Onity Group Inc (ONIT) 2010 Q3 法說會逐字稿

Welcome to the Ocwen Third Quarter 2010 Results Conference Call. All lines have been placed on a 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 would like to turn the call over to John Van Vlack. Sir, you may begin.

Thank you. Good morning everyone and thank you for joining us today. My name is John Van Vlack and I'm the Executive Vice President and Chief Financial Officer of Ocwen.

Before we begin, I want to remind you that a slide presentation is available to accompany our remarks. To access the slides, log on to our website at www.ocwen.com, select Shareholder Relations, then Calendar of Events, then Click here to listen to Conference Call, then under Conference Calls, Third 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 2, our presentation may contain 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, second quarter 2010 Form 10-Q, 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 3, joining me for today's presentation are Bill Erbey, Chairman of Ocwen and Ron Faris, President and Chief Executive Officer of Ocwen.

Now we will turn the call over to Bill Erbey. Bill?

Thank you, John. First borrowing from Mark Twain, I'd like to say that the rumors of my retirement are greatly exaggerated. We've promoted Ron in recognition of his leadership and contributions to the Company and I would like to congratulate him.

As indicated on our 8-K filing, Ron's promotion has been in the planning stages for a while now. And I intend to remain a full-time Executive Chairman of the Company focusing primarily on strategy, key personnel development, and corporate finance. I remain Ocwen's largest shareholder and I'm committed to increasing shareholder value.

We completed our acquisition and integration of HomeEq in the third quarter and became the third largest non-prime servicer with more than $76 billion in unpaid principal balances.

Since 2001, our servicing portfolio has grown at an annual rate of 15.3%, as shown on slide 4. While still early the HomeEq acquisition is meeting our performance expectations as is the Saxon portfolio, as shown on slide 5.

Note that in September, shown to the far right of the chart, the HomeEq performance is well ahead of Saxon in its first month after acquisition. We expect the HomeEq portfolios to continue to ramp over the next four quarters particularly in terms of ROE as reductions in delinquent loans reduce advances.

Loan modification performance has improved both in terms of acceptance rate and redefault rate. Driven by new technology that went into production in August of last year, the six-month redefault rate for loan modifications declined 43%.

The redefault rate for all of our mods completed in Q4 of 2009 is 13.5% at six months, while our HAMP default rates for modifications completed six months ago currently stands at 11%. To the best of our knowledge in both of these metrics we lead the industry.

We're particularly excited about the HAMP program's new emphasis on principal reductions, as we believe this will increase offer acceptance rates and decrease redefault rates. We deployed this enhancement in October of this year and have scheduled a very significant release regarding non-HAMP modifications for the end of this month.

It is our expectation that these enhancements will further minimize foreclosures, increase cash flows to the securities that we service and reduce advances. Given the heightened concern regarding foreclosure timelines, our ability to resolve a loan without foreclosing is a key differentiator for Ocwen. We have seen foreclosure timelines extend throughout the entire housing downturn. This year alone thorough September, foreclosure timelines have lengthened by 29 days. However, we have shortened the overall time that our non-performing loan remains in foreclosure by a net 22 days even with a 29-day foreclosure extension. This has been accomplished through modifications and improvements in other non-foreclosure resolutions.

As a result of these efforts, advances on our existing portfolio without HomEq have continued to decline and while no one knows the extent of potential further foreclosure delays, we're cautiously optimistic regarding advances given the technology enhancements that we have and will deploy over the next several weeks.

As will be covered later in the call, operating expenses net of one-time charges increased only marginally from the second quarter even with a 40% increase at unpaid principal balances serviced during September as a result of the HomEq acquisition.

I'll now turn the call over to Ron who'll review the results of our servicing business in Q3 and several industry-wide issues. After that, John will cover normalizing items in the third quarter, and the health of our balance sheet. Ron?

Thank you, Bill, and thank you for your continued vision, leadership and confidence in me and the rest of the management team. As Bill mentioned, I will cover the highlights of our results for the third quarter, as well as recent industry-wide issues. More detailed information is available in our earnings release and our third quarter 10-Q.

Slide 6 reflects servicing and subservicing revenue and expense in basis points per average quarterly UPB for the past five quarters. As seen at the bottom of the chart, servicing revenue increased to 17.4 basis points in Q3 from 15.6 basis points in the second quarter, as the Saxon portfolio continues to ramp. Subservicing revenue was 10 basis points in the third quarter, up from 8.7 basis points in the second quarter. To amplify the impact of the revenue improvement, the mix of servicing UPB increased to 65% of the total portfolio in the third quarter versus 58% in Q2.

Overall on a pre-tax net income basis, we improved to 6.7 basis points, which is back in line with Q1 of this year and Q4 of last year, even after an increase in other income expense resulting from increased interest expense related to the financing of the HomEq transaction.

John will discuss the Company's strong normalized Q3 results in more detail later in the call. Our total modifications for Q3 were 15,928 compared to 14,384 in Q2 of 2010. This performance fell near the upper end of our previous third quarter estimate of 14,000 to 16,000.

Included in the 15,928 number were 4,241 HAMP modifications in the third quarter. To date, approximately 85% of our HAMP modifications remain eligible for the annual success fee of up to $1,000 or $83 per month for all HAMP payments received on time. For Q4, we expect total new modifications in a range of 16,000 to 19,000.

Finally, we continue to make progress in reducing advances on our historical portfolio. As shown on slide 7, net advances decreased by $62 million for the quarter and are down $215 million since December 31, 2009, including declines in advances on the Saxon portfolio since boarding.

As Bill already mentioned, we continue to refine our loss mitigation models and approach to keep more borrowers in their homes, further reduce losses to investors, and improve the quality of our servicing portfolio.

Now, I would like to address some of the industry issues that had been in the news recently. First, as a normal part of our servicing process, Ocwen has needed to foreclose to resolve certain nonperforming loans. Like other servicers, we are thoroughly reviewing our process. Based on this review, we estimate that we have approximately 5,500 active foreclosures or approximately 1% of our total portfolio that our prejudgment and where an affidavit of indebtedness has been filed.

To the best of our knowledge, the information regarding delinquencies and indebtedness presented to the court was accurate in all cases. In order to assist the courts in confirming the accuracy of the affidavit and ensure that proper procedures were followed, in certain instances we are reaffirming that the information in the affidavit is correct.

For example, the courts in the State of New York are requiring that attorneys representing servicers and foreclosure actions go back and have the servicer re-verify the accuracy of all information provided to the court. We believe that this type of re-verification will help expedite and restore confidence in the process. We are cooperating with all requests for information from government agencies and today we have not received any subpoenas relative to our foreclosure process.

Second, in July 2010, Ocwen along with over 60 other originators and servicers received two subpoenas from the Federal Housing Finance Agency requesting information in connection with private-label mortgage securitization transactions where Freddie Mac and Fannie Mae had invested. The transactions include mortgage loans serviced, but not originated by Ocwen or its affiliates. Ocwen is cooperating with the Agency's request. The information requested was related to less than 5% of the loans and secularizations Ocwen currently services.

Third, to the best of our knowledge, we have not experienced any concerns about foreclosures being contested due to MERS or other assignment-related issues.

Fourth, we do not believe that we have any material put-back exposure with respect to the loans that we service. Except in a very small percentage of cases, we did not originate these loans nor were we the depositor or underwriter. To our knowledge, no investors have challenged any of the trusts that we service. In fact, we are working with various investors who are possibly looking to move servicing from underperforming servicers to Ocwen. We believe that this could be an important opportunity for us to expand our special servicing.

We did, however, make representations and warranties for one residential mortgage securitization with residential loans originated within the last 10 years. The original unpaid principal balance was approximately $200 million and Ocwen performed due diligence on each of the loans. We are not aware of any inquires or claims from trustees or investors regarding loan put-backs.

Finally, we continue to pursue additional acquisition of seasoned non-prime portfolios and are actively bidding on a portfolio of over $90 billion. We also continue to work with Altisource on developing a channel to capture FHA servicing on a flow basis. Through its cooperative relationships, Altisource has direct access to 175 originators that originated close to $80 billion in 2009, of which 40% was Ginnie Mae production.

Thank you for your time. Now, I'd like to turn the call over to John Van Vlack. John?

Thank you, Ron. I'd like to walk through a reconciliation of the items impacting our third quarter results, which is shown on the last slide. We accrued $20.1 million in litigation-related charges, primarily related to an adverse jury verdict and legal fees in connection with the Cartel case. As previously reported, this case was unrelated to our servicing business.

We incurred one-time transaction-related expenses associated with the acquisition of the HomEq portfolio of $33.9 million, including severance and WARN Act compensation of $30.3 million, technology contract exit cost of $2.3 million and other expense of $1.3 million. While we have not finalized the purchase accounting for HomeEq, our estimate for fourth quarter transition cost is approximately $90 million and by the end of the year, which should be substantially complete. And finally, we've recorded reduction in the fair market value of auction rate securities of $3 million.

As shown on slide 8, the net effect of all of the above items is that normalized income from continuing operations improved from $24.2 million in the second quarter of this year to $36.3 million. This growth is attributable primarily to the ramp-up of Saxon revenue, improved collections across the portfolio and the growth of HAMP annual success fees now that a number of performing loans [modifying that our] HAMPs are starting to reach their one-year anniversary.

Moving on to the health of the balance sheet. Even after the closing of the HomEq transaction, we had $312.6 million of cash and fully collateralized available credit at the end of the third quarter. Also, at the end of the third quarter, upon completion of the HomEq transaction acquisition, our book value per share was $8.84. This is calculated based on total equity of $888.7 million divided by 100.5 million shares.

Adjusting items to the fair value of our assets include $1.25 per share if our deferred servicing fees were booked on the accrual method versus our cash basis method. Deferred servicing fees are at the absolute top of the waterfall and are collectible in all circumstances. $4.01 of additional value per share if our MSRs were valued using lower internal cost rather than average market participant cost. After adding these items, our adjusted book value at the end of the third quarter is approximately $14.10.

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

Thank you, sir. (Operator Instructions) Our first one comes from Bob Napoli. Your line is open, sir.

Thank you. With regards to additional acquisitions, you talked about the $90 billion portfolio. Was that, I mean, Westcap I think suggested yesterday that maybe they weren't selling their portfolio. Was that -- but I think I was a little bit unclear and I'm not sure if that's specifically what you're talking about or if that was -- if I misheard that? And what else is out in the market? I mean could you give me some feel for other types of portfolios that are out there?

Bob, this is Bill. Good morning.

Good morning.

We're -- it's difficult for us to say more than what we said within the earnings release with regard to that and we'd like to leave it there. There are other transactions that I think are further away on terms of pools of loans or pools of securities. I do think, however, that is becoming an increasing reevaluation by the other part of companies that own these legacy-based portfolios, and -- but I think it'll take a while for them to -- for additional ones to come to market, so that's on the acquisition side, I think, that's where we stand. I think, there is -- obviously we're optimistic regarding both public and private in terms of flow of business in terms of special servicing.

On the -- I mean, are you hearing more from Fannie and Freddie, I mean there was, I mean, some discussion that they are looking to increasingly use some smaller servicers in which your name was mentioned as a potential -- I mean is there -- what kind of activity is there on that front?

Again, I think some of the same issue -- that we tend to treat that confidentiality as being important. I think the material you have in the public domain is accurate.

Let's see. With regard to -- if you don't get a large portfolio acquisition, how long would you wait to -- I mean what would you -- would you start buying back stock and how long would you -- if so, when would you start doing that?

We certainly -- if we do not believe that we'd get a large acquisition to be able to use the cash, we certainly would go, recommend to the board that we look to begin to retire shares and -- retire shares at that time, so it's -- it's a little bit difficult to tell you the exact time for that, but it won't -- we won't -- it won't be going on forever.

And, Ron, congratulations on your promotion, well deserved. I was hoping you can give a little more cover on the affidavits that, I guess, you said you were re-verifying a portion and it was a little unclear on exactly what you were doing there?

Well, first off, I mean we're -- as I mentioned that the number is relatively small around 5,500. As I indicated, in some cases we're finding that the advice that we're getting or the direction that we're getting from the courts and the states themselves is that, let's have everybody just go back and re-verify the information so that we know that it's accurate and we can keep the process moving.

So that is what we are doing. Foreclosures are continuing to occur, but what we're really focused on, what we've always been focused on and why I think we're different than others and have less of an issue, is because of our ability to modify a very significant number of these loans. And even though there may be 5,500 right now that are in that state, we would hope that many of those will ultimately result in a loan modification through our normal course regardless.

Okay. Then just last question, the processing -- the process management fees, the number -- the amount that you have for this quarter, is that kind of a -- is that a good run rate and I mean should -- can you maybe just remind me exactly what's in those -- that number and would you expect that to just kind of be steady as a percentage of the UPB -- of the owned UPB?

There are two primary items that make up process management fees, one is referral fees for REO sales and then the other is fees related to services provided to attorneys that handle foreclosure processing. And I think the REO sales certainly have potential to improve, so we don't think that that number will decrease over time.

And the mix of each type of fee as a -- of the percentage of those -- of that $7.9 million?

Yes. It's about 80-20.

Okay. Thank you.

Next question will come from Ryan Zacharia. Your line open, sir.

Hey, gentlemen, how are you doing?

Good. Fine, thank you. How are you?

Good.

Doing well. So just trying to understand, HomEq was on for a quarter, if I just do a very back-of-the-envelope math, it's look like the September month basically contributed $10 million to the topline, is that -- is my math correct?

Your math is correct. It was on for one month.

Right.

And we had the interest expense on the $350 million for two months.

Okay. So, as you look at interest expense, you had some drag there that that may be reduced core earnings. As you look to the fourth quarter and really the first quarter of 2011, you'll expect to see a ramp in the revenues as HomEq both is on for a longer period of time. And the interest expense won't ramp in the same fashion. And then -- so is that fair that you would expect to see kind of a pretty significant ramp in revenues over the next couple few quarters?

Yes. You would see -- first of all, HomEq will be on for three full quarters as opposed to -- three full months as opposed to one month. Interest expense will go up by -- basically in 50% of what you saw in the change, you have another 300 -- little over $3 million in interest expense in the next quarter on the $350 million. And you should expect some ramp in terms of basis points per UPB.

Got you. And then, looking at expenses, they seem to be pretty well contained. I mean is that an appropriate run rate, this kind of core figure of $39 million, $40 million, or $30 million or are there still lot of kind of expenses to come from HomEq?

Well, HomEq we expect the one-time upfront purchase accounting effect to be $19 million in the fourth quarter. But we expect those will fairly close to our normalized run rate for the business. what because of the two, it's only on there for one month, but you won't see a large -- you won't see a tremendous increase in operating expenses next quarter.

The main increase in the -- our normalized operating expenses would be three months worth of amortization on the HomEq MSRs rather than one.

Got you. So you think that, as you ramp the revenues of HomEq being on for three quarters, the operating expenses are really going to be kind of modest in terms of their upward movement.

Yes. At the margin we're very efficient.

Great. And then, so there was a discussion of ResCap, and there is speculation all the time. So I won't ask you to comment on that, but one of the things that I will ask is, the Barclays portfolio, as you guys have said, was on and off and it was a nine-month process -- the previous discussion about buybacks and how long it will take before you guys kind of say enough is enough.

What is the timeframe, obviously ResCap, it even seems like a more complex process given the involvement of the government and this foreclosure issue and kind of all those issues, maybe you guys can comment on what your appetite is to absorb that kind of timeline?

Yes, that's a little bit difficult for me to comment on that right now, because we haven't -- we've discussed it, but have not formally reviewed that with the board with regard to that, but obviously it is a significant decision to reach because of its impact on the earnings per share.

So I am very sensitive to that and we certainly will have continuing discussions with the board as to how to deal with that because running with over $300 million in cash and building cash at a fairly rapid pace for months, that's a large drag to EPS that we don't need to continue to suffer if we do not feel we have a good probability of closing a large transaction.

At least purchase transactions. So that brings up my next question as it relates to subservicing. You have the Freddie pilot program, of which you are one of two providers there. I mean how is that going? What have the results been to date and how come we think about what might happen in the future based on that performance?

Well, we believe we've performed very well with regard to that and obviously we are cautiously optimistic with respect to our relationship with Freddie Mac.

And when you do you think Lend One will start being a contributor in terms of servicing?

It probably will not be a large contributor until the -- I'm sorry -- it probably will not be even a meaningful contributor to servicing until the latter half of 2011. We intend to serve Lend One out on a trial basis to make sure that we have everything in place that we need to have in place.

Once we've vetted that and we've put our processes and procedures in place, we can -- we think that we can ramp it up much more rapidly, but the early -- the earliest will be starting to do loans, [four] loans will probably be in the second quarter at the earliest, next year.

Okay, great. And one final question just what was the remainder of the litigation expense that was -- that was $20 million, $13 million of which is for the Cartel verdict, what was the remainder?

The remainder is largely comprised of legal fees, interest and the PL cost.

Okay. Thanks a lot, guys.

Thank you.

Next question will come from Sam Crawford. Your line is open, sir.

Thanks very much for taking my question. I had a few that -- let me start with the most modest one. Just on the professional services line between the year-on-year 2009, 2010, haven't been able to put that against the increase in UPBs yet, but it looks like it might be a bit out of line and I'm wondering if you can help me break that down between what is true operating and what is acquisition-related?

The legal accruals are in professional services and so there was $20.1 million within the $25.1 million number for Q3 2010 and then we have -- we've got $25.3 million within the $37.5 million for the nine months of 2010.

Okay. And on the foreclosure situation, you did make a comment about the refiling our affidavits in New York and the Supreme Court judge, I guess, there has sort of established what policy it will be. But in more contentious markets like Florida, Ohio where maybe refiling is not so acceptable, how are you all choosing to proceed in those markets and what sort of delays are you seeing?

Well, at this point we're not seeing any delays. I don't think we're going to get into how we are handling each individual state, but I think it's fair to say that we have good relationships in both of those states and we're not seeing any delays related to our foreclosures. And again, we're going to proceed based on what we think will help provide confidence to the system and help things move through the process. That's what we're going to do, but right now we're not seeing any delays.

Okay. And --

And two clarifications to that, one, we are not refiling in New York. We'll be verifying as requested and just to provide perhaps, second one, a context to it, as Ron said, there were 5,500 affidavits nationwide, which is 1% of our portfolio.

Yes, yes. The last thing is just a broader question that probably you all have had occasion to answer in other forums. But as you look at the possibility of large acquisitions, I'm curious about how you want to proceed with the financing of that. Clearly you've been building up cash from quarter-to-quarter, but apart from that what sorts of goals do you have in terms of maintaining an equity debt mix post acquisition where kind of fund raising might be implied.

John, would you like to go through the equity debt mix?

Sure. So we've got covenants that are connected to our $350 million term loan and that would really drive the upper end of the debt mix. There's room to increase debt, but I think that if we had a very large acquisition we would look to bring in some additional equity as needed. But the pattern after making large acquisitions is a rapid generation of cash, as the profits materialize and the advances decline.

All right, okay. And very last, do you anticipate any additional cost associated with boarding the home equity portfolio in the next quarter or are we done now?

Yes. We project $19 million of charges in the fourth quarter with respect to HomEq and that will be done.

Thank you all very much indeed.

Thank you.

Next question will come from Mike Grondahl. Your line is open, sir.

Yes. Couple questions, guys, and thank you for taking them. The first one, what was the prepayment speed in the quarter and the overall delinquency rate at quarter-end?

The prepayment speed is in the 13% range for the quarter, which is consistent with where we have been throughout the year. And, at quarter-end, if you look at the overall delinquency rate, we were at 27.2% and I'll tell you how that's calculated.

That includes loans, which were less than 90 -- this includes loans that are greater than 90 days delinquent. And, it excludes loans that are performing under a forbearance or bankruptcy plan or modification. When we pull this number, we exclude special servicing of delinquent loans. For example, the Freddie Mac numbers would be out of that 27.2% delinquency rate.

Great, okay. And then, hey Bill, could you talk a little bit -- you had mentioned in your prepared remarks about the principal reduction HAMP program you rolled out in October and then I think you said a non-HAMP program in November. Could you talk a little bit about that? How incremental you think that will be to the portfolio?

It's a little difficult to give exactly how incremental. But I -- but let me just make a few comments on it. We believe that principal reductions are an important tool in terms of modifications on acceptance rates, but also redefault rates. If you look at it, about 70% of our advances are on loans that are defaulted with LTVs over 100.

It is certainly a major driver of borrower's behavior patterns. So our belief is that to the extent that we're able to get those borrowers into -- their equity into alignment with the loan amount, that they will not only accept more modifications, they also at the same time will basically keep to the modification program and significantly reduce the redefault rates.

So it's -- the reason we rolled it out now is we were always mindful of what people's perceptions were with regard to the -- to a principal reduction. Obviously, with the administration rolling out the HAMP program and having principal reductions, as the part of it we thought we could, in fact, mirror that in the non-HAMP program.

Our policy has been to try to mirror as best we can the government program, and then execute those in the non-HAMP side. If you just look at the numbers, there is an enormous amount of defaults in higher LTV loans and those loans that get modified tend to default. The greater -- the higher the LTV on a modified loan, the higher probability their loan will be default once again. Given just the extension of timelines that we've seen on foreclosure timelines, your net present value if you actually go to a foreclosure solution is quite low.

Got you. So I assume that this is one of the reasons that you think advances can keep dropping. And then maybe as a follow-up to that, I assume you can also do this and continue to kind of lower your operating cost into 2011?

Well, yes. I mean, I think that it is a -- it's probably the most impactful tool that we could deploy is really working on the principal. Historically, we've worked on interest rate, I mean, and to a limited extent extensions of the maturity date of the loan.

So any of our models would show us that those are much less important than the principal amounts of the loan. So we're doing that and rolling that out, we're also rolling out a different contact methodology that we think will significantly improve customer satisfaction and at the same time reduce -- significantly reduce operating cost because of not having to have repeat calls, being able to do one-call resolution with our customers, which increases customer satisfaction, increases your modification rate, acceptance rate because you do it earlier and reduces redefault rate. So we're rolling out a number of new technologies, quite a number of them we have and we'll continue to roll them out over the next several months.

Well, that will be interesting to watch. And then just one follow-up for John. John, could you mention again the two reasons why the adjusted book value was $14.10. I didn't catch those?

Sure. So, the first is that our accounting does not include any valuation of the deferred servicing fees. And so deferred servicing fees at the end of the quarter stood at $125 million, little bit over, which comes out to $1.25 per share, and additional value that have we been under a different accounting method, it would be reflected on their balance sheet.

And then the other item, which is $4.01 per share is related to the valuation of our MSRs, so the practice in MSR valuation is to book them based on the industry cost. Ocwen's cost structure is lower than the average cost for market participants in the industry, and that equates to an additional $4 per share.

Got you. And so the gap got bigger this quarter because your portfolio got bigger. Is that the correct way to kind of interpret, because there's never been this big a gap, but now there's a pretty big gap?

Absolutely. If you go back to the first one -- we've covered this, which is the third quarter of last year was -- it was a couple of dollars shared for both. And so the acquisitions increased now our deferred servicing fees from about $50 million for what I'll call our legacy portfolio to $125 million. And so we purchase those deferred servicing fees with our acquisitions.

Got you. Okay. Thanks, guys.

Next question will come from Bose George. Your line is open, sir.

Thanks. Hey, good morning. Had a couple of little things, one is just on the -- a clarification on the margin outlook. So with the Barclays' integration this quarter, does the margin still -- is there going to be any noise in that margin or should we look at that number at the end of this quarter and look at that as a baseline from which things go up?

Well, without providing guidance, what I would say is that if you were to model the additional revenue from HomEq for a three-month period rather than a one-month period, and you were to hold the cost constant at the level shown in the normalization and adjust the amortization, I think you would have a substantially bigger increase in revenue than expense.

I mean, I guess my question kind of referred to the way the Saxon portfolio came in where the initial margins were lower and then it kind of ramped up after the first few months, and Barclays has just been on a month. So I'm just wondering in the initial margins of the Barclays portfolio whether that's going to be lower than the overall margin and since it's such a big portfolio take that overall margin down a little bit, until it's fully ramped.

On an incremental basis, I think that the margins on HomEq will be higher.

So it's higher than the legacy portfolio?

Higher than the pre-HomEq Ocwen portfolio.

Okay. Okay, great. That helps.

Bose, another way to look at it for the HomEq for the -- try to do -- maybe simplify it. On the HomEq portfolio, it was gone for one month. If we apply one month of interest for the $350 million credit facility, you'd have made somewhere around between $3 million and $4 million on HomEq for the month, if margins don't -- if revenue does not ramp.

Okay. Yes, that makes sense.

So the impact of HomEq, the way we didn't put in our -- on our -- adjusting at our normalization, we assumed the full two months of interest and didn't normalize for that. We didn't normalize for the extra month of interest.

Okay. Yes, that helps. And then just switching to the principal reduction program, the non-HAMP modification program, for that do you need the investors to agree or do you just -- does it pass the NPV test and then you can apply it as long as it meets that hurdle?

It depends on the investor.

Okay. Is there -- I mean do a lot of investors, is it sort of 50-50 or how does that mix work? And can you roll this out reasonably well without -- or is there enough room to roll this out without contacting investors?

We think -- well, we -- obviously if an investor -- there is different, three different ways, either you don't -- either you're not restricted, you're absolutely restricted or you have to go back and get their permission.

Okay. Okay, great. Well, thanks a lot.

But we think it'll have a -- and we think we can roll out over a majority of -- over a majority of the portfolios.

Okay. Great. Thanks.

Next question will come from DeForest Hinman. Your line is open, sir.

Hi, I had a few questions. Can you talk, this is for Bill, in little bit more detail on why is the time right for you to transition from CEO to Chairman position? And then I have a couple others.

Sure. I mean we are having very large focus on succession planning in Ocwen. I think it's the right thing to do, it's -- and Ron has the same goals in his area to basically make sure he brings people along that can to one of us. So we in fact have backup. So it's a natural progression.

I mean Ron has run for several years the servicing business. I've basically dealt more with strategy with how we develop loss mitigation models, corporate finance and personnel development. And, Ron, clearly the guy who runs the servicing business within Ocwen. As we begin to expand responsibilities with Altisource and with Ocwen and with Lenders One, I think it's important that each of those entities are self-sufficient, but I can assure you my working day has not changed.

Okay. That's helpful. And I think this is implied, but I don't know if you've explicitly said this. Are we assuming that the match funding advances will decline in the fourth quarter?

The advances have declined every quarter, and we don't see any reason why that would be interrupted.

Okay. And then you guys were going to --

Excuse me, the fourth quarter is generally a more challenging quarter for that simply because it's basically when tax payments are funded.

Okay. And you guys -- you were also talking about some of the issues with potential risks and you briefly mentioned some warranties on $200 million of loans. I guess my question is can you kind of explain that more fully, what that could potentially mean, when were those loans originated? And I guess what's our kind of net risk because I would assume that maybe some of those loans have been refinanced over time, and then maybe our risk goes away or maybe I'm thinking about that incorrectly?

Well, the reason we brought that up is that the SEC is requiring all financial institutions to lay out what their put-back risk is. So our put-back risk, we believe, is we found one security where we believe we've made representation where I believe -- there's one security where we made representations as to the -- where we were the technical servicer, the depositor and made representations with respect to those loans that originated within the past 10 years, those two conditions.

There was a $200 million securitization, that's a very small securitization, so you could run -- I don't -- we don't believe we have any risk with regard to it, so what you'd have to do though if you wanted to assess it is to say, what is the loss on that. What potentially would be the loss on that pool in terms of -- in terms of underlying loans and then what percentage of that number would actually be where there is an underwriting error? I find in my life when you multiply a percentage times a percentage, it gets to be a real small number pretty fast.

Okay, but just to be -- to be clear, when were those loans originated?

In 2005 and 2006.

Okay.

So they had very -- at least in the early years before the market turned down, had very rapid prepayment, where they paid off in full.

Do we have a number where that securitization is trading at right now?

You want to know what the [offsetting] balance is today?

Yes, either that or what it's trading for?

Well, there -- I mean these securities have multiple tranches. I don't know what each of the -- I don't know what those tranches are trading at.

All right. Thank you.

Thank you.

Our next question comes from Jake Blair. Your line is open, sir.

Thank you, guys. When -- in the $6 million of interest expense that was related to the term loan, some of that's got to be fees and the amortization. Can you delineate those actual interest cash, interest expense and what was fees and how that'll look going forward?

The amortization is over the expected life of the facility and so you would have like the 2% OID in there. And any legal fees and upfront payments go to the lenders that organize the facility. And so the goal for the amortization would be that that would be relatively level based on the anticipated prepayment schedule.

We can get back. I mean the coupon on it was 9%, right?

The coupon is LIBOR plus 7% with a 2% floor. So assuming that we have a coupon rate that remains at 9% that LIBOR doesn't go above 2%, then this number will decline gradually. We made our first amortization payment at the end of September on this fund. So the interest component will decline and the amortization is set to decline as well at the same rate of the interest.

If I understand your question, the coupon rate is 9%, you multiply that by the 350 and you take two months, so it's $5.25 million, now it's a little more than that because it was actually several days in the month of July, but suppose if $5.3 million was the actual coupon that we were paying, and as John said, there's a 2% discount and then there were upfront legal fees, and that would make the -- the discount and the legal fees will make up the difference.

So I found the number within the $6.3 million that we booked, $5.3 million of that was interest and the rest was amortization.

Right. So that $1 million will be there going forward declining over time?

It will decline going forward based on the anticipated amortization of that.

Perfect. And then, just to be clear, you guys have talked about a $60 million number and now it looks like you -- only you earn expenses for HomeEq for more an act and the like, and obviously you took $30 million and change in this quarter and talking about $19 in the fourth quarter. Can you -- is that right -- there's -- there won't be any more additional charges there?

That is our expectation as of now.

Right. We have a fully completed purchase accounting, but that is our -- as John said, that's our expectation. Any other changes would simply -- as a matter of fact, many of those changes are non -- a good number of those changes are non-cash, any other changes would be simply a change from another -- they would be moving expenses around from one period to the next.

Right. Okay.

It wouldn't be changed -- it wouldn't change in the absolute. At the end of the day, when a deal is done, it wouldn't have changed the absolute dollar -- the absolute dollar of expenses.

Right. Okay. Thank you, guys.

Your next question comes from Rob Schwartzberg. Your line is open, sir.

Good morning. I apologize, I came in a little bit late and I missed the beginning. I think there was some discussion about the foreclosure timeline being extended 29 days, but the actual resolution being shortened and I just wanted to get, double-check those numbers. So 29 days, from what to what is the 29-day increase and what's the resolution timeframe?

Yes -- we overall find that our loans within a 90-plus day bucket went down 22 days even including the 29 days when foreclosures -- the 29-day foreclosure extension. I believe, Ron, what at the 343 or something like that was our average foreclosure timeline at the end of September.

Yes, correct.

So that timeline went up, okay, 29 days?

The timeline -- on those loans that foreclosed, they increased our overall timeline by 29 on which we had to foreclose -- increase the overall timeline on the foreclosure by 29 days, but modifications and non-foreclosure collateral resolutions were more impactful than that and brought the overall time that a loan remained in a 90-plus-day bucket, down by 22 days.

That's very helpful. Thanks. And then I just want to double-check a number, number that I heard, which 1% of your portfolio is basically connected to the affidavit issue, is that correct?

Yes.

Great, very helpful. Thank you very much.

Our next question comes from [Charles Craig]. Your line is open, sir.

Good morning. Just a couple of clarifying questions. On the securitization that took place in 2005 and 2006, you said the original UPB was about $200 million and that was a period of -- shortly thereafter, that was a period of significant refinance activity, what's the UPB today?

Approximately $40 million.

And do you have a sense as the percentage of the UPB that was -- the $160 million. What percentage of that was re-fi versus default?

We don't have that information.

All right. But it's -- I mean 20% of the securitization is outstanding today?

That's correct.

And even if you gross it up some percentage to your point, Bill, multiplying that by a percentage and then another percentage, it gets pretty small?

Right. Our losses tend to be much lower than the industry. So you only have -- the only starting bucket is what percentage of the $200 million are losses, then they ultimately and then basically say how many times did we screw up the underwriting or when we re-underwrote them, which I think also will be a very small number if at all -- if any at all.

As you can think of most of the defaults -- in the early days the predominant method of payoff was the total debt payoff and then we gotten into the period where there were more defaults, and we think that probably most of them would have related to people losing income and not necessarily underwriting issues.

It's kind of -- it's kind of ironic. We were very unsuccessful originating mortgages because of our underwriting standards. We couldn't originate much product, because we kept wondering how on earth you could underwrite loan -- how you could accept the underwriting standards that were out there.

So the good news is we didn't underwrite many loans -- we didn't originate many loans because our underwriting standards were much more stringent than the industry. So I don't -- the reason we've bought it up was simply because the SEC sent out a large letter saying, please be detailed as to the extent of put-back risk you have. Well, we have one security.

Right. Okay.

And there have been no inquiries or claims regarding this security.

And then my second question was with regard to HomEq. You closed on -- on or about $9.1 million, you start the boarding process, creates lot of messiness in the numbers, right? As you look to 2011, using a baseball analogy, where would you expect to be on January 1 of 2011 in the integration of the HomEq and -- I mean is the first quarter of 2011 going to be a pretty clean quarter?

So, I'll let Ron respond to the operational item. The operational execution that was -- I think it's impeccable. The sloppiness, as we say, the charges upfront were charges that in fact were related to purchase -- basically purchase accounting and the shutdown of the existing HomEq operation. Our expenses were very, very stable and had minimal inquiries as a result of HomEq. So I'd say it's on -- it's been boarded and it's fully functional.

Okay. But we saw that --

I think the answer is, by the first quarter things should be very clean. I mean, there -- as Bill said, I mean everything was transitioned immediately onto our technology. As far as the staffing and other types of transition items, those are materially complete as we sit here today and by the end of this quarter, there really will be virtually nothing left related to what you would call transition items and the first quarter should be clean.

And as we saw with -- as we've indicated we expect that revenue items and things like that and advances will start to -- revenue ramp up and advances ramp down, as the portfolio becomes more seasoned. So over a couple of quarter timeframe it takes us to do that. But as you saw with Saxon, it starts to happen relatively quickly.

And even programmatic charges that will take -- I mean, for example, [at least] shutdown cost for example where there is -- these are all scheduled sort of expenses associated with basically shutting down the HomEq platform that we knew about when we actually went into the transaction and priced it within our return parameters.

So in terms of incremental expenses for 2011 just with regard to HomEq, do you anticipate really any in 2011?

No.

So, 12/31 this year we're done. And we're just back to running the business.

We are back to -- let me -- maybe I'm not being with you. The actual expenses you saw on a normalized basis for the underlying operation business are pretty much what they're going to be in the fourth quarter, what they're going to be in the first quarter, et cetera. The charges that you see in the -- that were projected in the fourth quarter relate to shutting down the old operation, but nothing with respect to running HomEq.

But the hiring, the training, the technology, et cetera?

We've absorbed, we absorbed all of that -- all of those expenses in the second and third quarter. All the startup expenses are in the normalized numbers, it's the -- not -- the numbers we took out related to shutdown cost associated with HomEq and the one-time charges. They are terminating the employees paying severance and WARN Act, terminating technology, terminating leases.

These are all scheduled items that we knew about and a matter of fact they're coming in slightly under what we had projected with regard to it, we projected originally 60 million. We believe we will come in under that barring any sort of purchase accounting adjustments that would simply move income from one period to the other. They would be a non-cash charge.

Okay. So business as usual, things obviously get a lot of cleaner from a reporting standpoint next year. And to the extent there aren't any more acquisitions done, the cash flow you're going to generate through net income and advance reduction, you could use for share purchases, dividend et cetera?

Yes.

Okay, thank you very much.

Welcome.

Next question will come from Ryan Zacharia. Your line is open.

Hey, thanks guys. Just a couple of follow-up questions. As we talk about our principal reduction, so there'll be a decrease in servicing fees on the amount that you reduce. And I guess there'll be increased amortization because it's almost like a prepay, but your interest expense will come down, so you amalgamate all that stuff and you believe that there will just be a measurable positive impact to principal reductions?

Yes, and keep in mind, Ryan, we're already running at over 5% below our amortization rate. I mean we amortize our at 18%, we're running at 13%. So it's any principal forgiven that should come in well under that number.

But from MIAC's perspective, I mean does it matter? I mean do they just look at these numbers coming in and the fact that if you're running at 13% and you forgive principal and that number goes up to 16%, do they just keep the spread such that you amortize now at 21%?

This is a very technical point, but we use the MIAC valuation, we disclose that in the K and the Q obviously, but we use that to perform lower costs or market testing and we've got a substantial spread between the MIAC value versus the bases that we use to carry MSRs on our books.

We use the cost method less amortization and so there's a substantial spread between the amount we have in our balance sheet versus the MIAC value. So if UPB came down and then MIAC, let's say, value that UPB at the same bps value per dollar of UPB, that would reduce the MIAC value that doesn't necessarily lead to any P&L impact or balance sheet impact at Ocwen.

They use an industry -- Ryan, let me try it this way. They look at a long -- their estimate of 18%, I hate to speak for MIAC, but my understanding is they use a long-term estimate for the industry's prepayment rate of 18%. The reason we don't hit 18% is we don't foreclose on nearly as many properties as other firms do, as the foreclosure is an involuntary prepayment. So that number will not -- should not vary based on our performance, it's the industry's performance.

Okay, that helps clarify it. And, then just --

So, we run basically even slower than -- even faster, as John is saying, we actually amortize our MSRs even faster than the MIAC number. But we don't believe the MIAC number based on our performance will change because it's [supposed] to be an industry number and to be an industry number and we should be running -- we should continue to run materially below that.

Okay. That makes sense. And then, in terms of the mod estimate for Q4, what portion of that is supposed to, do you think will be attributable to HAMP?

I think it'll be in the 20% range.

And, would you guys be releasing the CUSIPs for this securitization that you made reps and warranties on?

No, we weren't planning to.

Okay. All right. Thanks a lot, guys.

Thank you.

Next question comes from Rob Schwartzberg. Your line is open.

Hi, just two follow-up questions also. I think at the time of HomEq, you had targeted a 25% ROE and I'm just wondering is there any update to that guidance, positive or negative, since you've now been in there for a couple months? That's my first question. And then my second question is on the put-back, the $200 million security, have you actually had any requests put to you on this yet or not?

Ron, would you like to ?

Sure. On the second question, I think we've already said, we've had no requests for put-backs on that security nor really on anything that we service and we don't expect on that security to have any request. We at this point have no reason to change our estimate on our returns on HomEq, but keep in mind a couple of things.

One, that return included all of the charges that we're taking on the front end. So since we're taking a lot of the charges on the front end, the actual -- starting, say, next year, the return should look even better because we took a lot of the charges on the front end.

And as Bill mentioned, we're optimistic that even that front-end charge may be slightly lower than what we originally projected, which is a little bit of a pickup for us. But other than that as far as the portfolio itself and the performance of the portfolio and our expectations, those are unchanged. There's nothing that we'd seen that would change those views.

Yes, that was actually more my questions, but you've answered it. So thank you very much.

Our next question comes from Bose George. Your line is open, sir.

My question was also on the put-backs to date. Thanks.

You're welcome.

At this time, I show no further responses, sir.

Thank you very much. We appreciate everybody joining the call. Have a great day.

At this time, that would conclude today's conference. You may disconnect. Thank you for your attendance.