Onity Group Inc (ONIT) 2010 Q4 法說會逐字稿

Welcome to the fourth quarter year-end 2010 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.

And now, I would like to turn the call over to Mr. 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 the 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 call fourth 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 filing with the Securities and Exchange Commission, including Ocwen's Form S-3, third-quarter 2010 Form 10-Q, and 2010 Form 10-K to be filed on or before March 1, 2011. If you would like to receive our news releases, SEC filings, or other materials via email, please contact Linda Ludwig at linda.ludwig@ocwen.com.

As indicated on slide 3, joining me today for today's presentation are Bill Erbey, Chairman of Ocwen, and Ron Faris, President and Chief Executive Officer of Ocwen. Now I will turn the call over to Bill Erbey. Bill?

Thank you, John. We continue to sharpen our focus on our core strength, the servicing business. With the sale of all remaining auction rate securities, and reduction in other assets, we've reduced our total investment in noncore assets to below $50 million, excluding nonrecourse assets for the securitization trust. Through a combination of selling noncore assets and operating cash flow, we are in a position to acquire another servicing portfolio the size of HomeEq without needing to raise additional equity.

The current servicing environment is challenging. However, even though foreclosure timelines have extended, unit servicing costs have continued to decline and loss mitigation performance improved as measured by the net present value of the portfolios that we service, and the $237 million decline in advances in the fourth quarter.

We are expending significant resources to not only maintain our industry-leading loss mitigation capability, but also to further increase the gap. Ron will cover, in a moment, our next-generation loss mitigation technology that will be placed into production in the second quarter. Regarding growth, we have an extensive pipeline of core servicing opportunities, given the current servicing environment and the projected impact of Basel III. Companies where servicing is not a core activity are considered -- considering selling their servicing operations. Even firms where servicing is a core activity are considering pruning noncore portions of their portfolios.

We have several initiatives that are expected to become -- that are expected to come to market in this year to supplement and provide better visibility to our growth. The first is flow servicing. Ocwen and Altisource have formed a new company called Correspondent One, previously referred to as Lend One, to support the members of Lenders One who originated 6% of all residential mortgage loans in 2010.

Correspondent One will enable Ocwen to bid on the servicing for $40 billion of FHA and VA mortgage loans originated by Lenders One members. Should the administration's newly proposed servicing fees happen, Ocwen could be in a position to compete for Fannie Mae and Freddie Mac servicing, greatly expanding Ocwen's potential market across the entire spectrum of mortgages, and affording the Lenders One members the potential for higher prices for their loans.

The second is developing the capability to service new segments of the mortgage industry, such as reverse mortgages and home equity lines of credit. And finally, we plan to deploy a full onshore servicing alternative for entities that limit or prohibit offshore activities by their service providers. This will increase our expenses but this should be more than offset with increased revenue opportunities.

We have spent considerable time over the past two years in an effort to reduce our use of capital to enhance our return on equity and ultimately to become noncapital intensive like Altisource. I am pleased to announce the formation of Home Loan Servicing Solutions, or HLSS, to MSRs and advances in a more efficient manner than is feasible for servicers. With the closing of its planned initial public offering, Ocwen intends to sell to HLSS a portion of the home equity MSRs and advances, and assign the related match-funded liabilities. HLSS intends to engage Ocwen as the subservicer of those MSRs.

I will now turn the call over to Ron, who will review our servicing performing, including the status of the HomeEq transaction, our new loss mitigation technology, the servicing environment, and an addition to our senior management team. After that, John will cover financial results, cash generation and debt repayment. Ron?

Thank you, Bill. As Bill mentioned, I will cover the highlights of our servicing performance. Slide 5 shows a continuing ramp of our HomeEq servicing fee and total revenue. In December, HomeEq servicing fees crossed the 50 basis points threshold, meaning that deferred servicing fees are now contributing to revenue, as has been true for the Saxon portfolio since June of 2010. Total revenue on the HomeEq portfolio averaged 61 basis points in Q4 and we expect this average to increase to 70 basis points or 15% in 2011.

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 fees decreased to 15.9 basis points in Q4 from 17.4 basis points in Q3, as the HomeEq portfolio, which was not fully ramped in Q4, represented a larger share of the increased average UPB.

Subservicing revenue was 9.3 basis points in Q4, down from 10 basis points in Q3, but up over the first half of 2010. Pretax net income decreased to 5.3 basis points after normalizing for the final HomeEq transaction expenses. This is below Q3, in part, because we had $9.3 million of interest for the senior secured term loan versus $3 million in Q3. If we had repaid this loan at the start of Q4, as we have just about done now in the first quarter of 2011, pretax income in servicing would have been 6.4 basis points.

We completed the HomeEq transition in 2010 at a cost of $52.6 million, which is less than the previous estimate of $56 million. We do not expect any material expenses for the HomeEq legacy platform beyond 2010.

John will discuss the Company's strong normalized Q4 results in more detail shortly. Our total modifications for Q4 were 19,999 compared to 15,928 in the third quarter of 2010. This performance exceeded the upper end of our previous Q4 estimate of 16,000 to 19,000. Twenty percent of the completed modifications in the fourth quarter were under HAMP. To date, over 80% of our HAMP modifications are qualifying for the annual success fee of up to $1,000. For Q1 2011, we expect total new modifications to be between 19,000 and 22,000.

Finally, we continue to make progress in reducing advances on our portfolio. As shown on slide 7, net advances decreased by $237 million for the quarter, bolstered by declines in advances on the Saxon and HomeEq portfolios.

As Bill already mentioned, we continue to work with Altisource to improve our loan servicing system and processes, deploying numerous upgrades in the latter part of 2010. Our system retains more data and information than the systems used by most other servicers. This has allowed us to develop the sophisticated and highly robust models needed to effectively service loans and reduce delinquencies in today's servicing environment. To find the right solution that is both sustainable for a struggling borrower and maximizes cash flow for investors, the use of nonlinear optimization models is a must.

Our most recent model upgrades have focused heavily on three factors that most affect borrower acceptance and long-term payment performance. These factors are early intervention, equity in the property and payment affordably. The technology also integrates into our borrower communication process, artificial intelligence driven by behavioral and psychological principles. By tailoring to each individual borrower what we say and how we say it, we create a market of one. As a result, we are able to increase our borrower acceptance rates of loan modifications and other foreclosure alternatives.

We now have the tools built right into the system that allow us to perform controlled tests of alternative solutions. This feature allows us to accelerate our ability to continuously improve performance. We expect 2011 to be another year of robust enhancements to our technology and processes. We are continuing the state-by-state rollout of our shared appreciation modification. We are also in the process of finalizing our system enhancements, improved dialogue engines and process changes needed to implement a new innovative way of more effectively interacting with our customers.

The appointment model approach, as we call it, should be superior to the two alternative methods used to most servicers today, which involve either specifically assigned loan resolution specialists or randomly assigned loan resolution specialists. We expect the appointment model to shorten resolution timelines and further improve our customer service.

On the new business development front, we continue to pursue various bulk servicing opportunities. While it is fair to say the current pipeline is reasonably robust, we are not in a position at this time to comment on any specific transaction.

Finally, the initial public offering of Home Loan Servicing Solutions, should the offering prove successful, John Van Vlack will become the President of HLSS. In that context, I am excited to announce the addition of a new member to Ocwen's senior management team. John Britti has joined as Ocwen's Executive Vice President of Finance. Prior to joining Ocwen, John served as the Chief Operating Officer for Republic Mortgage Insurance Company. Prior to that, he was with Freddie Mac, Capital One, McKinsey & Co. and the CIA. Mr. Britti holds a bachelor in economics from the University of Maryland and an MBA from Dartmouth College. I am very pleased to have John Britti on our team working with John Van Vlack, our CFO. When John Van Vlack becomes the President of HLSS, John Britti will become the Chief Financial Officer of Ocwen.

Now I would 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 affecting our fourth-quarter results, which is shown in the last slide. We incurred nonrecurring transaction-related expenses associated with the acquisition of the HomeEq portfolio, $17.5 million, consisting primarily of $14.6 million in office and occupancy expense, from writing off leasehold improvements and establishing a reserve, or discounted future rent and lease termination fees on the two HomeEq facilities which were acquired and closed in 2010, and final severance and WARN Act compensation of $2.6 million.

We have finalized the purchase accounting for HomeEq -- with the HomeEq transaction and incurred non -- and the nonrecurring expenses totaled $52.6 million. We do not expect to incur any material costs in 2011 pertaining to the HomeEq Legacy platform. We recorded $1.2 million of interest expense, representing additional amortization of up-front fees and original issue cost -- original issue discount on the senior secured term loan related to the $130 million voluntary prepayment made in 2010.

Based on additional prepayments made subsequent to 2010, reducing the balance on loans $35 million, we expect to recognize the full amount of the remaining up-front costs and original issue discount, which totaled $14.2 million at December 31, 2010, in calendar year 2011.

As shown on slide 8, the net effect including other largely offsetting normalizing items, is that normalized income from continuing operations improved from $22.4 million in the fourth quarter of 2009 to $34 million in the fourth quarter of 2010. Absent the $8.2 million of interest on the senior secured term loan, which excludes the $8.2 million of normalized amortization, pretax profit in the fourth quarter of 2010 would have been $42.2 million. This growth is attributable primarily to growth in Ocwen's UTB with the addition of the Saxon and HomeEq portfolios. We expect a quarterly run rate, or pretax income in 2011 to start at a similar level, excluding loan, interest and amortization, as the continuing ramp of HomeEq revenue should offset the decline in the unpaid principal balances of the portfolio.

Now I will turn to cash flows. Net cash provided by operating activities was a record high in 2010 at $728.3 million. We ended 2010 with $256.9 million of cash and available credit that was fully collateralized. Strong cash flow subsequent to year-end allowed us to repay all the $35 million of the $350 million senior secured term loan, which we kept outstanding to maintain the option of using the accordion feature to finance future acquisitions.

We are in a position to acquire another servicing portfolio the size of HomeEq, without needing to raise additional equity. At the end of 2010, Ocwen maintained $926.5 million of unused advanced borrowing capacity. Subsequent to year-end, we renewed a $300 million variable funding note supporting one of our match-funded advance facilities at improved terms. While the first $40 million tranche of our $200 million TALF note financing advances is entering amortization this month, as planned, we continue to maintain a tight match of the projected duration of our assets and liabilities. Thank you.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Bose George. Your line is open.

Hey, thanks. Good morning. Wanted to just start with clarification on the senior secured term loan. So do you have to keep at least $50 million of that outstanding to utilize that accordion feature, or can you pay that down further?

There's no minimum outstanding balance requirement to use the accordion feature other than that it can't be paid down in smaller increments than $1 million. But during the course of 2011, there are quarterly minimum amortization payments, so that $35 million will keep that accordion feature alive, even as Ocwen makes those minimum amortization payments through the end of calendar year 2011.

And then the comment you made about the $14.2 million original issuance discount, is that -- should we just assume that basically that has to get expensed over the course of this year, is that how this works?

Yes. So given that the mandatory amortization payment, unless we use the accordion feature, would cause the full repayment of the senior secured term loan this year, then amortization would also be completed this year. And so if we use the accordion feature, that still wouldn't affect the need to amortize that $14.2 million this year, because the accordion would have some additional up-front costs and potentially original issue discounts.

Okay. And so when -- like, in terms of when the amortization flows through, what determines whether it happens now or later in the year?

Under GAAP accounting, the large majority of it will flow through in first quarter, because of the fact that we may be accelerated voluntary repayments.

Okay. Okay, great, thanks. And then just switching to the home loan solutions announcement that you guys made, just actually a couple of things on that. One, in terms of selling the MSRs to that portfolio to a new entity, why have you chosen to sell just to Barclays as opposed to potentially just selling all the MSR and servicing advances into the new entity?

Well, I think we had to start somewhere, and the Barclays PSA had recently been evaluated for no downgrade letters, one of the conditions for receiving consent, and they are also contained within one advance financing facility, which makes the transition of these assets perhaps a little bit simpler.

Okay.

This is also committed financing for -- through August of 2013.

Okay, that makes sense. And then just finally on that, do you -- have you guys thought about the pro forma earnings impact to Ocwen from that transfer?

Well, so I think that would really fall under guidance, which we don't issue.

Okay. Thank you very much.

Our next question came in under the name of Ryan. Your line is open.

Hey, guys. It's Ryan Zacharia from JAM. I wanted to ask about HLSS, a couple of questions. One, do you know what the expected timing is in terms of when the entity could launch?

The difficulty, Ryan, we have, is we're not permitted to discuss essentially HLSS. We can certainly discuss certain questions around Ocwen's relationship with HLSS, but it's -- we've been advised by counsel to be careful about our remarks.

So maybe if I rephrase it. When does Ocwen plan on selling the MSRs to HLSS?

When HLSS is in a position to buy them.

Okay.

Ryan, I don't think -- I don't -- I think you can look with your experience at how long from this point forward someone is -- would be capable of getting into the market.

Okay. Okay, that makes sense.

Yes, I think that's -- we're not trying to be coy, it's -- we're just trying to be cautious.

Okay, that makes sense. And then the other question is, determining the purchase price of the MSRs, I looked through the HLSS perspectives and it kind of seems like the MIAC fair values are going to be the basis for setting the purchase price, which is on par with the Ocwen carrying value of the MSRs, and I guess one of the things I'm trying to understand is there's always been this assertion that they're undervalued on Ocwen's balance sheet because the cost to service at Ocwen is much lower than the industry cost to service, which is the cost that underpins the MIAC fair value assumptions. So how do we reconcile this notion that there's a value transfer occurring here?

Ryan, I think the issue becomes one of what is the net -- what happens to the revenue and expenses for Ocwen in terms of the transaction, in other words does our pro rata reduction in pretax net income go down much slower than the amount of equity relief we receive as a result of the transaction.

So you could think about any earnings that Ocwen has over and above the industry average, which ties back to the -- our higher internal valuation of the MSRs relating to ancillary revenues and costs that are below the industry average as still accruing to Ocwen.

Amongst any other amounts that would occur because of whatever the contractual relationship is with the -- with respect to subservicing -- the subservicing contract.

So the benefit of Ocwen's lower cost to service is still inuring to Ocwen?

Yes.

Okay. So it's not HLSS is getting the benefit of Ocwen's lower cost to service and also buying the MSRs at the market rate?

Right, because that would mean, at the end of the day, that essentially the pretax earnings would come down proportionate to the relief in equity and at the end of the day Ocwen would have -- would have -- would be capital light, but also they would be earnings light.

Right, right. Okay, and just going over the P&L, couple of quick questions there. John, can you break out what the payments related to HAMP were in the quarter?

Yes, I don't have the breakout of HAMP with me.

Okay, that's fine. And then on the comp and benefits line item, it increased a little bit more than I was expecting and was there anything atypical in this quarter, anything related to incentives or year-end bonuses or things of that sort?

Right, well I think the first thing you do is you would normalize for the $2.6 million, which --

Yes, I'm talking about the $15.3 million normalized number.

Yes, there generally are true ups of that nature at year-end.

So on an absolute dollar basis, on a going forward, you would expect that to be slightly lower?

Well, Ryan, it may go up a -- versus what it would have been normalized, it will go up as we roll out basically an onshore model, but we would -- we obviously would expect there would be some lag, that that would be more than offset by the revenue we generate.

Okay. And then as we think about technology and communication costs, those went up quite a bit, how should we think about those on a going-forward basis?

Yes --

The incurrence of costs related to the HomeEq transaction on the Ocwen platform would not necessarily be even.

We added servers that would permit us to service a million loans. There was -- it's not a -- it's not linear when you buy the new serve -- the main service -- servers that we utilize. It gives us plenty of extra -- excess capacity, so that another acquisition comparable to HomeEq would result -- would not result in a significant increase -- as significant an increase, in terms of technology and communications. Having said that, it will go up not associated with an immediate acquisition because of our bringing -- of creating the onshore model requires our disaster recovery site to be moved to the United States, so all of our platforms operate within the Continental United States.

So how do we think about this in the context of 2011, it sounds like there are a lot of expenses that are being incurred? It doesn't seem like there's a very specific acquisition of the size of HomeEq imminently, so it sounds like the first half of this year is, again, going to have some kind of drag.

Well, if you look at the chart that Ron covered that shows the revenue, stated in terms of basis points for HomeEq, and you look at the total revenue for HomeEq, which is 70.9 basis points in the month of December, that's significantly more than what was recognized in October and November. So if the runway were to continue at the December level, you would have a significantly larger contribution from HomeEq in Q1 than you did in Q4.

Okay. That makes sense. All right, That's all I had. Thanks, guys.

Thank you.

Our next question comes from Bob Napoli. You line is open.

Thank you and good morning. Question on the new entity as well and just the big -- again, I guess. kind of the big-picture strategy on home loan servicing, Bill. And I think you've mentioned this before trying to make Ocwen, I think, asset light. Is that the intention is to take -- to try to take Ocwen down to being a pure servicer and not holding assets, is that feasible or -- I mean, obviously, this is a first step in that direction, but is that the end game?

The end game obviously will -- we'll maintain obviously sufficient equity and cash to make the agencies comfortable, but our objective is to create an Ocwen that looks very much like Altisource and being a fee-for-service capital-light entity that generates positive net free cash flow every month.

Well, how much capital do you have to hold under that scenario to keep outside relationships happy?

Well, I think, quite frankly, it's substantially less than we have today. And one of the benefits we get is we go away from being a financial -- a nonbank financial services company into being a financial processor, which there are other comparables within our industry that have virtually no equity relative to what we have, and yet still carry debt ratings equal to or higher than what we have because of the -- they're in a different basket or bucket, if you will, within the agent -- rating agencies.

What, do you have a -- kind of a target, long-term ROE for Ocwen, assuming that your -- that the IPO gets completed?

We --

And you can move in that direction?

We really can't -- we really can't project that, but obviously we would like to mirror what we were able to accomplish with Altisource, which has a --

Okay.

-- fairly attractive ROE.

And did the timing of the onshore servicing business and -- in order to put that investment in place, you must have an agreement or an understanding with some entities that you don't currently do servicing for that if you build this they will come?

We have discussions with people with respect to that being a [gaining] feature for business. And keep in mind, the numbers are not -- we've vetted this, the numbers are not breathtaking. They could be somewhere on the magnitude of $3 million to $4 million a year when they're finally ramped. (Multiple speakers).

With additional expenses?

Is that your -- is that what you remember from the presentation?

No. So you're saying that it -- the additional expense is to have the onshore servicing capability will be $3 million to $4 million of expenses, and that is the expense that you -- that is the investment you need to open the door to some new substantial servicing flows potentially?

Yes, that -- it would be a minimal run rate of product and absorb all the fixed costs associated with it, but that -- are -- a reasonable level of production capacity.

Okay. And I just want to make sure, John, I was clear. You did -- well, you don't give guidance, you kind of gave a little bit of a first-quarter guidance and I wanted to make sure I understood that, and I think you were going from page 8, walking through the normalized earnings of $34 million and with all the debt you paid off, that would have been about $43 million in pretax, $9 million given the amount of debt you've paid off, and that would be a kind of a normalized run rate level that one should expect for the first quarter? You said something in that regard. I wasn't sure I totally under -- totally got it.

Yes. I think that's what -- what you said is about right. I'll point out though that we had mentioned a $9.3 million total interest expense including the amortization of the up-front fees and original issue discount on the senior secured term loan that was -- that is imbedded in the $15.2 million number before normalization for Q4, but we have a $1.2 million normalization which related to specifically the $135 million voluntary prepayment we made in Q4. So you wouldn't add back the full $9.3 million, you would add back -- it rounds kind of funny, but it's $8.2 million --

Okay.

-- bringing the number to $42.2 million. And so it -- rather than providing a pinpoint number, I think what we were saying directionally was that we think that Q1 could be similar. There's always the reduction in the portfolio, absent the --

Right.

-- the growth initiatives, and -- but then, we're also going to have -- we expect higher revenue from the HomeEq portfolio --

Um-hmm.

-- based on achieving results more similar to December of 2010 than October and November. Does that help?

Yes. And typically in the fourth quarter, Ocwen has had a -- an increase in their deferred servicing fees receivable, and seasonally the fourth quarter has typically been a weaker quarter, but the month of December looks like you generate some pretty high-level of revenue, because I know you only recognize that revenue when you collect the cash, and typically the first quarter is a strong quarter, but was there an increase in deferred servicing revenue in the fourth quarter in typical seasonal pattern?

Not this year. The deferred servicing fees went from $125 million because we reported in the third quarter down to $123 million.

And Bob, the reason for that is that the HomeEq portfolio was really -- and as you saw with Saxon, on slide --

Yes.

-- was it 7, is really ramping up throughout that period, so we can -- you could also -- another addition to that is just the significant decline in advances that were -- that we were able to generate in the fourth quarter.

Yes. Let's see, the term loans, what -- if you sold the HomeEq servicing rights to Home Loan Servicing, what debt goes with it, which credit facility? Is it the senior secured facility that you raised to fund that deal that goes with the servicing rights?

Yes, so it's --

(Multiple speakers).

No. It's not the senior secured term loan. It's the match-funded advance facility. So when we publish the 10-K, you will be able to look at note 14 and see the update.

Okay.

But in the Q, last quarter, you could find those notes, I believe in note 12. And although they're not labeled HomeEq, it's the -- the largest notes are identified in that footnote.

Okay. Okay, thanks, I'll take a look at that. The -- oh, let's see, I did have one or two others. I'll come back in with other questions. Thank you.

Our next question comes from Mike Grondahl. Your line is open.

Yes, thanks for taking my questions, guys, and congratulations on the progress you're making. The first question is really, you guys had tremendous cash flow from operations the last several quarters, really all year, and I assume the way your business works, that's going to continue for the next 6 to 12 months at least. What do you guys plan to do with all that cash?

Well, I think the -- Mike, we certainly are -- at the short term we've been paying down the high-cost debt that we have to the -- as John said, to the level that we can still reuse it and reissue it, and given the current status of the bond markets, or the debt markets, we are hopeful, at a lower rate. The remaining -- so we are, right now, generating excess cash that we are, at least for the time being, husbanding in terms of another transaction. Should that not come to pass, we would then look to buy back common stocks fairly aggressively.

Got you. Secondly, you guys had mentioned a fairly robust acquisition pipeline. How would you handicap your odds of announcing a transaction in the next six months?

Yes, we tend not to do that. I -- let me more describe the environment that we're operating in today, which I think has -- there's some -- there are pros and cons with respect to the opportunities out there. There are certainly more opportunities that are -- that we're discussing today than ever. But obviously, as you know, these transactions take sometimes longer than you expect and sometimes the seller elects not to execute.

But to -- I think you will see -- you've seen a large change in people's view of the world, as I sort of said in my prepared remarks, and those companies -- there are quite a number of companies where servicing is not a -- not core to their operation, and I think many of those companies are saying, why are we in this business today? Their costs may be going up pretty significantly. There's obviously environmental issues with regard to it and it may not be aligned with their other business operations. So I think that's one whole grouping of people that are in -- shall we say in discussions.

The second grouping, which we are -- which I think is new, is the firms that -- where it is core, are saying, well, yes, it's core to our business but not every individual part of that operation is core to what we want to do going forward, particularly given Basel III. So I think they're -- that grouping is also out there.

The offset -- the primary offset, I think, as to why you have not seen a lot more transactions occur in the very short term relates not to servicing per se, it relates to the origination risk some of the companies have. In other words, they're worried about put-backs and put-backs -- they don't want to give up the servicing because they believe they don't want any information in any way, shape or form to be outside of their control. So it's not that they want the servicing, it's not that they're worried about the servicing, they're worried about the put-back risk because they were the originator of the product.

Got you.

And that would be --

So they might hold on to the information a little bit while longer?

Yes. So if that were to be resolved, I think you would -- my impression would be that you would see an enormous amount of product coming to market.

Got you. And then lastly, Bill, and I know you're not going to give a specific answer, because no one really knows it at this point, but you have about $900 million of shareholders' equity supporting Ocwen today. I assume that that number could be a lot lower if you're successful with HLSS. Directionally, is that kind of what you're thinking and where you're trying to get the business in the future in this capital-light version?

Yes. I mean, I think that we will be more cautious than some other players in the industry, but you can look out that at people that are basically subservicers and are capital light and you can look at the amount of equity they have, and it -- we have more equity than all the independent servicers combined today. So they -- and they -- yet, they have debt ratings because they're perceived to be a processor as opposed to a financial services company. They have debt ratings that are as robust as ours, if not better, with, in some cases, equity (inaudible) approaching zero.

We clearly do not intend to run at equity rates approaching that because we think it's main -- it's not -- it doesn't met our -- it does not meet our risk profile, but we can take it -- if HLS were to be successful, which we are -- have no -- can't say for sure, we certainly would like to push towards that capital-light environment.

Yes. No, great. Hey, thanks again and congratulations.

Thank you.

Our next question comes DeForest Hinman. You line is open.

Hi, I had a few questions, primarily follow-ups on Ryan's line of thought with the MIAC, I think, valuation. I know we put the acquired HomeEq servicing rights on the balance sheet and I think we disclosed in the 10-Q that they were around $84 million, the number that was in the HLSS document looked like it was about $75 million. Is that kind of the ballpark consideration we should be using that we'd be paying Ocwen for those servicing rights?

Yes, but I'll mention the main difference between those two values that you quoted, is that not 100% of the HomeEq mortgage servicing rights are slated for this initial transaction.

Okay.

In addition to the fact that there's quarterly amortization.

Okay. And then to clarify how Ocwen maintains their, I guess, that phantom book value that you guys had talked about in the past, I think you had put it at around $4.40 in the third-quarter conference call. I'm looking at the HLSS S1. Can you talk about a base servicing fee, which is around, I think, 39 basis points, and then Ocwen has ability to earn a type of bonus fee if you -- they generate in excess of that amount. Is that the way the agreement is structured for Ocwen to be able to capture that phantom servicing rights value?

Yes. Let me step back for a minute and try to look at it from another -- perhaps try to explain it from another perspective. We buy -- when Ocwen goes out and acquires mortgage servicing rights and advances, we look at it as the net present value calculation. It's really cash flow. And what -- so it's a future stream of cash flow. So in some cases, obviously, we're going to transfer this at fair market value by a third-party appraisal, but what you're -- what you are -- when you look at that value, and you look at it in that pres -- the real question you need to ask is what is the relative net present value to what it's carried at.

You could also think about the present value of the subservicing contract that Ocwen will have with HLSS, which will -- which is probably higher than the value of the full MSR for most servicers, based on the cost advantage.

I think the reason we're not -- we actually -- I'm sure we come across as being either evasive or retarded. There are -- we're severely limited in what we can say. But that value of -- that value there, if you do it at the fair market value that we carry it at, because of the structure of the subservicing contract we have, we capture that value. You either capture it in terms of an up-front gain or you capture in front -- in the form of elevated earnings over the remaining life of the contract.

All right. I think that's helpful. I just want to make sure I understand then, and other people understand that there's a mechanism there where Ocwen isn't just handing all this MSR value that you have talked about previously, just handing it over to the HLSS.

No. And it's clearly -- and it's an arm's-length transaction, but I really believe as a major Ocwen shareholder that the Ocwen shareholders will be pleased with the outcome that they will receive as a result of that.

Okay. And then a second -- or a couple more follow-ups. On the debt that transfers, just to be clear, is that the class A through class D debt that you had disclosed in the third quarter 10-Q?

That is correct. (multiple speakers).

And there's nothing else going over to HLSS, that's just those five -- or five pieces of debt?

That's correct.

Okay.

I might just take a moment to answer the question that Ryan Zacharia had asked earlier about HAMP revenue, so the number for full-year 2010 is $32.4 million and the contribution to that figure in Q4 was $9.7 million.

Yes, I actually had a question on that as well. On -- the different fees that HLSS receives as part of this transaction, how does the late fees and the HAMP payments and things like that -- who actually is going to book those as revenue?

If I could rephrase the question in terms of the -- from Ocwen's perspective, Ocwen maintains all the ancillary fees.

Okay. And can you talk about the IPO-related fees that Ocwen expensed in the fourth quarter?

Uh --

There -- no, there were not any.

There weren't any.

Okay. Thank you.

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

Hi, guys. Two questions. You mentioned in the release that there's a more efficient structure available to acquire MSRs through the HLSS entity. Yes, you're still talking about bidding from Ocwen's perspective. Why -- how do we reconcile the fact that this new entity is somehow structurally more efficient with the fact that you guys are going to be bidding against them, theoretically, at some point in the marketplace, if you're going to be using capital that's going to be flowing out of the business to potentially acquire stuff?

Oh, you're saying that both HLSS and Ocwen will bid on it, or you are assuming that Ocwen (multiple speakers).

Yes, I mean, the release, I forget the exact phrase that you use in the release to explain why you're not just bidding -- raising secondary money from -- for Ocwen because of there is some structural efficiency that's created in the [HLLS] entity, yet you're still talking about bidding as Ocwen.

Well, so --

We never -- we didn't say Ocwen was quote, bidding, with regards to that, we were explaining the way in which Ocwen's were -- historically structured it's pricing, and how one would look at this.

Oh, I thought you said that there were some prospective acquisitions you might look at from free cash flow.

Oh, and those -- oh, yes, we are. We are still continuing to look at those. That's correct.

Okay.

And you're -- and over time, obviously, HLSS -- well, Ocwen would consider selling those to HLSS and maintaining the subservicing contract.

So it's just temporal, even though, I think the -- I'm trying to find the phrase. HLSS intends to acquire and hold mortgage servicing rights and related advances in a more efficient manner that is currently feasible for Ocwen. So that suggests some structural advantage the new entity has over Ocwen, both the bid and hold MSRs. And so what I'm struggling --

If you look at the interim -- you have an interim period of time before HLSS will be able to make new acquisitions or to purchase additional MSRs, and advances from Ocwen, and so Ocwen simply doesn't want to forgo any growth opportunities during that limited -- during that time period, before HLSS is --

So it's just temporal?

-- (multiple speakers) growth. But then -- but then --

Well, but what's --

-- once HLSS is funded, has access to the capital markets, Ocwen's vision would be that it would prefer to --

Step out of the market.

-- bid jointly for servicing assets with HLSS because the ROE would be higher than doing that alone.

And could you -- is the efficiency that you had talked about in this line item, simply a matter of ROE? I mean, why is it more efficient for this new entity to acquire this stuff than for Ocwen?

If we could prob -- if we -- I would love to answer that question. If we could defer that question, because we're really not permitted to comment on HLSS, given --

Okay.

-- where we are in the process (multiple speakers.)

Well -- well, what are -- maybe I can rephrase it. What do you -- what do you see as the structural impediments to being -- to being as efficient as you'd like to be at Ocwen right now in bidding for MSRs?

Well, one thing is we pay taxes. So if we paid a dividend, there will be --

Right.

-- in other words, a dividend is after cor -- would be after corporate taxes. Ocwen generates a lot of free cash flow, as you can see. If we were to pay that out to -- in a high level of current dividend, if Ocwen were to do that, it would do it after it had already paid the cor -- the 37% corporate tax rate.

Okay. Then the second question is, what's the advance rate on those Barclays notes A through D? I'm just trying -- kind of curious, obviously the debt transfers and you've got equity in the facilities as well. What equity kicks out once the thing is transferred?

Registration statements are generally available at sec.gov.

And you will have -- that question will be answered in those -- I would -- can't say that, okay.

I'm sorry, you can't tell me what the advance rate on your series A to D notes are right now?

We can. We can tell you that.

The -- right, the -- it varies somewhat from period to period, but it's in the high 80% range on a combined basis across all advance types, although Ocwen does not borrow to the full extent permitted on that facility.

Okay. So it could be somewhere between $100 and $125 million (inaudible) of equity that's instantly -- or cash that's instantly released from that facility once it's transferred? Is that the right way to think about it? Just -- I mean, you don't have to answer the question other than just a framework for what capital is released once the facility is transferred.

Yes, I think that is a good framework.

Okay. Thank you, guys.

Thank you.

Our next question comes from [Jim Fowler]. You line is open.

Good morning, gentlemen. It certainly seems like a good idea to create a dividend-paying IO structure in a rising rate environment. So that's an interesting development. I did have a couple of questions. You made mention of different servicing types that you're contemplating. Would all of that servicing -- would all of those servicing rights be held at HLSS, is that what you're contemplating in the future?

In the future, Ocwen would consider, yes, Jim, selling the -- it's mortgage servicing rights to HLSS. It would retain the subservicing contract on that and any other subservicing contracts it currently has.

Great. You mentioned just a minute ago, as a comment, Bill, the -- a high level of current dividend. I was just doing a back of the envelope from the filing this morning, I haven't had long to look at it, but maybe you can indicate if these numbers seem reasonable. I think there will be a 50-basis-point strip. I imagine the contract will be such that you'll hit the incentives. I'm assuming that's probably about a 13-basis-point fee, get the -- some amortization, modest G&A. Are you thinking kind of mid to high single digits, maybe a low double-digit ROE at HLSS, is that reasonable?

We can't -- Jim, that's one thing we've been told we absolutely cannot answer.

Okay. Have you -- is there anything contemplated that changes the liquidity risk of this business as it's being formulated now versus whatever risk, although minimal, as it developed at Ocwen, I mean is there anything transformational that's occurred that's been already agreed to?

Well, I think that all of the new -- all of the serv -- all of the advance facilities that we are currently renewing are all transferrable and almost all of them are coming in at more attractive rates than we previously faced.

Okay. Okay.

So I think there's a -- I think there's a, at least a -- let me just -- I'll just stop there, sorry.

Okay.

And the transferability requires the consent of the lenders.

Right.

So everything that you're thinking about, in terms of your counter parties, that's -- the commitments are in place, there's -- it's at least as -- it's at least the same liquidity risk, if not less so, post transaction?

Okay, we're a little bit constrained on that, but right --

Okay.

-- we are -- there is still work to be done on -- with respect to transfers, et cetera, but we're not getting -- okay.

Great. And last question. Is there anything -- is the relationship that Ocwen has with ASPS, is there anything about that that's different, any contractual agreements between Ocwen and ASPS, is that going to be changed in any fashion whatsoever?

No, they'll still remain the same as they always have.

Great. Okay, thanks, gentlemen. Good luck.

And one clarification on the prior -- and I'm sorry, I forget the person's name -- on the amount of equity that it would release. We would actually -- it would be more than that because we would lever them up as we begin to transfer. In other words, we would generate more net free equity.

Right, so the equity release would relate primarily to the equity in the advances, meaning the difference between the match-funded advance (inaudible), the match-funded advance liability balance plus the market value of the MSRs, based on the MIAC appraisal. And that could vary based on the size of an offering, in theory.

Varying methodology used made sense though, I just -- we just wanted to clarify that.

Our next question comes from [Rick Biggs]. Your line is open.

Oh, hi guys. I had another question on capital, actually, and I think Mike alluded to this. But in terms of looking at another way to kind of hone in on reduced capital requirements, is the $300 million offering size, is that what you'd consider a fair baseline or proxy for your reduced capital needs for the core business going forward?

Again, with any typical underwriting, there would be some underwriter fees and any new company would probably maintain some cash for liquidity, which would be reductions from that number.

Right. But at the same time, this is a -- as I was reading the S1, this is a two-step -- are contemplating a two-step -- two stages of transactions with the initial portfolio, the $17 billion and then the $29 billion, so presumably there's some capital generated along the way as they look to take on the additional $29 billion, correct?

Yes, right. Rick, we just -- we can't really com -- we can't comment on HLSS questions directly, if you know what I'm saying?

I understand. So then, I guess, a second way to ask it, if you have enough excess capital to buy another HomeEq-size portfolio, which, and correct me if I'm wrong, was $300 million of equity?

Right. That comment was without HLSS.

Okay.

Yes.

So even without HLSS, the thought is you have $300 million in excess capital and then with HLSS --

We have $300 million of excess capital capacity, right, to buy a comparable [slash] transaction.

And so that includes potentially using the accordion feature on the senior secured term loan.

Understood. So then is there a new thought on, in terms of timeline, if transactions aren't materializing or if, as rumors have held, people are asking too high a price to meet your IR expectations, is there a rip-cord or a timeline, Bill, in terms of when you would think about maybe considering a tender or more aggressive capital management?

I would think in the next by mid-year we would be there and -- but, again, I think we're -- we are pursuing a number of opportunities, and I'm pretty -- we're not considering buying the equity back today -- in large amounts, we're not considering buying the equity back today.

Okay, and then the last question is just in terms of GSE reform and there's some mention of it -- well, there might be some mention of this in a separate S1 with -- in the risk factors, but for Ocwen, do you see any threats or opportunities coming out of this for the Company going forward as a large independent third-party servicer? And that's all I have.

Thank you. No, we're reasonably sanguine about the announcement about the change in the servicing fees out there. A reduction in servicing fees as has been proposed by administration would be very positive for independent services as well as independent originators. The reason I say that is that it would reduce the MSR, which is a -- which is capital consumptive and which large commercial banks have a significant competitive advantage because of their deposit balances in terms of purchasing it. So a reduction of an MSR in the prime space would make servicers such as Ocwen far more -- extremely more competitive in the broad spectrum of products. It also would be very positive for originators, because today the majority of production has to be sold to the large correspondents, because they're the -- they're not -- they don't bid -- apart -- they don't bid servicing away from the loan that's originated. If there's no MSR to have to worry about the bid, the market for independent originators to be able to sell their product at higher prices is greatly expanded.

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

Hi, two quick ones. Just -- HAMP, there's discussion about terminating HAMP, what are your thoughts on that and would -- do you think that the modifications are already done on HAMP and the success fees would go away as well, if HAMP were to go away?

This is Ron. That -- I -- I'm not sure that any change would result in elimination of success fees that have already sort of been in place, so I'm not -- that's not an expectation, that I'm aware of. HAMP has, as a general, across the industry, started to see some burnout as many or most of the borrowers have been evaluated for it, so they're probably -- it's somewhat of a declining thing anyway. And the program does end at the end of 2012 anyway. So I don't know that that -- even if there is a change, it will have a meaningful impact one way or the other.

Okay. And then the senior secured accordion term loan that you have, it's pretty expensive; I mean, can -- what is -- can you refinance that? What kind -- what is the make-whole premium and -- you're showing very strong cash flow, I would -- the credit markets have improved, can you get rid of that facility and replace it with a much less expensive one?

Well, the way the accordion works is that you go back to market, and so the holders of the current notes are -- have been primarily paid off, they have the option of buying and then new investors can be brought in to -- we would expect to pay the current market price on the use of that accordion, which based on the movement in the bond market, in general, we believe would be less than what we're paying on the small amount of that loan outstanding.

About how much less basis points?

It's market, but I've heard people say 200 basis points to 300 basis points less.

The reason you want to keep the accordion, Bob, just so --

Sure.

-- just so we're clear, is that there is a lot of friction cost and brain damage structuring the deal and getting the underlying security interest in place. So we would prefer not to have to replicate that again. So it's very nice to have the shell out there.

Um-hmm.

And the amount we've left outstanding means that if we go through the remaining quarterly mandatory payments for this year, we could still issue the accordion up through the end of the year. That's -- that was our thinking as to why -- you might wonder why we have $35 million left outstanding --

Right. Yes, yes.

-- is that precisely gives us all of 2011 flexibility to ramp up the accordion again. And as Ron -- and as John said, we believe that -- at yields that are significantly below what we were -- what we paid in the last issue.

Thank you.

Our next question comes from [Fred Small].

Hey, guys. Couple questions about Ocwen as a stand-alone subservicer. The first one being, what do you think the capacity kind of post the onshore stuff you're doing is for the subservicing business, in terms of either UTB or loans?

Ron, would you like to take that?

Right, are you talking about our operational capacity or what the industry --

Yes, yes, for Ocwen. If you lose the -- you don't have the capital constraint of the MSR anymore and what -- what's sort of the capacity of the operation?

I think it's still -- the opportunities are still going to be a function of what's out there in the market and how competitive we are, whether it's subservicing fees or buying the MSRs in whatever fashion that takes place going forward. We don't think that we have a lot of capacity constraints. We don't have a lot of -- we don't sit around with a lot of extra people or infrastructure. We try to run efficiently. But as we saw with HomeEq, within a 90-day period, we can ramp up pretty significantly, and feel that we could do that again and again, so we don't think that there's a whole lot of capacity constraints on us.

Okay, sure. And if you have -- what do you think of revenue yield kind of on the subservicing operation is -- if you have -- if you include the -- I mean, I understand what the -- what you'll potentially get paid for just subservicing as a fee, but if you include --

Let me just interrupt. We're having a fire alarm in our building. So Ron, you're on your own, I'm afraid.

All right, cool. Thanks.

So, Fred, can you just say that again? I'm sorry, I --

Oh, sorry. I thought you were going to a fire drill.

Yes, well, I'm in West Palm and Bill is in -- Bill and John are in Atlanta, so they -- hopefully they're okay, but I'm still here to answer questions, so what was your -- what was the last question?

Thinking about the revenue yield of the sub -- stand-alone subservicer, is that just -- you get that and the fees --

As Bill commented before, we keep -- if you're talking about the structure with HLSS, we keep -- Ocwen is keeping all the ancillary fees and we would get something less than the 50 basis points. I think some others earlier referenced roughly where that would be.

Right, right.

So our -- as we were trying to say before, our intent is that the earnings will go down less than kind of the capital -- the earnings impact will be less than the capital reduction. But we can't really give a lot of guidance as to what that ultimately will be.

Okay, sure. And aside from kind of the -- aside from the amortization and the sort of interest cost on the advances, are there other big-fix costs that come --

No, those are the -- you -- you've hit the nail on the head, those are the primary costs that go away, the interest expense on the advance financing, maybe that match-funded facility, and amortization of the MSRs. There's a modest amount of expenses that go -- are involved in the management of advance facilities and things like that that will slightly go away as well, but that's probably immaterial compared to the -- those other two that you just mentioned.

All right. Thanks a lot. Good luck.

Thank you.

We have no other questions.

Okay, everyone. Thank you very much for your time today.

Thank you for joining today's conference. You may disconnect at this time.