Onity Group Inc (ONIT) 2012 Q1 法說會逐字稿

Welcome to the Ocwen First Quarter 2012 Earnings Conference. (Operator Instructions) This call is being recorded. If you do have any objections, please disconnect at this time. I would now like to go ahead and turn today's call over to Mr. John Britti. Sir, you may begin.

Thank you. Good morning, everyone, and thank you for joining us today. My name is John Britti and I am 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 under "Events and Presentations," you will see the date and time for Ocwen's First Quarter 2012 Earnings. Click on it and register. When done, click on "Access Events." Click on how you wish to listen to the event, either Adobe Flash Player or Windows Media. 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 at the bottom of the page pointing to the right.

As indicated on Slide 2, our presentation may contain certain forward-looking statements 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, first, second, and third quarter 2011 Form 10-Qs, and 2011 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.

Our presentation also contains references to normalized results which are non-GAAP performance measures. We believe these non-GAAP performance measures may provide additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures should be viewed in addition to and not as an alternative for the Company's reported results under accounting principles generally accepted in the United States.

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, I will turn the call over to Bill Erbey. Bill?

Thank you, John. Let me start by summarizing a few key points for today's call. First, Ocwen's core earnings potential has increased substantially with the Litton acquisition and the close of the Saxon and Chase transactions. Additionally, we expect to incur less than $1 million in additional transaction expenses on these deals in the second quarter. Second, our operating results continue to meet or exceed our pro forma projections. Third, we have a very strong pipeline of potential transactions, including agency and non-agency product, including both MSR acquisitions and sub-servicing opportunities. Finally, our very strong cash flow and the success of HLSS put us in an excellent position to finance future business. We believe that we are well positioned to fund all but the very largest new transactions without accessing the equity markets. All of these position Ocwen to deliver substantial value to our shareholders.

Ron and John will discuss our financial results in more detail later, but let me start by discussing point one - the earnings power of Ocwen. In the first quarter of 2012, Ocwen's normalized pre-tax earnings were $56.8 million, if we include ramp up related expenses of $3.4 million. John will provide more information on our normalizing entries later. This represents a year over year increase of over 25%, compared to the first quarter of 2011 where we had no ramp up costs. Additionally, we deployed $615 million of capital in the Saxon and Chase transactions with targeted pre-tax returns of 25%. By increasing our capital invested by 50% we are creating robust earnings momentum for future quarters.

Slide 4 illustrates our pro forma expectations for four recent transactions. As discussed in previous earnings calls, capital requirements start high and come down as we improve delinquencies and collect advances. Moreover, we incur higher expenses upfront. As delinquencies and expenses decline, returns increase over the first 24 months and then level out, as seen in the graph on the right hand slide--right hand side of Slide 4.

With respect to point two, our strong operating performance, Slide 5 shows delinquencies and advances declining as planned, particularly on the Litton portfolio. By consistently meeting or exceeding our pro forma expectations, we're confident that we will meet our targeted return on capital. Ron will discuss our operating results in more detail later.

With regard to point three, our strong new business pipeline, we are currently pursuing new business opportunities with UPB in excess of $450 billion. We believe additional opportunities will develop over the next 18 to 24 months as banks continue to shed the legacy servicing assets through sales of MSRs or subservicing arrangements. The largest opportunities are concentrated in several large banks, and we are currently working with two large banks on slow subservicing arrangements.

I'm pleased to announce that on March 20, 2012, Ocwen entered into an agreement with Aurora Bank to purchase servicing rights for $1.9 billion in UPB of commercial mortgage loans. Closing and servicing transfer is expected at the end of May.

We also see increased opportunity for Correspondent One, which should help us accelerate our long-term growth strategy of acquiring prime slow servicing. This is because significant changes are occurring in the prime lending market. There has been a contraction in correspondent lending driven by market participants either significantly reducing their volume or leaving the business altogether. This has created a void of buyers to acquire closed loans from mortgage bankers, including the members of Lenders One. Not surprisingly, at the same time there has been a sizeable reduction in the current price paid for prime loan servicing rights. Agency MSRs that had been priced at a multiple four to 4.5 times the annual servicing fee are now selling at a 2.5 times multiple.

As shown on Slide 6, paying 2.5 times the annual servicing fee for agency MSRs at a 15% long term constant prepayment rate, or CPR, resulted in a 19% return on equity, which makes it attractive for non-bank institutions to retain servicing. At this pricing, Correspondent One should be competitive in buying loans. The critical assumption in this now--in this analysis is the long term CPR. Everything else is simply math. While it is true that mortgage rates are at an all-time low and the refinancing incentive for newly originated loans is minimal, Americans have historically moved on average every seven years, resulting in a minimum prepayment speed of approximately 15%. During the first quarter of 2012, Correspondent One purchased $6 million of loans from the three members of Lenders One that were selected for its pilot program. Correspondent One also began selling the majority of its purchased loans to a large commercial bank.

With the pilot phase of operations now complete, Correspondent One is--Correspondent One in a measured fashion is rolling out its program to other members of Lenders One. During the remainder of this year, Correspondent One is targeting acquiring $500 million to $1 billion in loans. We expect to see a significant ramp up in Correspondent One's volume in 2013. Nevertheless, it is worth noting that newly originated prime service is not as profitable per dollar of UPB as subprime servicing or nonperforming prime loan servicing.

Please note that we do not differentiate between subprime servicing and highly delinquent prime servicing. How the loan starts its life is less important than where it ends up. What really matters is the delinquency rate.

Performing on servicing deploys less capital at lower returns than pools of highly delinquent loans. Highly delinquent mortgage servicing consumes five times the capital or dollar of UPB, principally in the form of advances, not MSRs, and can generate about 10 points greater return on capital for Ocwen. So to generate the same level of profitability on performing loan servicing, Ocwen's portfolio would need to be at least six to seven times its current size.

Nonperforming loan servicing generates higher returns on capital because there is greater scope to exploit cost and quality advantages. On Slide 7, we show an analysis of Ocwen's cost advantage in servicing nonperforming loans. Based on analysis comparing MIACs estimate of average industry cost for nonperforming loans versus Ocwen's, we have approximately a 70% cost advantage. In addition to operating expense advantages, Ocwen has demonstrated an ability to bring down an advance rate and interest rates far faster than others.

To illustrate the impact of cost and quality advantages on overall margins, Slide 8 shows estimated average cumulative pro forma cash flow as a percentage of total revenue over the first five years on our most recent transactions. As you can see on the left, we expect to generate average cumulative pretax margins of about 53% on revenues. If Ocwen's cost of servicing nonperforming loans were in line with industry average, it would essentially reduce our pretax margin by half. In addition, if advances only declined over the first five years in line with UPB runoff, then higher interest cost would drive cumulative pretax margins under 10%, which would mean pretax returns on capital in the low single digits.

Finally, on my last key point regarding our funding capacity, Ocwen is increasingly capable of funding all but the very largest new business opportunities without accessing equity markets. By completing the initial asset sale to HLSS in March, and a follow-on $2.9 billion sale on May 1, Ocwen has demonstrated that HLSS can be a solid source of financing. Indeed, the sale to HLSS plus internally generated cash enabled Ocwen to close its Saxon and Chase transaction without issuing $200 million of newly--of new senior secured term debt as had been originally planned. Further, we believe that we can access senior secured debt markets for up to $600 million. In addition, Ocwen firmly generates over $120 million a month of cash flow from operations. It remains our long term goal to sell our servicing assets to HLSS and turn Ocwen into an equity [life] fee for service business. The impact of this should be higher returns on equity than we could achieve by keeping assets on Ocwen's balance sheet. The effective cost of capital for HLSS is between 8% and 9%, whereas Ocwen seeks a 25% return on its capital.

I will now turn the call over to Ron, who will cover our operating results, including the Litton integration and our onboarding of Saxon and Chase. Ron will also comment on the current regulatory environment as it relates to our servicing business. Ron?

Thank you, Bill. As Bill mentioned, our integration of Litton continues to meet or exceed our expectations. As you can see on Slide 9, we saw a healthy increase in revenue on the Litton portfolio as a result of our modification efforts that drove a three-point decrease in delinquencies during the first quarter. The Ocwen team has done an exemplary job in boarding over 240,000 Litton loans while simultaneously driving down delinquencies. Keep in mind, about one-third of these loans were over 60 days delinquent or in REO at boarding. Such performance is without precedent in the industry and demonstrates both the talent of Ocwen's staff and the strength and scability of our platform.

The strong performance on Litton also did not distract Ocwen from improving its legacy servicing portfolio. In the first quarter, we reduced overall delinquencies from 27.9% to 25.6%. We completed 23,491 modifications in the quarter, an increase of almost 26% over the prior quarter. This was above the top end of last quarter's guidance of 20,000 to 22,000. In the first three months of the year, modification offers reached 28,500, which is a 32% increase over the last three months of 2011. This bodes very well for second quarter modifications, which we expect to be between 23,500 to 25,500.

HAMP represented 14.8% of these modifications. Principal reduction modifications, including our shared appreciation modification, or SAM, accounted for over half of our total modifications. SAM accounted for 28.5% of total modifications.

On top of excellent operating results, we were also able to board approximately 104,000 loans on April 2 for Saxon and Chase. I also believe that closing two such large highly delinquent transactions from different servicers on the same day is without precedent in the industry. As shown on Slide 10, we made substantial progress in reducing advances this quarter. In the first three months of 2012, net advances declined by $319 million. We expect continued declines in future quarters as we reduce Litton delinquencies. More detail on our first quarter results are available in today's earnings release and our first quarter 10-Q, which we expect to release in the next few days.

To further improve upon our industry leading cost structure, Ocwen also continues to invest in productivity enhancements. We have several initiatives underway to--could substantially lower unit costs by year-end.

On a final note, I would like to say a few words about the current regulatory environment. Even though we are not signatories to the Federal Bank Consent Orders or the State Attorney General [slash] Federal DOJ settlements, we believe the servicing requirements in those orders and settlements will become de facto best industry practices. Likewise, we are mindful of the servicing practices announced by the new federal regulatory agency, the Consumer Financial Protection Bureau. We frankly welcome these rules and emerging best practices as they provide greater certainty regarding what is required of servicers. Moreover, these rules and practices present expansion opportunities as financial institutions will look to subservice more business to specialty servicers with scalable capacity and a demonstrated ability to meet compliance requirements. In particular, the state AG-DOJ federal settlements with five large banks and potentially nine additional banks require principal reduction modifications. Ocwen is a pioneer in principal reduction modifications and we have developed substantial process technology and unique product offerings to support principal reductions that keep homeowners in their homes and provide positive net present value results for loan investors.

An important example is our shared appreciation modification initiative, which has been extremely well received by federal and state government agencies.

Thank you for your time today. I would now like to turn the call over to our CFO, John Britti. John?

Thank you, Ron. I would like to first walk through our normalized pretax income as shown on Slide 11. The first item is transaction related expenses of $16.1 million. Litton related transaction costs accounted for $9.7 million of this amount. Going forward we expect no further transaction expenses for Litton. Overall, we came in about $4.3 million below our original estimate for Litton shutdown costs.

The remaining transaction related expenses for the quarter are for Saxon and Chase. We expect to incur less than $1 million in additional transaction expenses on these deals in the second quarter. Our progress--our revenue ramp up on Litton and the addition of Saxon and Chase provide us with substantial earnings momentum going into the second quarter.

The $4.6 million normalizing item related to our senior secured term loan, or SSTL, is made up of two components. As mentioned earlier, we cancelled the $200 million upsize on the SSTL that we had originally planned to fund Saxon and Chase. As a result, we paid a $3.7 million cancellation fee to SSTL investors. The second item was triggered by the HLSS transaction in March. Under the terms of the SSTL, we are required to pay 25% of any funds received from asset sales to pay down the loan. The prepayment in March totaled $37.5 million. As a result, Ocwen incurred a $900,000 expense for early amortization of original issue discount.

Hedge related adjustments account for the final normalizing item. As you may recall from last quarter, we normalized a loss on currency hedges. This quarter we balanced that with a $3.4 million net gain on the termination of our entire Indian Rupee currency hedge position in January. Against this gain, we had a $6 million unrealized loss on interest rate swaps. These swaps were put in place to hedge advanced financing on our home eq transactions. When HLSS assumed a substantial portion of the home eq match funded liabilities, we lost hedge accounting. We are keeping the swaps in place to hedge new business. Overall, we had a net hedge related normalized loss of $2.6 million.

Ocwen also incurred $3.4 million of ramp-up costs in the first three months of 2012. In the past, we have not normalized for ramp-up costs, so we did not do so this quarter as it would have complicated prior period comparisons. Nevertheless, we are providing ramp-up expenses this quarter as they run unusually large and investors have asked that we provide additional direction on such costs. These costs primarily involve staffing and facilities expansion ahead of need. We expect these costs to drop substantially in the second quarter, though we will continue to carry some excess capacity as long as opportunities warrant.

Backing normalized costs out of our pretax income results in normalized pretax income from continuing operations of $53.4 million for the first quarter of 2012. Adding the impact of ramp-up expenses would have resulted in $56.8 million of adjusted normalized pretax income. This is a 25% improvement over Q1 2011 when the Company had no ramp-up costs.

As we will be executing more deals with HLSS, I want to spend a little time walking through the HLSS transaction in some more detail, though I would refer you to our 10-Q for a more complete description.

Because Ocwen sold rights to mortgage servicing rights and not the MSRs themselves, the transaction is accounted for as a financing rather than a sale. As such, Ocwen's revenues do not change and MSRs on our balance sheet do not change apart from regular amortization. The largest financial statements impact shows up in two areas. First, the match funded advance assets and related match funded liabilities are removed from Ocwen's balance sheet. Second, Ocwen's interest expense increases. The increased interest expense is partially offset by removal of the match funded liabilities. The remaining interest expense is effectively what we must pay to compensate HLSS for their capital. As Bill noted earlier, we price our deals to higher rates of return than the implicit yield at which we sell assets to HLSS, which should provide higher returns to Ocwen shareholders.

It is worth noting that we sold the rights to MSRs in March at a price that is $10 million more than the carrying value of the MSRs. This amount will be realized over time as the rights to MSRs amortize.

At the end of March 2011, Ocwen had $683.9 million in cash on the balance sheet in anticipation of the Saxon and Chase closings. Our liquidity position remained strong after these closings. Cash flow from operations in the first quarter of 2012 was a robust $373 million. We also retained substantial unused borrowing capacity. As Bill mentioned earlier, we believe that we are well positioned to fund all but the very largest new transactions without accessing equity markets. We anticipate further asset sales to HLSS and we have the ability to access substantial funding in senior secured debt markets.

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

Thank you. (Operator Instructions) Our first question comes from Bose George. Your line is open.

Hey, guys. Good morning. My first question, I just wanted to get a breakout of that $16.1 million charge between compensation and benefits and the other operating expenses, and also, the run rate for expenses, the $86 million less the $16.1 million, and then less the $3.6 million of the ramp up expenses?

I'm sorry. Let's do the one--let's do one at a time. The $16.1 million, the majority of the Litton related expenses are leases that we--are related to leases that we--and [closed down] facilities. The majority of the--or about half of the Saxon and Chase related are compensation costs for folks that we were carrying without the related revenues.

Okay. So for the $16.1 million, do you just have the number that just goes into comp and benefits?

I don't have that handy. I'm sorry. You should be able to discern that from our 10-Q though.

Okay. And then, just when I think about the run rate going forward, is the way to think about it the $86 million less the $16.1 million and the 13--and the $3.6 million?

I think going forward, I think it would be fair to say that our--we'll see substantial reduction in the ramp up related expenses. We would expect--we're running probably--we would probably at most run about $200,000 per month to carry some of the additional capacity we've got.

--The numbers already. That--our operating run rate is--I don't have the numbers right in front of me, but those--that is our current expenses in the quarter for comp and benefits less--or our current operating expense less the $16 million and the $3.8 million.

Yes. We should be running about the same comp and benefits in the--.

Okay. And then, just wanted to just go back to the comment you made about the HLSS and the impact on the interest expense. I didn't really understand that. If there is--could you just repeat that, the interest expense impact from HLSS?

So what happens is our overall interest expenses go up a bit, and it's made of two parts. We take the match funded liabilities off the balance sheet, and so that covers part of it. There is some net increase in our interest expense, and that's effectively what we're paying for the capital that HLSS has to put up against those, because we get that capital back when they--when we execute the transaction.

Bose, this is Ron. One way to look at it is the interest expense related to the associated advances that move off, that goes away. But we're still recording the full 50 basis point servicing fee on the mortgage servicing rights that went over to HLSS. But you actually see an increase then in interest expense for what we're paying to HLSS to compensate them for in effect financing the MSRs.

Okay. Yes, that makes perfect sense. And then, just a quick question on the Aurora commercial transaction. I'm just curious what the opportunities are like in that market. Is--could we see more along those lines or just any comment on that?

Well, it's still a very--it's a much smaller market than our residential market. We did pick up some small commercial servicing when we took on Litton. And this is a nice addition to that portfolio. We--as we continue to see opportunities in the commercial space we will look to pursue them, but it still is a much smaller market, at least what we think fits with our platform, than the residential market. So it's going to be more opportunistic and won't have a significant impact on the overall bottom line. But we still think it's a good addition to our product mix and one that we've been involved with for many years, so we're very familiar with the asset class.

Great. Thanks a lot.

Thank you. And our next question comes from Mike Grondahl. Your line is open.

Yes. Thanks, guys, for taking my questions. The first one is just kind of getting at your comment in the press release where you say you expect to close additional transactions in the coming months. Could you kind of give us a flavor of what you think those transactions are, maybe kind of number, size, and type, and kind of your confidence in that?

Mike, this is Bill. I--we'll try to give you some information without going into that level of detail. I think we're reasonably comfortable that we will close a fairly large agency servicing deal and we're making I think very good progress on a flow business with respect to non-core large servicing that several large banks have. Those tend to be at the present time in process. We're well down the path with those transactions. There are obviously other competitive deals out there that obviously you don't know until you've won the deal. So--but these are the deals that we've spent a lot of time on and have made reasonably good progress on.

Would you be willing to comment on the volume of UPB that's associated with those two deals?

That's a little difficult for us to do at this time. We'd like not to do that. It's a meaningful number--those deals represent a meaningful number compared to our existing book of business. We'll just leave it at that. They're now--some of them are more--since some of them are subservicing and others are agency deals, they do not represent the same relative waiting in terms of profitability. It's very difficult on not--on--the most profitable business out there in terms of generating raw dollars by a wide margin, as I said in my prepared comments, are--is nonperforming loans, whether they're prime or subprime, where you own the MSRs. Those are quite substantial revenue income generators. Obviously, as you go down into more current products and as you go into subservicing as opposed to servicing, the impact of that is somewhat--is definitely mitigated. So we really don't look at our business internally in terms of UPB. We think that's a fairly--that doesn't tell you a whole lot. What really matters is the quality of that UPB in terms of its ability to generate income.

Great. And then, could you maybe comment, Bill, just the progress on what you've done on the agency side to get some traction there? Because historically that's been less emphasis for you guys.

Right. I think you'll--we feel very--reasonable sanguine in terms of it will show some progress there in terms of deals in that space. And it just diversifies our business space. But even if you--if we won $100 billion of agency servicing it would not materially move the need on that income just because of it has much lower capital investment within it, and it actually has slightly lower return parameters than you would in our current piece of business. But we do think it provides diversification and shows that we can access that market. But it's--we're--if you want us to generate income growth, income growth is really associated with the more delinquent portfolios that--where you have servicing.

The two new deals we just closed the last month is--represents a 50% increase in normalized earnings for the business. And it's only $30 billion--or $27 billion of servicing, but it deploys $615 million of equity at a 25% return. That's very important. You'd have to do many more--seven times that amount to get anywhere close to that same level of income in terms of the prime space.

Got you. That's helpful, Bill. And then, two quick other questions. Did you say that your backlog was now $450 billion? Did I hear that correctly?

Yes. I mean, it's sort of that number. You can pick--let's say it's a huge number and you can pick a wide variety of numbers depending on where you assess yourself to be in the pipeline on transactions. There's certainly an enormous amount of business out there in the marketplace. So it just depends where we put our marker as to what we say is a deal that's active and what we're pursuing.

Got you. And then, lastly, any surprises in the March quarter, good or bad, that you just kind of see as you've been going along?

Not really. I mean, I--what's--what I--what we're starting to see with the business - and we've worked very hard on this for almost a period of four or five years - the--if you internalize Slide 4, the business really does track those curves. And it relates to our ability to do modifications, to reduce delinquencies within the portfolio, and to maintain strict cost discipline in our operations. If you look at those charts, what it does, it shows you that--the first quarter I think did extremely well, because the one chart that shows--the one slide--the one deal that shows--starts off negative in the first year, was really the Litton transaction. So you have some degree of headwind with regard to that. But as these deals and transactions mature, the ramp up in ROE far more--far outweighs the any sort of amortization that you would have within the UPB. So I think we've gotten the business model down to a point where we track very closely or meet or exceed those projections that we're showing--or the performance we're showing rather with respect to delinquencies in our cost structure.

Great. Thanks, Bill.

Thank you. And our next question comes from Ryan Zacharia. Your line is open.

Hey, guys. Thanks for taking the questions. The first thing is you guys [beat] pretty big on the revenue line item, and I saw that the Litton fees were 72 bps, which seems pretty high especially given the contractual rate is lower. I assume that was deferred servicing fees due to delinquencies going down. So is it really sustainable?

I think as you see long term, you end up--those will--those should eventually come back down towards the contractual fee level. But we still have over $200 million in deferred servicing fees that don't--they don't appear on our balance sheet and are ultimately--[we're targeting] to collect as we either bring the loans current or take them through REO. So I think that those lines, while they're--while inevitably they will come down, they are not--they're sustainable for probably some extended period of time.

Yes. I mean, Ryan, if you look at page nine and you look at the--how many quarters on the home eq field that we've been just under 70, it will level off at some point. But it stays above that line for--the 50 basis point line at least--for many quarters. And Litton shouldn't perform any materially different than this fee on the Saxon and the home eq field that we've had on the books for quite a while.

Right. It's just that Litton was four basis points higher than either of those and it has a contractual fee that's four business points lower. So it's a pretty material difference, if it's going to hang around 72 for a while.

Yes. But again, I would point you to the revenues on the Saxon and home eq lines. I mean, even if you subtracted four basis points from those lines--and you will see some volatility quarter to quarter, but if it bounced around a few basis points below those lines, you'd still see substantial revenues for an extended period of time.

It should run in the high--at least in the high 60s for revenue off of that portfolio for the foreseeable future.

Okay. And I was surprised the advanced facilities didn't come down here more. Advances were down $727 million, including HLSS. What drove that?

Well, there's $413 million of the--of that advance reduction, which was the sale of the HLSS. So we excluded that from the advance reductions.

No, no, no, but--.

--From that charge--.

--You're--the corresponding liabilities didn't come down commensurate with the--.

--Oh, no, that's because we do--we still carry all of those as if they're on our--.

--Well, I think maybe the answer, Ryan, is keep in mind on April 2 we were funding the two new deals. And so, we were making sure that we were fully borrowing and had available cash ready to fund those two transactions. So I think had we not had two transactions ready to close, we would have used a lot of the cash to pay down the liabilities. But we were carrying a tremendous amount of cash right at that point in time simply because we were closing two big transactions the date following the quarter.

Yes, okay. That's what I thought it was. What were HAMP payments in the quarter?

I can get you that number in a second.

Go to the next question--.

--Yes, go to the next question while I'm pulling that up.

And then, I just wanted a little bit more clarity on these ramp up expenses. Are you characterizing them as one-timers or just expenses leading revenues? I wasn't clear on that.

Well, they were associated with the fact that the transaction closed much later than we thought. And we were running for the--most of the quarter with fully staffed for those two new deals.

Right. So it's just expenses leading revenues that--you would not expect OpEx to drop in the following quarter.

You wouldn't expect it to drop. You--but you would expect the revenues to--we--you'd expect the revenues to ramp up materially.

Got it. And on that last point, why--.

--Which is--you'll see the normal ramp up, but it takes about a quarter. You'll see a lot more revenue. But it--you won't get fully ramped until the subsequent quarter.

And by the way, the--those HAMP fees for the quarter were $12.7 million.

One other question was--I mean, you just mentioned it. Why did the transactions, Saxon and JP Morgan, take so long to close?

So they're--I think as they have been more and more of these larger type transactions out there, they continue to get more scrutiny from regulatory bodies and other interested parties. It creates friction. We did I think a great job of holding to our timelines on home eq and Litton, and believe me it was not easy to hold to our timelines there. But you're generally not going to make these things go shorter. If anything, they're going to go longer. Both of these deals just ran into some friction. You saw in some of our filings that we changed--the Saxon deal changed from a stock purchase to an asset purchase, which from our standpoint, we looked at it, it was very positive, but it did create some delays in getting the deals closed. We think that some of the things that caused the friction, to the extent they're in our control, we've dealt with them in such a way that on future transactions we can potentially minimize some of that. But a lot of the friction was on the seller sides. And so, we would potentially see similar things on future transactions. But mostly, it's just there's a lot more scrutiny by regulatory parties and interested parties in these deals, which just makes getting the process complete that much more difficult.

Okay. And then, just two more questions quickly. So the HLSS payment and interest expenses, is that effectively the 32.5 bps on UPB?

Yes.

So like it would be like $12 million this quarter or something, or fully ramped it would be about $12 million on a $15 billion portfolio?

Right. We added a deal on May 1 as well.

Yes. And then, the final question is just on this $450 billion, does that include res cap being $350 billion?

Certainly, that's something that's in our sights, but it doesn't make up that large a portion of that. It does not make up as large a portion as you just stated.

Okay.

We may have some portion of that in there.

We may have some portion of that in there, but that's not nearly--quite as large as you laid out.

Okay, thanks.

Thank you. And our next question comes from Douglas Katz. Your line is open.

Thank you. Good morning, Bill. How are you? A three-parter real quick. Firstly, you recently have been outbid by Nation Star Mortgage on an immense transaction. If as you say, you are the local servicer, how could someone outbid you? Second question is, some of your competitors, including again Nation Star, apply aggressive gain on sale accounting. What is your posture on the subject? And finally, third, in the chart that you gave earlier in your presentation where you hypothesize a 19% ROE on new business, might that number be higher given the loss of homeowner mobility because of the large decline in home prices nationwide, which would result in a longer turnover period? In other words, a longer period where people stay in their homes, the lower prepayments.

I'll try to answer your three questions in order. We're--we don't know what happened with respect to the Aurora transition. It certainly is a little puzzling to us given the change in--given the cost advantage that we have with respect to that portfolio. But again, the--I think it's--we--the more delinquent a portfolio is, as you see on that slide, the greater the competitive advantage that we have with respect to winning those deals. So I really can't comment specifically on what Nation Star was thinking in their bid there, but it did very much surprise us with respect to that. The second thing on gain on sale is--I was at a conference one time and Peter Lynch--he was referring to the airline industry. He said if investors knew then what they know today, they would have shut down Orville and Wilbur Wright. And sensibly, we're in an industry that has managed to outdo the airline industry, this specialty finance industry, in terms of generating negative retained earnings. And I--you're seeing--what I think is critical in this business - I can't comment on the airline business - is really your ability to generate cash.

And cash really--is really the denominator that enables you to basically go--ride through the cycles and be able to survive within this business. When you look at what's happening now in the industry, we're back to gain on sale. I don't think it's--we saw gain on sale blow up the specialty finance business in the '90s and again in the mid-2000s and we're repeating that. Look going back to the slide, for example, on what you can afford to pay for prime MSRs, and it sort of feeds into your third question, Doug. I mean, it's--the market has collapsed from what used to be a five times multiple to a four to 4.5 times multiple. So today, you could arguably say the market's between a two and 2.5 times multiple. And keep in mind we own Lenders One. So we have more than a passing view into the marketplace. One in every 10 mortgage loans originated comes through our members.

The key to that gain on sale assumption is, as you pointed out, what is your prepayment speed? What are you going to assume? And yet, it is true that today people are much less mobile for a variety of reasons, not the least of which is their homes are underwater. So to the extent that you assume that we will have an extended recession going out many years, you will tend to see lower mobility. Mobility tends then to--go back to the mean reversion, if you will, it tends to go back to the 15% per year as the economy picks up. In other words, you get greater mobility in the--in good times. So when you're dealing with a 30-year mortgage, I think betting against the long term trend in U.S.--in America's mobility is not--doesn't make a lot of sense. I mean, literally, if you book these assets at 4.5 times and only assume no refinance premium, but just long term mobility movement, you're almost at zero in terms of return. So you've booked all of your profits upfront, and then you put a multiple on them.

I mean, it's really kind of a perplexing thing to me. When we do our deals through Correspondent One, we're going to book them at what we paid for them, which is 2.5 times. And I think you'll have then a long term earnings stream that's justifiable and it may not always turn out to be that way, but it's justifiable. Same thing on when we bid on MSRs and auctions. I mean, the last time I checked at an auction the guy who bids the most wins. So it--arguably you could say that if you were the high bidder you ought to mark it down to the cover bid, because that's the next willing buyer and seller of the asset.

I mean, we see people out there being the high bidder, and then marking them up. And you could mark them up--perhaps you could argue like in our case that we are--our costs are so low that we'll make more money on those assets. But when you're--when you don't have fundamental earnings besides the mark ups, it just doesn't make a lot of sense to me. So the market has gone back to embracing gain on sale and there's very little manage--measurement of quality of earnings I see in the marketplace today.

Thank you, Bill.

Thank you. And our next question comes from Henry Coffee. Your line is open.

Yes. Good morning, Bill. All this talk about gain on sale has me reaching for the bourbon in the drawer. If we--.

--You and me both, Henry. You sort of get it vicariously. I have to live it every day.

The $86 million obviously includes about $16 million of the acquisition related costs. And is it--under the assumption that there are no major transactions in the second--maybe in the second quarter, is it fair for us to simply look at that as your core expense rate? I mean, just 86 minus 16, and then build forward from there? I mean, assuming that there's no new major flood of business.

Yes, I think that's fair. I mean, apart from new business, that would be right.

Right, exactly. And then, secondly, you make a great point about the financial returns with obviously, the ROEs on prime MSRs given the capital deployment is attractive. Have you on that front--there have been some political issues surrounding MSR transfers Have you made any headway in terms of developing a U.S. front that will help you address some of those issues?

Are you talk about buying existing pools or originating them?

No, buying. Buying existing pools.

Yes, we have. And as I was alluding to previously--in prior comments that you'll--I think you'll see something there.

And then--.

--Keep in mind--all--keep in mind, all of the agencies will put anything onshore somebody wants to have onshore.

Right.

And I've sat in meetings with at least one of the agencies--I won't go into which one--and they were saying, well, we'd like it onshore. And I said, oh, that's fine. We'll do that. And then, we said, by the way, what's the price? Well, we gave them a price onshore and off shore and they said we're going off shore because we have an obligation to--as the conservator--to get the best value for the taxpayers. We'll do it anyplace. We'll put it on--if you can find somebody who can speak English, we'll put it--I'll put it in Washington, D.C. if they want it. It's an economic issue. It has nothing to do with where you can do it or where we want to do it. We'll do it with whatever our customers want to pay for. And the primary difference in cost between all the players because productivity levels, while some are better than others, the primary driver of cost structure is the location of personnel.

Right.

It costs us one-tenth in India what it costs in the United States. There is no way, nor would you be permitted by any of the rating agencies, et cetera, to deviate materially from numbers of loans per servicer. So the--it's--that is purely an economic issue with regard to it. We will be as efficient, if not more so, than anybody else, but the major driving impact on cost and profitability is the cost of your labor.

And then, on the servicer acquisition front, obviously everybody's looking and waiting to see what ResCap and Ally are going to do. The press has talked a lot about it. I don't know whether you have any thoughts on how that process is going to unfold. Do you think the bondholders are likely to demand an open market bid for the servicing or--?

--It's really--we're not the position at the present time unfortunately, Henry, to comment on that.

All right. Well, thank you. This is very helpful.

Thank you.

Thank you. Our next question comes from Ken Bruce. Your line is open. Mr. Bruce of Bank of America, your line is open.

Thank you. I'm sorry. My question, which I'll get to following the comment. I look at the quarter and it was very good execution obviously with the delinquencies falling and modifications growing obviously and the onboarding of portfolios and the like. That's very good. I guess when you kind of step back and look at what's going on, there is clearly a little bit of a horserace that's gotten set up between Ocwen and Nation Star. It's been alluded to here several times and obviously that's kind of created an interesting dynamic around the stock. But that may or may not necessarily be the right way to think about shareholder value creation. The one that does tend to interest me, as you alluded to in several of your comments, the allocation of capital into the different businesses where you can optimize the returns and ultimately grow earnings. And we're getting a lot of questions as to kind of what that--what the depth of this nonperforming or sub performing part of the market will ultimately be and how you think about that is very interesting. If you could kind of just explore kind of where the--where this can ultimately go from a size standpoint and how you would look to optimize your capital base to best extract the earnings out of that, please.

Sure. I mean, it's--there--the last time I checked there is really not a limit on the amount of nonperforming product that is out there today. There is over--there is well over $1 trillion of portfolios of loans that are not performing in both prime, subprime, Alt-A, et cetera. And if you were to assume that you were to bundle those all into portfolios that had 30% delinquencies, which looks like a subprime pool, I mean you obviously would run into a number that's more than three times greater than that. So you're up to about almost a $4 trillion market potential.

The real key then is really the willingness of the owners or the services--owners of that servicing whether they want to keep it themselves or they wish to get rid of it. I think there is an increasing trend on the part of the large banks to rationalize their portfolios and to begin to more aggressively dispose of portfolios within the market or dispose of servicing out there. And I see a lot of interest right now in the subservicing aspect of it. We're--I just said we're dealing with two large banks right now on flow subservicing portfolio. So you're looking at a company that has like 119 billion of servicing. There's potentially $4 trillion of market available. Most companies, if they were to grow 30% a year, everybody would be going--would think that's just amazing. And that truly is a drop in the bucket compared to the market potential.

But it all depends upon not a lack of mortgage--not a lack of nonperforming loans. My God, there's a--we're almost at an all-time high. It really relates to the willingness of the owners of that servicing to either subservice it or to sell that servicing.

And just as you are looking at the subservicing opportunity, is that you think a byproduct of the agreements that recently have been signed, or is there anything you think is maybe focusing the current servicers' willingness to want to subservice versus sell that servicing?

Well, I think it's a couple of things. I think certainly the--two levels on the agreements. I think the agreements sort of added clarity to the environment for the banks. So I think most of the banks now have a greater--have a vision as to where they'd like to go. I think that was very much a gauging item, the agreement to do this. I think that a certain element of it, too, is banks have requirements to do a certain level of principal reduction mods within that. I think we've done about as many principal reduction mods as the rest of the industry combined. So I think that's--there's some--there's some (inaudible) [fee] behind that. The reason we're seeing I think more subservicing today--we're at--I'd rather produce servicing, but because you deploy more capital and you have larger gross profit. But the reason you're seeing more subservicing I think is because of our cost structures and our quality of bringing down advances. You match that with a bank's cost of capital and it's a pretty attractive alternative for the. So it's--we can put out there--where there's really not a lot of debate about what your capital is worth and everything else, if you really want to go head to head on what is the cost to subservice, we think we'll win that every day.

Right. And you've got a fairly well demonstrated low cost structure. I guess the challenge is always that other buyers can talk themselves into paying higher prices based on the marginal cost that they may kind of use in their fabrication of a particular bid. So that I guess tends to ultimately boil down to who's got the lowest cost of capital in addition to cost structure. I mean, is that how you think about HLSS and other financing opportunities, is ultimately just driving down the cost of capital to Ocwen?

Well, I think in the--certainly in subservicing it's really not a cost of capital. It's sort of mono on mono in terms of what your cost structure is and how--do they think you're effective at reducing delinquencies. I mean, so on subservicing it's a little more straightforward. Obviously, the other part that you mentioned, on servicing it becomes more a cost of capital view. Now, we've tried to be pure as Caesar's spice here in that we happen to like--if you were going to basically take a bit on servicing as a capital provider, we believe it's the smart bet and I think the market shows that because of the discount rate is to bet on subprime servicing. 90% of it is advances, which have zero credit risk and zero valuation risk and 10% is MRS, which has zero credit risk but has limited valuation risk. So we--if we go into the performing--if we go into the performing space on prime product, we are not intending to put that product into HLSS because we think to do so would sort of drive--arguably everything else being equal would drive the required dividend yield up.

We would hope that given the amount of product that's out there in the market that driving the cost of servicing down to the marginal cost of capital in terms of these vehicles is--when there's a very large supply of product is not exactly a thoughtful strategy.

Yes, I would agree.

May I add one thing--or a couple things? We think that as a non-bank our cost of capital is highly competitive. But I think as we demonstrated on the Slide 8, the quality of servicing matters a lot when it comes to bringing down advance rates. So we believe we're very competitive for two reasons. One is I think versus other non-bank institutions, we believe we have a very competitive cost of funds. But more importantly, we're--we've demonstrated our capability to drive down advances and that makes a big difference even if cost of capital was the same.

Yes. It's not even just the interest expenses we show there. We just used over time far less capital than other players because of our ability, as John said, to reduce our advances.

Right. Well, that all makes good sense and I do enjoy the horserace of sorts. Maybe just lastly, if you could maybe give us some thoughts as to how deep you believe the HLSS market to be, just in terms of capital formation for that particular vehicle, if you could address that at all?

Sure. I mean, the short answer is until we do it, we really don't know for sure. And--but if you look at several markets, which we haven't really addressed yet, I think we would be hopeful that we could ultimately not only expand the market, but also drive the required yield down significantly. On a risk adjusted basis, it presents about a 400 basis point alpha. We happen to think the product would be useful in both the pension plan area, where they're looking to get a 7.5% return and very low risk, and also in the retail market with people who want very safe investments and very good yields. Both of those markets we have not yet effectively addressed.

Obviously, the fiduciary or pension fund market or Taft Hartley market takes a little longer to develop than it does with the other institutions that we're--are major shareholders today. And when a stock comes out as an IPO, the investor banks, as you're well aware, tend to put it in for a--it has to be--it's only suitable for growth accounts and high risk accounts, which is kind of a mismatch between what our investment objectives are and how it's marketed. So we're hopeful as we begin to demonstrate our ability to generate excess cash flow and consistent dividends that we will be permitted to access the retail systems for whom the product was really intended, which is really people who want to put money away and be able to sleep at night and still get a nice yield. We think when we do that, the market will be fairly substantial as you see in other sorts of income oriented investments, and we'll be able to achieve a lower return than we have today.

Great. Well, thank you for your comments, and good execution in the quarter. Look forward to talking to you soon.

Thank you.

Thank you. Our next question comes from DeForest Hinman. Your line is open.

Hi. Can--I think you talked about potentially going to the senior secured bond markets - $600 million, if you did do a transaction. Do we have any indication of what the cost of that funding might be?

We said we think we have the availability, but we're not planning on doing it today until we win a large transaction where we need it.

Do you have any indication as to how much that could cost?

Our--at the--[TL] today trades in the high fives is the yield.

Okay, thank you.

Thank you.

Thank you. And our last question comes from Mike Grondahl. Your line is open.

Yes, Bill. Just two follow-up questions. With some of the sellers that you're talking to, can you talk about what's resonating with them and why they're choosing Ocwen? And then, maybe secondly, as it relates to Correspondent One, that appears to be a nice opportunity for some forward flow business in 2013. Any sense on the volume that you might be able to get from that?

Yes. Sometimes--well, I'll try to do them in reverse order there, Mike. We're running comfortable today saying what we think we can do for the latter half of 2012, which is $500 million to $1 billion. Obviously, that is a huge ramp up from what we did in the pilot program. And so, I look at--when we ramp businesses up, we try to start slowly. But it does--you tend to get a fairly exponential growth rate within it. Obviously, if we did $1 billion next year in 2013, that would--we wouldn't be talking about it and we wouldn't be spending the management time and effort to do it. So we would like to be a reasonably moderate sized originator in that product in the marketplace today.

When you talk to sellers, what resonates I think is--are a number of different things, and particularly the longer the term of the relationship. First of all, I mean, let's just be rather clear about it - price matters. So you need to be in the price range. I think the other part of it that's very important is really your operating systems, your ability--first of all, to get flow business from large banks, you have to go through a very detailed underwriting on the parts of those banks to make certain that you will comply with everything, that your systems are sound, that your processes are effective, so that you will be able to provide good quality service to their customers, because the large banks, that is a major concern for them that you will provide quality service. So our ability to provide that quality service demonstrate those systems, processes, and procedures, and our ability to board it without causing massive amounts of brain damage for them really become very important. But you need to--in order to join the club, you have to have a price that makes sense for the. But on the longer term relationships, not just the trade--the longer term relationships really resonate around quality and performance.

Got you. That's helpful. Thank you.

And I have no other questions from the phone line.

Thank you very much. We appreciate your time.

Thank you for participating in today's conference. You may now disconnect at this time. Have a wonderful day.