And I guess, Bill, you mentioned that there are a handful of transactions in the market where the portfolios are shrinking and are not economic. Is there a level of a portfolio where it becomes noneconomic?

Well, I think it's all relative to where it was previously. In other words, companies tend to build up-- have a natural tendency to build up some infrastructures that are larger, so obviously a portfolio that's shrinking does create some challenges, with respect to the economics that I would start seeing portfolios, I would think, much below $20 billion or less really seems to be a-- problematic, just because your infrastructure costs are so high.

And you mentioned sellers were kind of coming in and out of the market. Are they approaching you to take a look at their portfolio and bid on it or are you approaching them? Can-- how's the sales process work?

A little bit of both. We certainly do reach out to everyone there. I mean, we had one potential seller express the other day, that say we are the only credible buyer in the market. That doesn't mean we're going to get the-- that doesn't mean they're going to sell. But I think there is-- if you had to ask most sellers who they would put on their list for nonagency-rated product as the number one bidder, I think we would be on the top of the list on almost every-- by every seller. But, again, it takes a willing buyer and a willing seller to consummate a transaction.

Great. Thank you.

Thank you. We have a question from Bose George of KBW. Your line is open.

Morning. My question was wondering if there was any more detail you could provide on the $6.9 billion servicing portfolio you acquired, in either purchase price, servicing advances, delinquency rates, and also just in terms of modeling the returns, can we just assume it's fairly similar to what you guys already own?

Yes, I think the only thing we probably feel comfortable divulging really is the amount of the investment-- equity investment we had, which Dave says is $160 million and it would be in line with our historic profitability.

Okay, great. Thanks. And then just in terms of this going back to the potential sellers that are in the market, could you-- would you characterize them as sort of medium-sized originators that-- essentially the ones that didn't have the scale to keep their servicing platform, is that the cohort that's really trying to sell?

I mean, that's certainly an element of it. I mean, I think that-- I mean, outside of the active-- the companies that are trying to grow would be your Nationstar and on a noncapital intensive basis, on subservicing, would be Greentree. And then a question is on-- American Home I think is in that mix as well. So that's a fairly limited-- can you think of anyone else, Ron? I haven't seen anyone really show up for the-- those players--

I think Saxon may be looking to--

Correct.

-- (inaudible) on some subser-- they've announced--

Correct.

-- initiatives on special servicing and subservicing as their focus.

Right. But I think apart from those players, to a greater or lesser extent, people are trying to examine their strategic options.

And I was thinking, just in terms of the potential sellers, I mean, are they being characterized as sort of the medium-sized subprime originators of, whatever, 2005 to '07?

Well, I mean, I certainly think that's one element of it. I'm a little reluctant to go ahead and try to characterize who sellers would be, just because of competitive issues.

Okay, great. Thanks for the detail.

Sorry.

Thank you. And it looks like our final question is a follow-up question from Bob Napoli of Piper Jaffray. Your line is open.

Thank you. Just on maybe a little more color on the auction rate securities, is there any ability to sell what's left on the balance sheet in the near term?

Yes, depending upon how the market moves, but yes.

We're probably going to look to finance those, Bob, longer term, and use that equity to redeploy within the servicing business. In other words, we pretty much make our-- the earnings of Ocwen are pretty much made off of about 450-- pre the last transaction, about $450 million of equity. So our challenge initially getting loans current is to dedicate more and more of that equity base into the servicing business and eliminate those assets really that don't earn those rates of return.

Right. So lieu of being able to sell them, you feel like you can long-term finance, match-fund finance them or something like that, that would re-- mitigate--

Most of them-- a good deal of them already are with the Citicorp financing.

Okay. And I guess I just-- I'm just trying to get to is basically the capital you have available maybe. I mean, your balance sheet looks pretty good. You just mentioned that you used $160 million of equity for the $7 billion-- for the $6.9 billion transaction, and trying to figure out how much capacity you have. You have a lot more debt capacity to-- than you've had in the past, the ability--

Yes, we have-- right, I mean, we have about $160 million worth of cash, okay, after we spent the other, so say $150 million. We actually have available-- readily available capacity on the debt side of at least another $0.25 billion that's already pretty well done. So we have reasonable levels of debt capacity, particularly as we grow. We're not going to be imprudent. I mean, I still do remember 2007, 2008. But effectively, we had almost no recourse debt to Ocwen. I mean, nominal amounts, probably under $200 million of recourse debt to the company when you take out the nonrecourse advance financing. So we have a very, very unlevered balance sheet that gives us some means of expansion of profitability without going-- without being too aggressive at all, in terms of additional leverage.

I mean, if you try to put that into how much additional servicing you could buy, portfolio, I mean, is that-- do you look at that as-- and I know each deal is different and some of the sellers may finance part of the deal, so it may take less equity, but--

About $27 billion, $28 billion.

Right, yes. So, I mean, do you feel like you have the capacity to buy $50 billion worth of servicing, and I guess I'm just trying to get some--

I mean, no, I mean, obviously not. I mean, we have enough financing right now to close the next transaction and that would obviously-- we would be-- have deployed capital, if you will, of somewhere around $600 million of capital on those transactions, versus the $500 million that we had pre the last deal we did. We clearly will-- we clearly would need additional capital at that particular point to go after the next transaction, but we're not going to do that until we're able to demonstrate that we effectively deploy the capital we asked our shareholders to give us.

All right. Thank you.

Thank you.

Thank you. I have no further questions. I'll turn it over to the speakers for any closing remarks.

Thank you very much everyone, have a great day, we appreciate it.

We thank everyone for their participation today. That does conclude today's conference. You may now disconnect. Thank you.