Onity Group Inc (ONIT) 2012 Q2 法說會逐字稿

Welcome and thank you for standing by. We want to welcome you to the Ocwen Second Quarter 2012 Earnings Conference Call. All participants are on a listen-only mode until the question-and-answer session of today's conference. (Operator Instructions) I'd like to inform all parties that this call is being recorded. If you have any objections you may disconnect at this time.

I now would like to turn the call over to Mr. John Britti, CFO. You may begin, sir.

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

Before we begin, I want to remind you that a slide presentation is available to accompany our remarks. To access the slides, log on to our website at www.ocwen.com, select Shareholder Relations, then under Events and Presentations, you will see the date and time for the Ocwen Financial second quarter 2012 earnings. Click on this and register. When done, click on Access Event. Finally, select 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 the gray button at the bottom of the page pointing to the right. As indicated on slide two of our presentation, we may make 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 to factors that may cause such differences, 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 2011 Forms S-3 and 10-K and the first quarter 2012 Form 10-Q. And if you would like to receive our news releases, SEC filings and other materials via e-mail, please contact Linda Ludwig, at linda.ludwig.ocwen.com.

Our presentation also contains references to normalized results, which are non-GAAP performance measurements. 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 three, 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. This earnings call marks a couple of records for Ocwen. The second quarter of 2012 achieves new records for revenue and income from operations. Revenue for the second quarter of 2012 came in at $211.4 million, while income from operations was $125.5 million, both numbers are roughly double the level of the second quarter of 2011.

Our net income of $44.8 million would have been a record, but for the fact that six years ago, we had a large credit to income tax expense, making this only our second best net income quarter. These records reflect something we have been emphasizing on prior earnings calls, that is the earnings power of our business model as deals mature. Most investors focus on growth and we certainly see a very strong new business environment. However, I'm not certain that the earnings power of the business already on the books is fully appreciated.

Slide four shows how we think about acquisitions in terms of the earnings profile over time based on six actual deal pro formas. As you can see on the left-hand graph, capital requirements start high and come down as we improve delinquencies and collect advances. Moreover we've incurred our highest expenses upfront as we invest in loss mitigation resources and pay transaction-related costs.

As advances and expenses decline, returns increase over the first 24 months and then level out as seen in the graph on the right hand side of slide four. Ron will cover our operating performance in more detail later, but slide five shows how we have consistently met or exceeded our delinquency and advance reduction expectations, with the new deals developing as planned.

The Litton deal is only starting to reach higher margins now, while the Saxon and Chase deals are still in their very early phases. Thus we expect to improve returns and profits over the next several quarters, even then if we were to experience no growth in our servicing portfolio. This higher level of profitability should continue over the next four years, as increase in margins offset run-off as portfolios mature.

With regard to growth, the second quarter showed that we continue to close new business opportunities and that our pipeline remains large and diverse. In the second quarter, we closed four acquisitions of mortgage servicing rights totaling $42.2 billion. On top of these deals we have boarded almost $2 billion worth of delinquent sub-servicing from a large bank. A further $1.1 billion delivery was made on July 31, and we expect to see regular deliveries of delinquent loans from this large bank in the future. We are engaged in conversations with other major banks regarding similar arrangements, and we would expect this to become a sizable component of our new business.

This sub-servicing is generally 100% delinquent, so it represents earnings growth far larger than similar UPB on sub-prime and particularly prime loans. Moreover, it is very efficient from return on capital perspective, as the arrangements do not require us to advance principal, interest, taxes or insurance as we do for owned MSRs.

In July, Ocwen closed the acquisition of a Fannie MSR from a financial institution, and we closed another Fannie MSR acquisition on September 1 from a West Coast mortgage bank. These deals will at $2.7 billion of UPB to our GSE servicing portfolio. These deals saw the scope of our business opportunities as we've added sub-prime as well as GSE/prime at loan servicing for both the seasoned and newly originated loans.

Our new business included both residential and small-balance commercial servicing. The nature of the deals included both sub-servicing and the acquisition of mortgage servicing rights. The second quarter also showed a trend we expect to continue on our new business as some sub-servicing and GSEs, MSRs become larger components of our growth. We believe that the solid UPB growth in the second quarter is indicative of the new business pipeline.

Excluding the ResCap transaction, we are currently tracking new business opportunities with UPB in excess of $400 billion. The ResCap deal on which we intend to bid has approximately $200 billion of mortgage servicing rights and over $150 billion in sub-servicing. As we've stated publicly, we expect Ocwen to be a competitive bidder for ResCap. I would note a few things about this deal to put it in perspective.

First, based on the stalking horse bid for the servicing and origination platform, the overall investment required is less than what we paid for the Litton transaction. Secondly, from a scalability perspective, Ocwen servicing operation offers employers more people than the ResCap servicing operation.

Lastly, ResCap employs a substantial offshore workforce and Ocwen has over 12 years of experience in managing overseas resources. We are also seeing our investments in float servicing channels begin to bear fruit. In July, Correspondent One saw a substantial growth in its funding pipeline. In addition, we launched our co-issue business with our first settlement in July. The combined funding pipeline for these businesses is approximately $195 million.

These efforts still remain early in their development, but we are confident that by 2013 these will be substantial contributors to Ocwen's portfolio acquisition capability. As our GSE business has been expanding, we've been building out our capability to refinance loans under the HARP II program. We would expect to see some impact of this on our revenue in the second half of the year though the impact will be limited by the relative size of our GSE portfolio which currently constitutes only about 10% of our total UPB.

The remainder of our portfolio consists of sub-prime and other non-GSE loans that do not qualify for HARP II. The good news is that these loans have voluntary prepayment rates of only about 2% even during this strong refinance market. This is because the borrowers either don't qualify for new loans or because of modifications have limited incentive to refinance, even if they could. While this dampens potential origination revenue, it also means that our portfolio has low prepayment volatility and more predictable duration than GSE portfolios.

As we have stated in the past, Ocwen is increasingly capable of funding all but the largest new business opportunities without issuing equity. Indeed, Ocwen has remained less leveraged than we could be in order to retain the ability to fund new transactions. If Ocwen were not anticipating growth, we would increase corporate debt to repurchase stock and increase returns to shareholders.

Ocwen continues to generate very strong cash flow that has been used to self-fund recent deals and build out operations to handle new sub-servicing. Operating cash flow for the second quarter of 2012 was over $0.5 billion. Our borrowing capacity remained strong not only because of our cash flow, but the strength of our balance sheet. Advances are 79% of our total assets. These are exceptionally high quality assets because they carry virtually no credit risk. The only uncertainty is over timing of collections as home prices would need to fall by over 97% before we would have any impairment in our ability to collect advances.

On top of these assets, Ocwen had $303 million of uncollected and unrecognized servicing fees related to delinquent borrowers as of June 30, 2012. Some services accrue these as revenue and carry them as receivable on their balance sheet. These unrecognized servicing fees do not appear on our balance sheet and Ocwen treats them as revenue-only as they are collected.

In addition, Ocwen treats its MSRs differently than many servicers. We carry MSRs at the lower of cost or market and amortize them over the remaining life. Moreover, valuation of our MSRs is based on industry level costs. If Ocwen were to take into account our 70% cost advantage in servicing non-performing loans, the implied value of our MSRs would be roughly triple their current book value as shown on slide six.

This earnings power embedded in our current balance sheet does not account for other sources of value such as superior advance reduction capabilities and sub-servicing contracts. Yesterday, we completed our second flow transaction with HLSS selling rights to MSRs for approximately $2.1 billion of UPB. Further details on the sale are in on our second quarter 2012 10-Q filing.

The strong pricing of HLSS's stock suggests that we should be able to raise follow-on offerings in the coming months to further strengthen Ocwen's ability to fund new transactions and move toward our long-term goal of turning Ocwen into an equity-light fee-for-service business. The impact of this should be higher returns on equity that 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% pre-tax return on its capital.

I'll now turn the call over to Ron who will cover our operating results and servicing capabilities in more detail. Ron?

Thank you, Bill. As Bill mentioned, the integration of Litton continued to meet or exceed our expectations. As you can see on slide seven, Litton revenues have ramped up as a result of our modification efforts that drove a 4.2 point decrease in delinquencies during the first half of 2012.

The Saxon and Chase transactions, being new this quarter, have not yet seen the impact of our modification programs but early results are very promising. It is generally true that when new portfolios transfer, delinquencies rise. Once again, however, as with the Litton transfer, our strong onboarding capability has immediately enabled us to improve performance.

We saw non-performing loan rates fall by 1.8 points on the newly boarded Saxon portfolio and 70 basis points on the Chase portfolio. In the first quarter, we reduced overall delinquencies from 25.6% to 24.5%. Excluding newly boarded loans, that were on average more delinquent than our existing portfolio, the reduction would have been 1.8 points or 23.8%.

We completed 21,943 modifications in the quarter maintaining our strong pace from the prior quarter. The June rollout the HAMP Tier 2 is having a temporary dampening effect on modifications as it requires re-evaluating loans for the HAMP program. Nevertheless, we expect the longer-term impact of HAMP Tier 2 to be positive as more borrowers will [call up] for the HAMP program.

For the third quarter, we expect modifications to be between 16,000 and 20,000. The HAMP portion of modifications increased from 14.8% in the first quarter of 2012 to 20.5% in the second quarter. Principal reduction modifications, including our shared appreciation modification or SAM accounted for 68.3% of total modifications. SAM alone represented 28.3% of total modifications.

As shown on slide eight, we continue to make substantial progress in reducing advances. In the second quarter of 2012, new advances declined by $321 million, excluding advances acquired in the quarter and the sale of assets in May to HLSS. Had we included the asset sold to HLSS, the reduction would have been $392 million. More detail on our second-quarter results are available in today's earnings release and our second quarter 10-Q which we expect to release tomorrow.

As Bill mentioned earlier, we are seeing an increasing opportunity to provide sub-servicing for banks. These opportunities in sub-servicing are bolstered by the federal bank consent orders and the state AG federal agency settlements which have pushed banks to find partners that can help them meet government mandated goals. Ocwen has always viewed government settlements and agreements as de facto standards. But we have kept pace with the development by updating our systems and processes to adhere to these requirements. This has positioned Ocwen as a strong partner and solution provider for banks subject to the settlements.

Ocwen also brings other advantages to the sub-servicing business. Ocwen is the only industry player with an extensive record of boarding large transactions, while successfully reducing delinquencies. This capacity is crucial to banks with large servicing requirements. Industry observers believe that the settlement will expand to other banks which will further support sub-servicing growth.

In addition, we expect to see sub-servicing opportunities on newly originated products from smaller players that historically sold servicing but are now choosing to retain servicing. Ocwen's reputation as a specialty servicer is an important component of what helps us grow.

Over the years, we have consistently demonstrated our performance in two ways. First, we've had excellent results in what amounts to a real world experiment comparing servicer performance. Note that prior to our acquiring them, Saxon, Litton and HomEq although highly respected servicers were all losing money. Having boarded these portfolios on our platform and rapidly reducing delinquencies, we are now earning a strong return on our investment.

Second, Ocwen is consistently ranked as a top sub-prime and specialty servicer in studies conducted by third parties. These analysis were not commissioned by Ocwen so they represent objective evaluations of performance. For further information on these studies, go to ocwen.com.

The last topic that I wanted to cover is the news of local governments potentially using eminent domain to force performing loan sales to private investors that would then modify the loan terms. While I won't comment on the wisdom of government intervention in private contracts, we don't believe that Ocwen has substantial exposure for a variety of reasons.

First, any actions are likely to be tied up in court actions for many years as there are important constitutional issues that would likely be argued all the way to the Supreme Court. Second, the concept appears confined to a small number of localities. Third, Ocwen's commitment to sensible loan modifications aimed at helping borrowers stay in their homes means that we have, in many cases, done what the local governments are seeking to do, albeit via more direct means. Lastly, even under a worst-case scenario, we do not see any risk to our collection of advances.

Now I'd like to turn the call over to John Britti. John?

Thank you, Ron. We only have one normalizing item to mention on slide nine. We incurred $1.8 million in transaction related expenses. All of these expenses were for the deals that closed in the quarter. Backing these costs out of our pre-tax income resulted in normalized pre-tax income from continuing operations of $72 million for the second quarter of 2012. This is a 71% improvement over Q2 2011 and a 35% improvement versus the first quarter of this year. These improvements are largely attributed to growth in our servicing portfolio and our ability to reduce delinquencies and unit cost.

At the end of June, Ocwen's liquidity position as measured by unencumbered cash plus unused collateralized financing capacity was $128.1 million. This was equal to our cash position at the end of the first quarter, because we borrowed under advanced facilities to support the four deals that we closed in the quarter. Cash flow from operations in the second quarter of 2012 was a robust $527.6 million. This strong cash flow from operations allowed us to call all $26.1 million of our 10.875% Capital Trust Securities on July 31.

In the second quarter of 2012, Ocwen also paid down its senior secured term loan debt by $21.5 million, and we will make a further $7.2 million pay down as a result of yesterday's [flow] asset sale to HLSS. As we anticipate further asset sales to HLSS and the ability to borrow in the senior secured debt markets, it is likely that Ocwen can fund substantial additional growth without issuing new equity. Thank you. We would now like to open up the call for questions.

Operator? Operator?

(Operator Instructions) Mike Grondahl, Piper Jaffray.

Yes, guys. Congratulations on a very strong quarter. First question just gets at revenue. Servicing revenue as a percent of average portfolio was up about 10 basis points sequentially to about 74 basis points. Is that a level to use going forward or does it trend back down a little bit?

I think if you look at slide seven, you can get a pretty good indication of how we can maintain those higher levels for an extended period of time. They don't trend down immediately. I think long term, certainly they will revert to closer to the 50 basis points contractual level. But as you can see, just on the Saxon portfolio, we've remained elevated for several quarters and it is sustainable for some period of time. And as we mentioned, we have delinquent servicing fees of over $300 million and those -- that's what drives up that higher level of earnings.

John, I might point out that when they return to the contractual level of 50 basis points, we'll have zero advances and virtually no employees.

Gotcha. And then just on interest expense, it looked like the average rate picked up a little bit to about 7%. What do you see as the rate going forward?

Interest expense picks up to some extent because of the, as we've explained in the past, because of the HLSS transactions. But I don't think that -- in fact our interest expense and the rates that we're paying are actually falling, and we expect that we should be able to control that better than we have in prior quarters going forward.

Gotcha. And then Bill, could you give us some sense or range of UPB that you think you would add over the next six months to 12 months?

You know how much I hate that question, Mike. I think that -- I think I defer on that. We certainly have an extremely robust pipeline. You've seen the amount of business that we've been able to book in the first half of this year. So we perceive we will continue to be able to grow. But I think that given the nature of this business, trying to forecast specific growth rates is very difficult because the deals are extraordinarily -- tend to be very, very lumpy.

We are, as you do see however, we are gaining a reasonable amount of flow business, the business that'll come in quarter after quarter and hopefully grow, but you still are subject to large transactions that they're extremely difficult to forecast their timing.

On that flow business, that is a 100% delinquent, the profitability on that must be much greater several times your traditional business, is that correct?

From a return on equity standpoint, it certainly is (multiple speakers) required.

Maybe just lastly, Bill, in thinking about the ResCap transaction, what is Ocwen's weakness in going after that? I mean, where is the hole or Ocwen's weakness? I mean it seems like you have a number of strengths, but I'm trying to just think what makes it challenging for Ocwen?

It would be more on the origination side of the businesses attending to the GSE portfolios. However, as the transaction, month after month moves on, with a very rapid prepays, those portfolios, not those specific to ResCap, the type of product is experiencing very, very rapid prepayments. So it actually becomes less significant as the months roll by.

Okay, great. Hey, again, nice quarter, guys. Thank you.

Thank you, Mike.

(inaudible) Ryan Zacharia, Jacobs Asset Management.

Hey, guys, thanks for taking the question. I got a few of them. Can you just explain the sequential increase in expenses, operating expenses relative to the increase in UPB? We saw this last quarter as well and since Q3 2011 your UPB is up 50% on average but your operating expenses are up more than that. So maybe can we read into this that it's just costing more to service these days with no point of contact and complying with some of the regulatory changes?

Ryan, this is Ron. I don't know, that we would necessarily attribute it to those factors although we have taken certain steps which do have modest increases in expenses related to those factors, but I think it's more of a function of the fact that we did over hire as part of the various transactions that have come on, and we're in the process of correcting that through a combination of additional growth, normal attrition and right sizing through reductions of low performers.

Growth does compress margins as we are at our highest spending [per] loan early on as we invest in loss litigation and incur up for onboarding costs and transaction related expenses. So margins improve as deals mature. So we would attribute it to those factors mostly.

So how much of the operating expenses do you think embed or contemplate future growth? We saw operating expenses rise 20% and sequentially I wasn't expecting that because I thought that there is a lot of kind of ramp for Saxon and JPMorgan already in Q1 which I thought was high. So how do we think about the addition of UPB and incremental operating expenses going forward?

Ryan, maybe you can help me understand what the increase you're looking at [because larger] operating expenses declined slightly, total operating expenses.

So, operating netting out one-time expenses and not including amortization.

Okay. Because of part of the issue you had during the first quarter, while we incurred a bunch of transaction-related expenses, we were ramping up our operations in that quarter. And I think our guidance was that we would be maintaining our level of operating expense and I think that's pretty much what we've done in the second quarter.

Let me try a little bit, Ryan. I mean you point an excellent question. I mean the good thing about it is that expenses are slightly more controllable than revenue, and I think a couple of things. Let's look at it from two perspectives. I would look at it as a margin question as opposed to an absolute dollar per UPB or dollars spent per UPB. The first thing to have happen is we are seeing shifts in our business composition, it's still very profitable business, but highly delinquent portfolios. We have much higher staffing levels but much higher incentive arrangements with regard to those. So we don't consider that to be a low-margin products. So you will see expenses go up, we're getting product that has to be conducted in the United States, and we are getting paid for that. So we will see some, if you will, secular change as a result of that type of business.

But overall, I think as Ron said, we would expect our in a steady state basis, our margins to be stable to improving from what they were. But as we add new business; A, it is more expensive when you board and that's part of that whole ROE ramp, the cures we show on slide four. We spend a lot of money upfront to drive down advances and we've -- and delinquencies and advances and you've seen that in these portfolios. They have come out of the chute from the day of transfer almost that we've been able to drive down delinquencies which is almost unheard of in the business. And the second is, we did over hire and we intend to adjust that. But we're not -- we're working very, very hard constantly to try to improve the effectiveness of our servicing operation which by force actually reduces our cost. We've been very effective over the years at continually making ourselves more efficient, and we don't see any reason for that not to occur. So we are very mindful of fact that our costs were higher this quarter, and I think you'll see management take appropriate steps to deal with that.

Okay. Can you give a little bit more color on this MSR funding vehicle that was mentioned in the text of the press release?

You mean HLSS?

Is that what it's referring to? It's that entered into three new servicing advance facilities and an MSR funding vehicle?

I am sorry. John, would you like to take that?

Well, I can take that. I mean, historically we have not financed really since going back probably to the mid-2000s, financed directly our MSRs. But on one of the transactions that occurred during the quarter, one of the GSE transactions, we were able to actually finance a portion of the MSR through a funding vehicle.

What's the cost of that?

The details on that will be in our 10-Q.

That's fine. And then on the delinquent subservicing that kind of fee for service business, what kind of fees do you get on that?

Fees are not -- don't tend to be in basis points. We have [a whole] -- we get incentive fees as well as fees based on -- typically based on loan level status. And so it's hard to quote a number, and even if I -- and I wouldn't quote a number because those subservicing contracts tend to be private contracts with confidential terms. And we also wouldn't disclose it because we wouldn't want to provide information that's valuable to competitors.

Right. Did you guys have any on-site exam yet with the CFPB and has anything happen with the FTC Civil Investigative Demand?

We have had no on-site exams from the CFPB. We have been made aware that whatever it was that the FTC was looking at they have handed off to the CFPB. But other than that, we don't have any other updates.

And then last question, just on the agency MSRs, can you give us a little bit of color about what those are? Are they largely performing? What's the vintage, what's the coupon? And then how are you handling a resize in that portfolio, and how does that tie-in with Lenders One and potentially Correspondent One work? How do you potentially recapture a resizing that portfolio?

Well, let me first -- the vintages tend to be that pre-2008 -- 2004 to 2008 would be the dominant portion of them. It's not entirely that, but they tend to be a larger portion. They tend to have higher than average delinquency rates for GSE portfolio -- for GSE loans, but lower than sub-prime. But it does appear based on the deals that we've seen in pipeline that it would be wrong to suggest there is a single metric that I could use for that because the deal we just did had about, I think, about a 15%, [90-plus] delinquency rate but we would -- we're seeing some in the pipeline. It might be much higher than that. So I don't want to lead you astray with that.

We also -- I think as we mentioned in the -- in our prepared remarks that we are -- we do have the option of being able to refinance these loans through HARP II -- for HARP II and we have been working with some lenders, loan lenders on other activities that might be related to originations. But I don't want to get into detail on that, but we do work occasionally with Lenders One lenders on that.

Okay, great. Thanks a lot guys.

(Operator Instructions) Bose George, Keefe, Bruyette & Woods.

Hi, good morning. So first thing, do you have an average servicing portfolio size for the quarter? Given the timing of stuff coming in, it was a bit hard to calculate.

(inaudible) average for the quarter. You know what, let me not -- let me check that number.

I mean, Bose, to think about it, the Saxon and the Chase deals closed on April 2. So there were there for the entire quarter. The larger GSE portfolio that we had announced earlier came on around mid-June. So there was a little bit of things that occurred in the middle of the quarter. $1.9 billion of the small commercial thing came on at the beginning of June, but the big subprime deals were there for the whole quarter and the GSE portfolio came on mid-June, if that helps you, but we'll also try to get that number out as well.

And that's very helpful. Thanks. And when you think about the $303 million of deferred servicing, is there kind of a weighted leverage life we can use to run that through earnings?

I mean it never really goes to zero, but -- because there is some replenishment to the extent that we have outstanding delinquencies, but I think -- but [I was just going to say], I think it's fair to say that the way those get collected kind of happen in two big chunks. One is, as a result of resolving loans through -- primarily through modifications rather non-foreclosure method. And then secondarily through foreclosure on REO sale. So I think that the longest period of time would be related to some kind of average timeline for revolving loans through that period. And I think that should run no longer than, say, like two years.

And that's two years for the foreclosure bucket and something much shorter for the modification bucket.

Yes.

One thing -- the slides that show our delinquencies coming down that you take each of the deals and multiply times the UPB and the run-off, you take the run-off of UPB, take the delinquency percentage times and then that's how you would -- I suggest you to amortize that DSF, the deferred servicing fee into income.

Okay, that makes sense. And then just a quick follow-up on the expenses, is this quarter's number a reasonable run rate for next quarter, assuming no meaningful acquisitions or other changes?

Yes, I mean, I think if you back out the one-time acquisition costs that we talked about and as I mentioned, we continue to try to right size for some of the over hiring. But I think that what you've seen this quarter is a reasonable expectation for steady state for at least this quarter.

Thanks. And one last thing on HLSS, in terms of your decision to move stuff to HLSS, is that going forward, just contingent on HLSS having the capital or do you need other investment opportunities or just how are you thinking about that?

It would -- HLSS has been -- somewhat careful of how I speak about another company, but HLSS's capacity to buy relates to it -- its flow deals are that we just -- the two flow deals we did was really through -- primarily through excess cash that we generate over and above earnings and the dividend and then basically to do larger deals, we need to do a follow-on offering.

Yes. And then, Bose, I think from Ocwen's standpoint, we are prepared assuming the pricing is right and everything to sell additional assets to HLSS whenever they are in a position to acquire them.

Okay, great. Thanks a lot.

Ken Bruce, Bank of America Merrill Lynch.

Thank you. Good morning.

Good morning.

I guess, I would like to also delve into the subservicing a bit more. I understand, you're not going to provide us with some of the revenue items, but just in terms of the way to think about this business as it grows, what -- how should we -- are these performance-related fees always, so there is no kind of incremental revenues associated with them or what's the general top line? And then if you could just give us some sense as to how to think about margins on the subservicing, please.

I'll take that, Ron. You can jump in, if you like. But I think the -- first of all, generally, the contracts have regular servicing revenues associated -- monthly revenues associated with the status of the loan. So typically based on how delinquent it is or whether it's in bankruptcy or foreclosure [OREO] for example. And then in addition to that, there are incentive related fees for modifying the loan or other short sales or other activities that we might engage in for loss mitigation.

I think one way to think about these would be from a gross margin standpoint, they would tend to be not that dissimilar from what we get across our business as a whole.

And then in terms of the scope for this part of your business to grow, is this -- I know, in prior quarters you've had this discussion as to whether the market was tilting more towards subservicing or asset sales. How do you see this particular piece of the business growing with the opportunities that looks like?

I think we continue to see both -- we continue to see that there is both opportunities. There is going to be MSR opportunities and there is going to be subservicing opportunities. I think the important thing to keep in mind is what we kind of referenced in this -- in the prepared remarks is, now that we've done a couple of transactions with one large bank, it means that we've gone through their process and have been approved through their process which, as you're familiar, if you looked at any of the OCC consent orders, there is pretty robust vendor management requirements for the large banks.

We mentioned in here that we're working with at least one other bank going through a similar process. So as you get through those processes, it opens up the opportunities, start receiving business from them. We do think, as we said in the prepared remarks that with some of the settlements and things that have been out there in the industry, it provides added incentive for certain big players in the market to utilize services of specialty servicers like Ocwen. So I think over time, it will become a bigger piece of our business just because we're getting approved to the process and I think with the settlements now, sort of clarity on those, it allows the other sides to start executing on their strategies, but we would definitely expect to still see MSR transactions as well.

Okay. And then as you look at these different opportunities, are you contemplating being able to leverage your offshore capabilities more or less within the subservicing, kind of get that to some of these questions around the expense management right sizing the operations?

It's a little hard just to focus on expenses. I mean I think like Bill said, it's best to focus on margin because we are not -- we're indifferent to where the work is done but we would expect, that if there is requirements to do certain things, I'm sure that we would then receive higher revenue. So, it's more about margin than it is about where the work is going to be done and what -- it's very difficult for us to give you projections on what the costs are going to look like related to that business because each transaction may be different as far as what kind of work will be done where, but our intent is to focus on margins.

Okay. So I think we can say to date, Ron, that the subservicing we're getting is heavily -- heavy US based component. But we are very -- we're very comfortable with the margins that the business will generate.

Good. Okay. And then I guess, as a follow-up to that, you've mentioned in expense management, you want to right size, you're correct. Maybe what is a little bit of a [broader] cost structure is, at the same time you're talking about significant growth potential. I mean, how do we reconcile or how do you square that circle, if you will?

That's a good question. I think when you look at where we were leading into the second quarter and through the second quarter, we had a number of signed deals that we knew for sure were going to occur or had very, very high probability and that allowed us to trigger making significant investments to make sure that we were prepared for those. We do intend to maintain capacity for the opportunities that are out there. So, we will always be running here with some excess capacity to prepare for those. But I think what we're trying to say is that, we over hire to make sure that we can hit the cover off the ball on the deals that we knew we had in hand and there is some opportunity for us to do some right-sizing there while still maintaining the ability to grow for opportunities that are out there.

Okay. And then -- thank you. That is helpful. Bill, if I could ask maybe one question, you mentioned in your earlier remarks about the potential to effectively utilize the relationship with HLSS and the different cost to capital. We often get a lot of questions as to why not just embed these businesses within or have these embedded businesses with Ocwen. Why wouldn't the market effectively look at that similarly to the bifurcated businesses? You've made art of bifurcating specialized assets? How do you look at that somewhat theoretical question?

Well, I don't think the market has. I mean, if we substantiated -- I think we've substantiated the extremely low volatility of our asset base that we've been successful and we hope to be more successful as we get to what I would call the natural buyers of the product. But we've been successful in our limited sense of showing that the market should value our assets at around 8% yield. Clearly, Ocwen trades at a much higher effective yield than 8%. I mean multiples of that. Yes. So, if you were to -- just to bring clarity to the assets then also on top of that is the operating capacity of the business. Ocwen would trade at a -- would trade at a multiple of its current share price.

So I understand the efficient market arguments but I haven't in our case maybe it's -- in our case I haven't seen that occur. So, we were trying to make it much clearer and more transparent to our investors. And also it attracts -- one of the advantages is it attracts another set of investors. People who want to get income and HLSS, on top of that provides a very tax-efficient means to pass that dividend through to those investors. So, we don't lightly take -- we don't lightly create another company because there's a lot of work overhead and [at some] there is a degree of friction or inefficiency of doing that. We only try to do it where we think it can provide better clarity as to what that underlying business is all about.

Great. Thank you very much. Appreciate that.

Henry Coffee, Sterne, Agee & Leach, Inc.

Yes and congratulations, Bill. The market obviously likes what you're delivering here.

Thank you.

Two unrelated sets of questions and then kind of just a small item. As the business evolves, what are the limitations or restrictions on Correspondent One. I'm assuming you have all your licensing done, you are testing out the software before exciting the wholesale and various correspondent channels and [droves]. What are the restrictions to turning that into a real active part of the business, and when you do do that can that become again another way for you to take advantage of the resize in some of the agency MSRs you are buying?

No, we think it can. We've always been fairly cautious operationally as we start new businesses. I mean origination -- unfortunately the origination business is exceptionally hot right now. So that costs us that caution, if you will, with regard to it. But the origination business, you need to do it. You need to do it well and in this day and age you need to do it perfectly because of the ongoing reps and warranties that one is supposed to make. You don't want to basically be making tons of loans today and then find out three years to five years later that you are writing -- stroking massive checks with regard to it. So I think you'll continue to see us -- I think in a prudent manner try to you grow that business. I think it would have a tremendous long-term opportunity. I want to make sure out of the box, that we don't damage that franchise in any way possible. It's important we not only we do well by Ocwen, it's also important we do well by our business partners in terms of the members of Lenders One. So it's growing -- July was a very large increase from a very, very, very small base, but you'll continue to see that growing. We think it's an important asset and we want to [asses it before we book].

And when it becomes a meaningful part of revenue, it will show up its own revenue line and then ultimately its own business line inside of Ocwen in terms whatever contribution is there. How would that ultimately work?

I think you'll see that reported. John is probably better at knowing exactly what income line it'll have, but I'm sure it have its own. It'll be reported separately as a separate line of income (multiple speakers) revenue.

Once we deem it as a significant or material contributor then we would likely break it out separately.

And then, on ResCap obviously, you'll be one of many putting in bid packages. We won't ask you too much, because obviously it's going to be very competitive, but there seems to be a regular news flow about activity surrounding that the lawsuits from some of the minority securitization holders. It's almost like every other day. How item sells, they said they wanted to fast track this thing. Can you give us some sense of what you think the ResCap timeline looks like? And are there any sort of outside obstructions to that that could really slow the process down?

Fast-tracking a bankruptcy processes is --

Yes. It's like 10 years instead of 12 years.

(inaudible) I think the bid is, correct me if I'm wrong, it's around the end of October.

Right.

And I don't think the projected closing, I think this is public -- it's a public information. Ron or John (multiple speakers).

[There is their 8-K, guys].

Yes. No, it's public. I think their intention is to close. They would like to close around year-end early this fall or early 2013.

And you haven't seen anything that would gum up that process in a real way yet?

The problem with the bankruptcy process is, as you know, that there are probably hundreds of things that gum it up. So we don't -- we probably -- we haven't seen anything. We only read, but you read which is public information or we can only disclose certainly and we haven't seen anything which is just otherwise that -- there is nothing right now, but there are any number of things that can gum up the process. So it's hard to say.

Amortization, small item amortization, cost of course jump up, that's the new acquisitions. Is this the regular run line or does that sort of taper off over time?

Well we did had some more MSRs late in the quarter. So I wouldn't just take the number that you saw in the quarter and say that's the run rate because the amortization does tend to trend down over time but we added more MSRs late in the quarter to the big GSE portfolio that we brought on. So you only had a very small amount of amortization for that particular deal.

But there wasn't any unusual adjustments in there or anything?

No.

Great. Well, [listen], congratulations, again and thanks for taking my questions.

Thank you, Henry.

Thank you.

Bob Napoli, William Blair.

Thank you. Good morning.

Good morning.

Most of my questions have been answered. A couple, just on the -- this is a numbers question, the $127.8 billion of unpaid principal balance, how much of that is subservicing?

Currently -- in the current amount.

Right. Of the $127.8 billion, how much of that was subservicing at the end of the quarter?

I'll get you the exact number but it was -- it would have been less than $10 billion.

Okay.

It was 10%, I think. Right?

Yes. It was, but in this case it's a little bit -- it's less than $10 billion.

Okay. Just on --

Actually, John, I think -- just I think I have got it here. It's actually about $15.7 billion is the subservicing component.

Great. Thanks.

That includes some of the commercial stuff that we do as well. But --

Okay.

But mostly it's residential.

The cash taxes in the quarter, what was the cash tax rate and what do you expect the cash tax rate to be over the next couple of years?

Well, actually, we've put up a -- the cash tax rate?

Right. That's right. We have to (inaudible) tax asset.

Our GAAP tax. I'll get you that, I'll get you that in a minute. Ron answered the future tax rate question I'm opening it up. but it should that minute Ron ability well into the future tax rate question, why would we. We think that our tax rate going forward will be probably the part of the 4th quarter significantly below our current tax rate okay.

Right. (multiple speakers) deferred tax asset?

Let me find the cash. We've put up the 36% as our GAAP tax. I'll get you that. I'll get you that in a minute. Ron or Bill, do you want to answer the future tax rate question while I am [working that out]?

We think that our tax rate going forward will be probably by the fourth quarter significantly below our current tax rate.

Okay.

We are not 100% there yet with regard to that, but we do have the initial steps and approvals to effectuate a lower -- a significantly lower tax rate than we are incurring today.

Okay. Again a follow-up on that. Just on the CFPB, is there -- I mean, what step is next with the CFPB? I mean there -- I mean looking at a whole bunch of industries and really the amount of compliance work that people are having to do in different industries is very substantial. And with the servicing industry, what's the next step with the CFPB and with Ocwen and with the servicing industry broadly?

Well, the CFPB has made it clear that mortgage servicing is going to be an important part of what they're going to regulate and oversee. Well, I think we look at it as having a real regulator of our industry at the federal level in the long term provide some consistency and clarity on what the practices need to be. So we view that as a positive.

The fact that there has been some pretty large settlements out there that have included best practice type standards, we would expect that the states and the CFPB at least use that as a starting point to look at what they are going to develop and the CFPB has announced that they will be coming out with their own standards, and we're waiting for that as everybody else is. But I don't know that we're not necessarily expecting any tremendous surprises from that and that there's already been a lot of information out there through some of these other actions that are already taken place. So, yes, I mean as a non-bank, we will eventually see them probably do regular exams and do what regulators do, but that's pretty normal course type activity. And we don't expect that policies or practices that they've put in place to be anything that'll create an undue burden for us.

And just last question. On the Fannie Mae servicing, did you say who you bought that from and how competitive -- is that competitively bid? Was that --

It was competitively bid and we didn't say who we bought it from.

Okay. And have you guys -- you're not really getting any subservicing yet from Fannie Mae, is there any update on being able to get subservicing directly from Fannie Mae?

Well, our understanding is there's not that much to be given any more.

Okay. All right.

By the way, the only -- the difference between our -- we put up an increase on our deferred tax asset of about $112,000.

Okay.

As you grow in certain cases Bob, as you ask, you actually have -- the servicers actually have a cash, as you know, a cash tax rate that is above their actual GAAP, reported GAAP rate.

Okay. Thank you very much. Congratulations.

Okay, Bob, to fill you in a little more about what you asked on the tax position.

Right. Yes.

I think we're extremely close to on a project we've been working on for closer to two, three years. Yesterday, we received approval from the Economic Development Commission of the Virgin Islands, and it requires one final signature to basically put that in place. So, our expectation is that we will have the 30-year tax credit that will substantially reduce our effective tax rate going forward.

I'm sorry tax credits, that would that rate down to --

We believe it'll be mid-high single digits.

Okay. And that's through the Virgin Islands?

Yes.

Is that -- I mean, how do you -- okay. All right. Good news. All right. Thank you. Take care.

You're welcome.

Jordan Hymowitz, Philadelphia Financial.

Thanks, guys. Can you hear me?

Yes, thank you.

Two quick questions. (inaudible). One, are you guys more focused on modifications on foreclosures at this point or is there an emphasis on one versus the other?

I mean -- we've always been --

Let me put it this way, (inaudible) that question differently. With the Fannie Mae contracts specifically, was there any additional push to push for more modifications, even more so than you usually do?

No. And with Fannie Mae, you follow the GSE rules. So, I wouldn't say there is anything beyond the fact that it's GSE, that there is anything different.

Okay. I assume Fannie Mae approve this transaction from the bank that you purchase, correct?

They have to approve the transfer.

They have to approve the transfer?

Yes.

Okay, thank you very much.

Thank you, Jordan.

I have no further questions at this time.

Okay. Well, thank you very much everyone.

Thank you.

This concludes today's conference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.