Onity Group Inc (ONIT) 2012 Q3 法說會逐字稿

Good morning, and welcome to the Ocwen third quarter earnings call. All participants will be able to listen only until the question-and-answer session. (Operator Instructions). This call is being recorded. If you have any objections, you may disconnect at this time. Now, I would like to introduce John Britti, Chief Financial Officer. Sir, you may begin.

Thank you, good morning, everyone. Thank you for joining us. My name is John Britti, and I'm the Executive Vice President and Chief Financial Officer of Ocwen Financial Corporation. 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 presentation, you will see a date and time for Ocwen's financials third quarter 2012 earnings. Click on this and register. When done, click on access events, 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 on the gray button at the bottom of the page pointing to the right. As indicated on slide two, our presentation may contain certain forward-looking statements pursuant to the Safe Harbor provisions of the Federal Security 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 statement.

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 2011 forms S-3 and 10-K, and first and second quarter 2012 form 10-Q. 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 and adjusted cash flow from operations which are non-GAAP performance measures.

We believe these non-GAAP performance measures may provide additional meaningful comparison between current results and results in prior period. Non-GAAP net 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 Ferris, President and Chief Executive Officer of Ocwen. Now, I will turn the call over to Bill Erbey. Bill?

Thank you, John. The past several months have been extraordinarily productive. On today's call I will cover three topics. First, I will review our strong third quarter results. Second, I will discuss our competitive profile especially with regard to substantial developments in our funding efficiency. Finally, I will discuss our recently announced acquisitions and what they mean for the future of the Company.

Highlights of our third quarter results are shown on slide four. Ocwen earned $51.4 million of net income, or $0.37 per share on record setting revenues of $232.7 million. Income from operations also reached a new high at just under $140 million. All of these numbers are substantial increases from prior year results and healthy increases from the second quarter this year as well.

These results will continue to improve as the existing portfolios age. Moreover, our consistent ability to drive financial performance on newly acquired portfolios gives us confidence that we will deliver strong results on recently announced acquisitions. As we have stated in the past, our competitor profile is the function of three factors, cost of service, the level of delinquencies and advances, and cost of capital and financing.

Slide five shows Ocwen's substantial cost advantages in servicing non-performing loans and sources average industry costs largely as a result of proprietary technology and process that we've developed for decades. Our cost of servicing non-performing loans is approximately [70%] lower than the industry average. Our existing cost advantage will be further enhanced by the re-organization of our overseas operations under Ocwen Mortgage Servicing or OMS, which is located in the economic development zone in the United States Virgin Islands. I have relocated the same core USVI and we've moved a substantial of Ocwen's assets under OMS.

We also expect to start up call center operations in the United States Virgin Islands within the next 12 to 18 months. We anticipate these changes and we'll streamline global operations and lower our overall international tax rate to around 10% on existing assets. We expect to start seeing substantial impact from these changes in the fourth quarter. The future effective tax rate will vary based on a variety of factors such as the mix of business and a potential retention of mainland US operations from new acquisitions.

Slide six shows our consistent performance in driving down delinquencies and advances on acquired business. But also, that these portfolios were previously managed by servicers that were considered among the best services in the business. So it is no mean feat to rapidly improve upon their results. John will provide some additional information later in the call in our ability to bring borrowers current.

The third component of our competitive profile is diversification and efficiencies in our sources of financing. The recent success by HLSS in tapping both debt and equity markets bodes well for Ocwen's funding efficiency. In September, HLSS raised almost $250 million to purchase rights to MSRs from Ocwen. The success of HLSS's capital rates proves our ability to execute the capital lite strategy we laid out almost two year ago. Additionally, in October, HLSS broke new ground in the advanced funding market by issuing an asset backed security that was heavily oversubscribed.

HLSS reports that it was able to reduce its advance of funding costs by almost 130 basis points while extending the tenor. We believe that this approved funding makes Ocwen even more competitive. Further asset sales to HLSS combined with senior secured debt should be sufficient to fund the Homeward and ResCap acquisitions without the need to raise new equity at Ocwen beyond $162 million in preferred shares paid as part of the Homeward transaction.

Ocwen's low cost structure, ability to bring down advances, and efficient funding translates into strong cash flow for the Company. As mentioned in our quarterly highlights, Ocwen generated $533.5 million in operating cash flow excluding a reduction in match funded advances in operating cash flow results in $201 million of adjusted cash flows from operations in the quarter. We show this metric over the past three quarters on slide seven and compare it to net income. We believe that this is the most accurate measure of the economics of the business and neutralizes the impact of varying accounting policies.

Based on our current market cap of about $5.2 billion this would represent a 6.5 multiple on annualized third quarter adjusted cash flow from operations. Now, let's turn to the acquisitions that we announced over the past several weeks. Let me first emphasize that we have extensive experience in successfully managing large servicing acquisitions and we have been planning for these opportunities for many months. These acquisitions provide both profitable near-term portfolio growth, and perhaps more importantly a variety of capabilities to substantially improve Ocwen's future competitive position.

The Homeward and the ResCap acquisitions will add almost $200 billion in MSRs to our portfolio, and at least $37 billion in self-servicing based on UPB at the end of August. While obviously adding substantially to our earnings growth potential, both servicing operations also contributed high quality capacity and added breadth in management, work force, operating facilities, and product experience that we can deploy on future businesses of development. We had indicated last quarter that we had a pipeline of over $400 billion in addition to ResCap.

While Homeward has now moved through our pipeline, some new items have come into it. We're currently tracking opportunities over the next 12 to 18 months in excess of $350 billion of UPB. Moreover, we still believe that the market can see upwards of $1 trillion or more in MSR and sub-servicing transfers over the next two to three years. All this suggests that we will very much need the capacity and capabilities that we are acquiring. Ocwen's long-term replenishment and growth strategies will also be transformed with the acquisition of originations businesses from Homeward and Genworth.

The Homeward acquisition accelerates our previous strategy of building correspondent lending and flow servicing acquisition capabilities. Homeward has a very experienced team that has been originating approximately $800 million per month primarily in the correspondent channel. We expect to fall into the Homeward business our own Correspondent One efforts. The Homeward team has also developed a direct to consumer capability to capture capability that will accelerate Ocwen's ability in an area essential to the economics of prime loan servicing.

Yesterday we announced the acquisition of Genworth's reverse mortgage origination business for $22 million. This acquisition is not as large as the others we announced, but it is strategically significant in that it provides us with the number one reverse mortgage originator based on the most recent monthly industry data. We expect the acquisition to be immediately accretive to earnings. We expect net income contribution of $8 million to $9 million in 2013.

More importantly, this acquisition positions Ocwen well in the reverse mortgage business which has enormous long-term growth potential. As shown on slide 8, there is sizable untapped potential in the reverse mortgage market that could sustain rapid growth. In particular, financial planners and academics increasingly appreciate that the product is an excellent tool for managing retirement income risks. The long-term growth potential of the reverse mortgage markets compliments the near and medium term growth opportunities we expect in our forward mortgage servicing business.

Before turning the call over to our CEO, Ron Faris, I want to congratulate him on receiving this year's Rooted in ESOP award presented by Empowering and Strengthening Ohio's People, a leading community advocacy organization based in Cleveland, Ohio. Ron was recognized for his leadership and foreclosure prevention through Ocwen's loan modification efforts, particularly principal reductions.

Ron is the first private sector recipient of the ESOP award. Prior recipients included Congressman Dennis Kucinich, and CFPB director, Richard Cordray. Ron, congratulations again, and I will now turn the call over to you.

Thank you, Bill. The ESOP award really speaks to the hard work and dedication of our entire Ocwen team in helping homeowners in distress wherever possible. We are grateful to ESOP and all of our non-profit community partners around the country such as Home Free-USA, National Community Reinvestment Coalition, National Council of LaRaza, and so many others for their relentless work in homeowner outreach and counseling.

They are truly indispensable in our success in keeping struggling families in their homes. I will cover a few areas today including our operating results, our strong loss mitigation capabilities, and our integration plans for Homeward and ResCap.

As slide nine shows, the revenue ramp on the newly boarded Saxon and Chase deals are meeting or exceeding our pro forma expectations. The Chase and Saxon portfolios boarded in April had delinquency reductions of 1.5 percentage points and 1.0 percentage points respectively, while delinquencies on the Litton portfolio fell 1.7 points.

Overall, delinquencies fell from 24.5% to 23.6% from the end of June to the end of September. The total decline in delinquencies over the past 12 months has been more than five points despite the boarding of highly delinquent loan portfolios during the period. These improvements occurred despite a slowdown in modification that we had anticipated in our last earnings call. With the expansion of the federal government's HAMP 2 program, Ocwen evaluated all non HAMP modifications in progress for eligibility under HAMP, which deferred some modifications into the fourth quarter.

Total modifications for the quarter were 18,135. HAMP modifications accounted for 29.3% up from 20.5% last quarter. The higher level of HAMP mods bolsters our expectations that the impact of HAMP 2 will be positive overall as it increases the number of borrowers qualifying for the program.

About three quarters of modifications in the quarter included some principal reduction with about one-third of those mods being our shared depreciation modifications. Completed modifications began to rebound in early October and offers for Q3 came in at a solid 22,869, suggesting that modification should be back on track in Q4. For the fourth quarter we expect modifications to be between 19,000 and 22,000.

As shown on slide 10, the pace of advanced reduction remains strong. In the third quarter of 2012, net advances declined by $347 million excluding the sale of assets to HLSS. More detail on third quarter results are available on today's earning release and our third quarter 10-Q, which we expect to release tomorrow. I want to talk a little bit about our integration plans for Homeward and ResCap as they differ somewhat from our past acquisitions.

First, with respect to Homeward, it is important to recognize that unlike previous platform acquisitions, Homeward is currently generating positive income on a standalone basis. We expect to improve both performance and costs by transitioning to Ocwen's world class platform. But we intend to maintain substantial portions of their servicing personnel and the origination business in its entirety.

With respect to ResCap, we will take full advantage of their solid Ginnie Mae and prime loan platform. As such, we anticipate retaining much of the ResCAp US based servicing personnel for the foreseeable future. I especially look forward to working together with the strong management teams at Homeward, ResCap, and Liberty as we continue our positive transformation and evolution.

For both Homeward and ResCap, we are confident that our pricing and opportunities to reduce operating expenses while improving cash flow will provide attractive returns to our shareholders. At the margins both transactions are extremely accretive as they can be funded almost exclusively with debt. However, even with our long-term mix of debt and equity pre-tax returns on equity are targeted on these deals in the low 20% range.

As an indication of how Ocwen achieves the superior performance Bill spoke of earlier, I also want to share with you an analysis based on subprime private label securities data sometimes referred to as PLS. On slide 11, we broke PLS data into Ocwen and non Ocwen portfolios. We then looked at the percentage of total loans in the portfolios that have been modified, and the percentage of those modified loans that are 60 days or more days delinquent. As you can see, Ocwen has modified 52.8% of its portfolio compared to only 46.6% for other sub-prime servicers.

Getting more borrowers into modifications is a critical component of our ability to drive down delinquencies. But it's just as important as our ability to modify loans is the persistency of these modifications to remain current. Often, modifications that are 60 or more days delinquent are only 27% compared to non Ocwen servicer redefaulted rates of 38%.

These results are the opposite of what one might expect as it would seem that we might be modifying less qualified borrowers to attain higher numbers of modifications. Our better performance is a direct function of our industry leading technology platform and the use of psychological principles that enable Ocwen to deliver modification programs that increase both borrower acceptance rates and adherence. By the way, this analysis is consistent with several third party studies that show Ocwen modifies more loans and has lower redefault rates.

Our results are equally impressive when evaluating our success in getting loans to cash flow. Slide 12 portrays the percentage of subprime borrowers in PLS that have made ten or more payments in the past 12 months. As the chart shows, over 72% of Ocwen borrowers made 10 or more payments compared to only 64.7% for other servicers. This means more cash flow to investors and lower advance rates for Ocwen.

In the third quarter we began boarding subservicing from a large bank adding about 13,200 loans in August and September. We were also targeting subservicing business from a second large bank early next year. The last thing I'd like to mention is the impact of an improving economy upon our results, especially over the long-term. An improving economy provides substantial potential upside in Ocwen's results.

First of all, reduced unemployment will likely reduce delinquencies and redefaults, and potentially lead to a more rapid reduction in operating expenses and interest costs as advances decline faster than anticipated. An improving economy will also likely lead to longer duration of assets as many of our borrowers have low rate modifications with little incentive to refinance. Moreover, many of our borrowers do not qualify for current mortgage offerings so they are not well positioned to refinance or buy a new home. This should keep voluntary prepayments low.

In the third quarter voluntary prepayments are very low, running 2.8% out of a total CPR of 14.3%. As foreclosures and modifications abate, total prepayment should slow considerably as involuntary prepaid typically accounts for two-thirds of Ocwen's CPR. Now, I'd like to turn the call over to John Britti. John?

Thank you, Ron. On slide 13, we show that normalized pre-tax income increased from $72 million in Q2 to $80.7 million in Q3. We had no normalizing items in the third quarter. This is a 69% improvement over Q3 2011 and a 12% improvement versus last quarter. These improvements are largely attributable to growth in our servicing portfolio and our ability to reduce delinquencies. At the end of September, Ocwen's liquidity position as measured by unencumbered cash plus unused collateral financing capacity was $464.2 million.

This was made up of $270.5 million in cash and $193.7 million in available credit. This sizable liquidity position is largely the result of asset sales to HLSS in August and September that generated proceeds of $1.1 billion. Approximately $667 million of these proceeds were used to pay down match funded liabilities, and another $99 million to pay down our senior secured term debt, leaving about $336 million to fund future acquisitions and other corporate purposes. To track the impact of HLSS on our financials I will walk you through the entries. HLSS is accounted for as a financing of MSRs, adding approximately $14 million to interest expense in the third quarter.

The advances assumed by HLSS on the other hand move off of our balance sheet. We must net the savings of $6.4 million in advanced funding costs we avoided to arrive at a net increase in interest expense of $7.6 million. When we sell the rights to mortgage service -- to MSRs, we also realized deferred tax assets. As a result of this and other savings, the expected cost of funds from these HLSS transactions is in the mid-single digits. Year to date HLSS transactions have netted Ocwen nearly $470 million in capital to fund growth or other corporate purposes. For those modeling Ocwen's earnings, I will provide some direction on our new acquisitions.

Homeward servicing portfolio is relatively easy to model as we anticipate economics similar to what we have experienced on recent subprime acquisitions such as Litton, though with lower transaction expenses. Homeward's originations are expected to grow from the current $800 million per month pace to about $1 billion early next year. ResCap is a little more complicated. The private label securities or PLS have an average contractual servicing spread of about 31 basis points versus the 50 basis points that is more typical of PLS in our portfolio.

The average contractual servicing fees on Freddie Mac and Ginnie Mae portfolios are typical of such business at about 27.5 basis points and 34 basis points respectively. The nonallied sub servicing has average fees of approximately 9 basis points. The master servicing contracts generate approximately 6 basis points of revenue.

Thank you, we will now open the call up to questions. Operator?

Yes, thank you, sir. (Operator Instructions) Our first question comes from Bose George with KBW. Your line is open.

Hey, guys, good morning. Just a couple of questions in terms of modeling the portfolio. On the cost side, especially for ResCap, for the other pieces, the [GSC] and the Ginnie Mae. Should we assume that those, the cost of service will be quite a bit lower?

Yes, the major driver of costs are delinquencies. Those portfolios are much less delinquent so they will be much lower.

Okay, then just switching to financing for ResCap. I mean, is HLSS going to be able to do, presuming they can do the non-agencies, but can they do the Ginnie Mae and the GSC portion as well?

HLSS will not be taking those assets onto its balance sheet. We want to maintain clarity with respect to the asset classes that they have, which are predominately 90% advances in cash. Then, and only 10% of MSRs when they tend to be -- they're the far more stable MSRs associated with non-prime loans. HLSS will not be financing those assets. We are in the preliminary stages of actually viewing another vehicle that will specifically deal with prime and agency based products.

Okay, great. Thanks a lot.

Thank you, Brad Ball with Evercore.

Thanks. The $350 billion pipeline that you mentioned, does that include the $120 billion related to Ally that is mentioned in the press release?

That is not included in that pipeline.

Would you have an interest in bidding on that John?

I think we are interested.

Why wouldn't you include that in the $350 billion? Maybe, could you just talk about what is in the $350 billion and what the timing would be?

When we were looking at mostly the kinds of transactions that are similar to the ones that we've done in the past -- in the recent -- well, it's in the last two years. We look out and say what is likely to close in the next 12 to 18 months? That is how we come up with that pipeline.

Does the $350 billion, is it predominately subprime? Or, can you give a sense as to the proportions?

It would predominately be non-prime.

Okay. You said that Homeward was part of your $400 billion plus. That is the difference in your guidance. What would be the timing for boarding Homeward and ultimately time ahead of boarding on ResCap next year?

This is Ron. Yes, we are targeting to close Homeward in December of this year. On ResCap, the transaction will likely close at the earliest at the end of January. But -- and, maybe at the latest by the end of March. Somewhere in that time frame.

Would they be boarding right away or would you expect them to board over a couple of quarters following the closing?

Well, I guess it depends on the definition of board. With Homeward, we are acquiring the Company. We will own Homeward assuming everything goes as planned and we close in December. There will be then a transition period as we migrate onto our platform as I mentioned in the prepared remarks. There will be a period of migration. But as we also mentioned, Homeward is a profitable business on a standalone basis and should add profitability immediately upon closing.

On the ResCap side, yes, we are acquiring along with the servicing assets, the servicing platform. We think that the platform is well suited to Ginnie Mae and other agency business. We would expect to maintain the platform to handle that kind of product for the foreseeable future. We will look to migrate the private label business onto Ocwen's technology platform over an orderly period of time. We're going to have to sort of plan that out in conjunction with the Homeward movements as well.

Okay. Thanks, and John, thank you for the contractual fee breakdown that you gave us. But what would you expect to do in the way of ancillary fees on each of those component parts?

I think our -- I think you should expect that on the private label securities we should do about what we have done in the past. I do not have a good number for you on the Ginnie Maes and Freddies in front of me. We'll come out with an estimate and try to go public with that.

The overall revenue margins on Homeward should be similar to those on Litton?

I think that would be a good way to model it. Yes.

Okay, thank you.

Kevin Barker with Compass Point.

Good morning. John, could you go over the funding for each, Homeward and ResCap acquisitions beyond the debt? Talk about some of the debt covenants that may be placed on -- that you have existing right now? How that would flow through? How you look at that from a funding perspective?

Well, we primarily believe that we can fund as we mentioned. First of all, we have substantial cash available as I mentioned earlier. We anticipate by closing a substantial portion of our ability to close Homeward is with cash on hand. Plus the equity that is part of the transaction of preferred stock. That transaction should be relatively straightforward. The other component, two components of our funding are proceeds that we'll receive from likely further sales to HLSS and senior secured debt.

I think that makes up virtually all of our funding. We anticipate we have already had discussions about the debt covenants that are required with respect to issuing new senior debt. We anticipate no problem with the covenants.

Do you expect from an interest coverage standpoint with those, a new senior debt? Where do you think it falls out and do you expect it to have two times coverage, or three times coverage? Where do you see that coming in?

I don't have that in front of me. But I do think that we -- I mean, we have gone through the details of the covenant requirements, we're confident that we can easily stay within the kind of covenants that will be expected from investors.

Then, from a margin perspective on ResCap. When I look at the base fees that you -- the contractual fees you talked about and coming out with an average 23 basis points on base fees. If you add in some extra fees for ancillary and late fees, et cetera. We'll probably see that come up to I guess maybe 30 basis points or 35 basis points. Am I looking at that correctly?

I'm not sure I want to give you -- give me those numbers again?

I was thinking you had an average base fee for the entire portfolio close to about --

Well, margin we're not -- I don't think we're going to give it a direction on margin at the moment. But we can give you more direction on that in future calls.

Okay. Then the ResCap portfolio, is that -- do you see a lot of opportunity for refinances through HARP and modification through HARP or anything along these government programs in the near term for 2013?

As you are probably aware, we did the ResCap transaction in conjunction with Walter. They are taking the Fannie Mae component which is the larger GSC portion that is probably most available for HARP refinance. But on the Freddie Mac piece that we're retaining we would expect to capitalize on refinance opportunities there. We would expect to have a retention business in place for the Ginnie Mae portfolio as well.

Okay, thank you.

Bob Napoli with William Blair.

Good morning, a couple of questions. I guess I would like to understand Bill and Ron, the origination strategy that you are going to be building now at Ocwen. I guess, I think I heard you say that Correspondent One is being folded into Ocwen. You will buy out all the sources, piece of that, or something like that? But, what are you looking to do longer term with the origination strategy?

You were buying something that is right now all correspondent, are you going to -- when are you going to go up to build out of a real -- build out a retail strategy, or -- is it going to be all prime or over the medium term do you expect to get back? Is this country going to start originating subprime loans again? Are you going to be part of that?

I think the Homeward acquisition gives us as we mentioned already a very strong correspondent lending platform. That is the reason why we see a combination combining Correspondent One into that platform. We think that there's further growth from where they are today. John mentioned where we expect them to be early next year. In addition, Homeward has started to develop on a small scale basis some retail based capabilities particularly for refinance type recap -- recapture business.

We would definitely plan on continuing to build that out and grow that piece of the business. Obviously with the acquisition of Genworth, we anticipate being a meaningful player in the reverse space. I don't think we have any current plans to look at non-prime lending. One of the things that Homeward is not doing today is FHA and Ginnie Mae business, which Ocwen is qualified to do. We see that as a nice addition to their product mix that they're not tapping into today. I think that kind of sums up the strategy as we stand today.

Okay. A question just on your servicing yield in the quarter. The revenue yield, the improvement. How much of that was from bringing current -- the -- I guess some of your past due servicing fees and how much do you have left? And is that -- that 81 basis points -- I understand you're going to bring on Homeward, but what is the yield? Is that really sustainable, I guess? Or are there unusual items in there this quarter?

Well, one thing I think in our earnings release, we note that we have $295 million of deferred servicing fees.

Okay.

Which is the component that we use to drive up that servicing fee above the contractual rate.

What was that last quarter, John?

At the end of September it was $295 million -- the last quarter was a little over $300 million.

Okay.

Bob, if anything the actual -- because of [course] HAMP 2, it actually slowed down our modifications and the recognition of DSF for the first servicing fees in the quarter.

Okay. I mean, but then the servicing yields though is -- you're suggesting for the current portfolio that that number is not only sustainable but could increase a little more from here?

Well, yes, as we continue to obviously mod more. Now, as the portfolio becomes more and more current. That was what Ron was speaking about. You will lose that extra revenue. But your advances and interest expense along with your operating costs will just simply fall -- will decrease more.

I mean, the ideal portfolio for us would be one that doesn't prepay and has no delinquencies. Right, I mean, with the -- It would be pure margin.

Right.

Yes, you will have that as, if we don't buy more products as delinquent. You will have that excess if you will ancillary fees will start to taper off. But concomitantly with that, you will have a reduction in both interest expense and operating expense that should more than outweigh that.

Then just on the tax rate. I think though you had said in your comments the 10% on existing assets. Any thoughts on being able to maintain that 10% tax rate as you bring on these additional acquisitions.

Yes, the reason we stated that is that we have not yet decided whether those new acquisitions will be placed into OMS first and then sold to HLSS. Or, just sold directly to HLSS. In the intervening time, if we leave them at Ocwen, they'll move them down, and move them to HLSS. They will be paid the full tax rate for that period of time. Then obviously, when they go to HLSS, will be paying a 1% tax rate. It's only for that and rank them between when you actually board them and you actually -- and you move them off either to HLSS's books or onto OMS's books.

Great. And then last question. Just, I mean, what additions are you making to the management team? Are you getting some key additional members to the management team from these acquisitions? Or, do you need to bring in somebody to head up, I don't know, the origination business? I mean, or the agency servicing business, or, what -- you are becoming a much larger and somewhat more complicated business that probably needs maybe a deeper management team.

Absolutely. This is a great opportunity for us. I mean, both of these companies as Ron pointed out -- Homeward was a profitable business. That is certainly unique and they have a very solid sound senior management team that we'd like to integrate within our operations.

The same way with ResCap. ResCap is extremely well regarded as a servicer. You can see that in their delinquency rates. They do a very quality job. There are -- one of the intangible benefits with this, a very significant one is the ability on these two acquisitions to add significant management talent to our ranks.

Thank you.

Mike Grondahl with Piper Jaffray.

Yes, thanks guys for taking my questions. Can you help us on the flow deal that you talked about? I think you got 13,200 loans in the quarter. What does the profitability look like on that deal? How do you think about that flow continuing in the fourth quarter is 2013?

John, do you want to take that?

Yes, I think as we've mentioned in the past, the way to think about sub-servicing profitability is it is, it's very profitable, but it has much shorter durations. Primarily because a lot of the revenue stream that we get from these flow subservicing transactions come in the form of incentive fees that are front loaded. We anticipate that some of these things are coming in a little bit more slowly than we had liked. But I think we would expect that we will continue to generate subservicing into next year. We're very hopeful that I think this will be a nice component of our overall business.

Okay. Then you were talking about the base fees on subprime, and agency paper, and Ginnie Mae paper. Generically speaking, how should we think about pre-tax profits in basis points on those different types of paper?

We're not providing direction on that right now.

But, I guess what I'm asking is not specifically on what you acquired. But just if you look out to the marketplace. What do you think is the profitability on your platform you can get in those different buckets?

We'll provide direction on that in the future. I don't have direction to provide right now on that.

I think, Mike, it always comes back to we look at it more on a return, on capital basis than on -- that is how we look at it and how we model it out. We've given some guidance on where we think we are there. That is how we look at it.

Yes, I am always -- I think we're always hesitant to give -- to discuss the business in terms of basis points. Largely because we think it leads you astray. I mean, I think as we've talked about on prior calls. When we start talking about basis points, it's trying to mix sometimes completely different types of portfolios.

Because to the extent that you acquire Ginnie Mae portfolio that's highly delinquent it's going to have a different cost structure than one that doesn't. A seasoned portfolio is going to have a mixture of both. I think we have got to just be careful we don't -- we don't want to lead you astray by giving you level of profitability which are going to be very different for newly acquired portfolios, seasoned portfolios and highly delinquent portfolios.

In some cases it actually becomes difficult for us to answer real time. Because none of the management team ever looks at a portfolio and says what are the basis points on it? We don't -- that isn't a metric that we even -- is even in our management lexicon. It's always a translation process for us to get you that data.

Okay. Then maybe I can try to ask it this way. When you look at Homeward and ResCap, how do you think about the capital or the equity that you're deploying each deal? What is the size of that equity that Ocwen is putting into each deal that it is going to get that return on?

That is the operative question in terms of what -- how we look at the business. I don't have that. I don't know if John or Ron has that off the top of your heads?

Well, I think -- I mean, the first thing is that as we mentioned, we are funding this -- in terms of equity we're not issuing new equity at all. The amount of equity that we're putting into this transaction doesn't -- is essentially zero. But the amount of capital we're putting in is related to the issuance of senior debt -- we will give more direction on that.

But I think the other piece is when we have a better sense of what we're going to be selling to HLSS. Because that's the other form of capital that we raised. I don't -- I think that it would be premature for us to say exactly that mix. Because we're still working out some of the components of it.

Got you. Then, maybe just lastly, what should we think of as the tax rate for the fourth quarter? Do we just use that 10% or is it going to be blended for the fourth quarter?

I think that it would be -- it will be -- I think that's a fair --

There will be some elements that have yet -- there will be some small elements that have yet to move. 10% is the upper end of the range. It is just we're hopeful a combination that will be able to come in at that level.

Okay. Great, thanks, guys.

Ken Bruce with Bank of America Merrill Lynch.

Thank you, good morning. I've got a couple of questions. First, I guess just to reflect back on your prepared remarks. I believe you said that the Homeward and ResCap transactions from the return on capital perspective were going to be in the low 20s pre-tax. I think just given a reasonable tax rate that those are still going to be very attractive return on equity businesses. Maybe a little below the thresholds that you've had before, but still very attractive.

Yet they increase your capabilities pretty dramatically. I'm hoping you might be willing to discuss how you think about this business now strategically as you increase your servicing capabilities. It used to be a relatively small subprime servicing shop. You're moving into something much bigger. Can you discuss how you think about that strategically, please?

Sure. I think these transactions do really transform us. Because we are now a much larger scale player. When you look at some of the opportunities that are out there in the marketplace, many of them are large scale opportunities. It's only going to be a handful of players that probably even have the capability to pursue those because they're such large potential transactions. You're going to have to have a seasoned experienced management team with a lot of depth and breadth to it. You're going to have to have the kind of platform that can handle all the different mortgage asset classes. And have strong experience in those areas.

That is where we see the market going. That is why these acquisitions are very important in taking what we've already developed and adding to it. Making us we think the best positioned player for a lot of the future opportunities that are going to be out there. We're going to add into it the origination capabilities so that we have organic growth to go along with the acquisition opportunities that remain out there.

Just as you think about this in the context of the capital light strategy, HLSS has been a tremendous success. Bill had mentioned that you're in early thought process around something like that within the agency, MSR arena. I think that maybe the capital light discussion has maybe evolved a bit from where you initially began at a possible stock buyback situation to something where maybe this is going to be more of a -- basically supporting a lot faster growth. Is that a fair assessment at this stage?

I don't know that that's --well, I don't know that's the change from what we've said in the past. I think it's from in the past we've always said that we expected in the near-term, our growth would outpace HLSS's ability to purchase assets for a period of time. But that ultimately they would then outpace our growth. Long-term we would achieve this capital light objective. But I don't think that we ever said that we were going to get the capital light in the direct line. We thought that we -- we always expected we get there first by outpacing HLSS's ability to continue to buy assets.

Then once we -- once they start to grow faster than we do, then we would buy back stock.

Does, I guess, as you transform yourself into a more, normal servicer is this -- I want to reconcile that statement with the potential for growth. Because it would seem that you could continue to use capital even in a very different balance sheet configuration from today as you grow. If the market opportunity is. as was discussed earlier, is as big as it is.

Well, we'll continue to use our capital to support our growth. We'll continue to look at vehicles such as HLSS that provide cash flow streams that meet the specific needs of individual investor groups. We're going to work on both sides of that equation. We continue to work in that all the time. You'll see us continue to push more and more towards the capital light model. But, as we get -- again, as we continue to grow that, we may not be getting there tomorrow.

Understood. Then just lastly in just the context of the growth that is now coming. How should we look at this in the context of the rating agencies? How have those discussion gone? Should we expect any actions on their part?

I don't think we can necessarily project what they're going to do. We definitely communicated all the information available on the different transactions that we're doing. How we planned on funding those transactions. I think some of them have come out already. They're expressing some concerns about our -- what they would term rapid growth. But, I think there's some recognition that if we were very experienced at doing this.

We have a strong record of acquiring large servicing portfolios and businesses, and integrating them quickly and effectively. Hopefully, we're starting to get some recognition of that and some credit for that on a going forward basis. These particular transactions, I think we're -- since we're going to, for example, with ResCap maintain their platform for the foreseeable future.

Handling the Ginnie Mae and the Freddie Mac portfolios, there is the integration risk if you want to call it that. I think it is much less on those portions in the portfolio -- on the private label stuff. We've got tremendous experience in doing that, and don't expect there to be any hiccups there. But I think that remains their biggest concern. They'll obviously continue to monitor that. But I think overall what you -- we don't expect anything beyond what you've seen so far.

Great. Well, thank you for your comments. It's a very interesting time in the mortgage business these days. You continue to be at the forefront of that. Thanks.

Thank you.

[Brian Zachariah] with [JAM]. Your line is open.

Hi, guys, and thanks for taking the question. Bill, you can just kind of bring us back to kind of the original thinking behind Correspondent One. Try it keep it removed from Ocwen. Now it seems like well, all the logistics aren't fully ironed out. Correspondent One is now going to be brought into Ocwen by way of Homeward. Can you just go into a little bit, kind of set that decision making process? Maybe a little bit more specifically on how that's going to work?

Well, yes, I mean, the process is just -- the decision making process is one of being practical about what can get approved and not approved through the agencies. Ocwen has a more -- a longer track record and approvals as a seller servicer. So, it streamlined that process significantly by readjusting the ownership between Altisource and Ocwen to build that business model.

The Homeward acquisition will still have Correspondent One. I mean, we still have Altisource ownership within that vehicle. Because I think it provides support to both Ocwen and Altisource in their business models. You will continue to see that joint ownership there. I'm not sure whether that's -- is that responsive, Brian?

It is. That is helpful. Can you give a little bit more color. I asked this on outsource call maybe with more time. There is some more clarity. But how the Homeward ancillary businesses are going to be treated? Whether we can expect those revenues to stay inside Ocwen or not? How that's all going to work?

Yes, we're not commenting on that for a specific business reason with regard to that. We can provide you I think much more clarity on that. We'll provide you a lot of clarity on that we believe in our next earnings call.

Then, can you help us reconcile. For the last couple or few quarters there's been kind of this ramp in core operating expenses that supposedly leading growth. You've been overstaffed. But it sounds like on the latest transactions you're going to retain a lot of the overhead. Even though, average UPB was basically flat this quarter with last quarter. We saw operating expenses rise. I think since the beginning of this year operating expenses have risen on the order of magnitude of around 60%. UPB is only up around 25%. When are we going to see kind of a normalization in core operating expenses?

Thank you, please.

Go ahead, Bill.

No, Ron, please.

Just to clarify a couple of things. One of the reasons is that operating expenses have been rising relative to UPB is the special servicing or subservicing business that we're doing for one of the large banks out there. It's virtually all non-performing loans, which means it's very heavily people intensive. A large percentage of the people handling those portfolios are being hired onshore based on certain kind of arrangements that we have with that particular bank.

There's sort of a disproportionate amount of growth in the US operating workforce because of that portfolio. That probably is one of the things driving that. We've been very careful to make sure that we're staffed to handle any of the acquisitions that come on, and hit the ground running, and have no hiccups as far as our ability to serve the customers. I think we've done an (inaudible).

Right, but if you're retaining a lot of the overhead. I guess that's kind of where I'm -- that's what I'm trying to reconcile. You're retaining a lot of the overhead on what you're acquiring. What were you building out for?

We weren't really as much building out as Ron was saying, as we were bringing on new portfolios during that period of time. First of all, you see the quarter number. You don't see what's happening month by month and within that quarter. But we were making a very concerted effort to drive down delinquencies. Now that was somewhat interrupted in the quarter because of all this, the massive amount of rewriting -- re-underwriting to do on the HAMP 2.

We don't lose those modifications. But they in fact get pushed into say the fourth quarter. We also basically pick up because if there are more HAMP module. We'll pick up more revenue with regard to it. What you don't see within the quarter is a large ramp up on prior quarters with regard to [hoarding] new portfolios. Those headcounts as you bring delinquency down fall away fairly quickly. There was a lot of work done in the third quarter that was really a one-time effort to try to basically get the entire if you will inventory of modifications re-underwritten.

But both for the HAMP 2 program as well as for our own private label programs with regards to that. We however, we're very mindful of when going into these acquisitions of not cutting a lot of excess headcount that we're carrying which is pretty significant in certain of our operations. Because even though we're requiring new people, new organizations, there will be transition in their workforce as some people decide they want to go work somewhere else before the deal closes, et cetera.

We're trying to make certain that we have more than sufficient staffing going into these acquisitions. Then in the steady state, we're at much better able to significantly reduce our headcount in our staffing.

If we think about Q4 where irrespective of Homeward, what would we expect? What should we expect quarter operating expenses to look like vis-a-vis Q3?

We exited the September with headcount that was meaninglessly below where it was in the month of July. We still are significantly overstaffed. We're not planning on reducing any headcount from that. But either Ron or John, if you'd like to give different color on that?

Yes, I mean, with the upcoming acquisitions we're not going to look to reduce staff significantly. Plus, as I mentioned before as we've been adding the most recent addition to the portfolio have generally been in the subservicing area, which have resulted in a lot more people being hired in the US relative to offshore. That changes the cost mix. I mean, I don't know that we'll see dramatically different operating expenses in the fourth quarter compared to the third quarter.

Okay. That makes sense and then --.

The only other thing I might mention is that I know that -- and this is one of the reasons why we'd like to shy away from these basis points models. If you look at our operating margin it actually has remained the same quarter to quarter on a percentage basis. It's just the, and I think it's partly because of, as Ron mentioned. It's the mix of business change that has had influence on that.

We've taken on more expensive business to service, but it also generates decent revenues associated with it. I think that, now again, the margins these businesses will change as the mix changes. But I think if you look quarter to quarter, I know that you've focused on sort of how much you're spending per dollar of UPB. That's probably not the most appropriate way to do it. Because as much as the subservicing business that we're taking on for example, also generates much higher revenues.

Yes, I hear you, but the preponderance of your servicing is still in the purchase servicing that's kind of relatively I guess I would say vanilla flavor to what Ocwen's bread and butter is, Litton, Saxon, and Chase. In those portfolios which make up the preponderance of your recent growth have resulted in inordinate expense ramp vis-a-vis, let's say HomeEq. That's kind of what I'm driving at.

Right, Brian, I think the one thing though. The product we're bringing on the flow business is almost 100% delinquent and serviced 100% in the United States. It is extraordinarily labor intensive. It is also, however, produces incentive fees that are really quite attractive to us. In other words the business from -- if you start from beginning to end and look at it, we believe it will be very profitable business for us. But those incentive fees tend to be lagged a little bit. In other words you do a tremendous amount of work up front to try to put yourself into the position to resolve those portfolios. But those resolution fees are really quite exciting to us.

We've been investing heavily. It looks like a small portion that's 100% delinquent. It does require a meaningful amount of labor. Now, having said that we still do have more people on our payroll now than we need to service the portfolio, and it's not -- it's a real -- meaningful number. But we're not going to take those people other than people were just simply poor performers that are destroying value. We're not going to take those people off because we want to go into these acquisitions extreme well staffed, and able to handle them.

We are building through the prior question -- was how does the ratings? How do ratings agencies and other governmental agencies treat you? Our ability to demonstrate the take on portfolios and to immediately reduce delinquencies is an important part of our business model. If it caused a little bit of money in the short-term. I'm the cheapest guy on the plant. I don't like that as both Ron and John can say -- can attest to. But I think it's the prudent way to continue to build value in the business.

No, that makes sense. I appreciate the color. One final question. Just can you give any color or guidance on Homeward correspondent being on sale margins?

No, we'll give probably more guidance on that next quarter.

Okay, all right, thanks a lot guys.

Henry Coffey with Sterne Agee. Your line is open.

Yes, good morning, everyone. Let me just continue on this subject. I'm narrowing in on just looking at the second and third quarter. Between those two quarters, you're actually, your compensation costs went down a shade. Amortization was a little bit higher, but that's expected because the average servicing was probably a little higher. The two items that seemed to kind of take a jump in costs were servicing and origination costs, and quote other operating expenses. Can you give us a sense of what drives those?

I mean, John, the best -- I mean, the best way. There will be a lot. There will be a fair amount of details in the 10-Q that may be most helpful in looking at those kind of things. There are certain as we've become bigger in the GSC business, there are certain expenses in the form of compensatory fees and things like that. That larger GSC servicers would have in their numbers. Our numbers has historically been low. But as we've taken on more of that business some of those numbers have started to rise. They're in a sort of category --

Is that like compensate? That weird thing where you have to pay half a --? Do you have to pay a month's interest, and?

Generally things -- no, there are certain, depending on foreclosure, timelines and things like that. Where there are certain fees that you paid back in effect to the GSCs depending on performing. As so, as you get bigger those numbers are going to go up. We've been pretty small in that area, but started to grow with -- we did a $10 billion acquisition in June of Freddie Mac business.

Some of it has to do with kind of a change in mix in product where some of the expense lines come into play. We build those things into our, how we appraise the portfolios. But they will change some of the line items. I think maybe the queue will be somewhat helpful in trying to fetter --

Good, (inaudible).

-- Some of that stuff out, but.

Yes, and there's some volatility I think in another operating expense line that's generated by te --

I'll go through the queue and then call you.

(Inaudible). Yes.

On the HAMP issue. And I'm going to ask you to repeat some of the numbers. What were your HAMP mods in the quarter?

Well, we did. Yes, they were about 29% of total mods. Then, and we did --

What were the total mods, yes?

Yes.

18,135 was the total mods.

18 -- and then what -- you made a comment about what was going on in the current month and what to expect in the fourth quarter.

Well, the fourth quarter we said mods should be between 19,000 and 22,000. It's a little hard to tell where the HAMP percentage is going to come out. HAMP 2 is obviously driven the number up because as we indicated the second quarter we were at 20% for HAMP. We're up to 29%. Hopefully that will stay at that higher end and maybe even improve a little bit more as HAMP 2 kicks in even more.

Does the delay and tied to the review was a procedural issue? Or, you felt it was (inaudible).

No. It basically is a -- actually I'd call it more of a requirement. I mean, when HAMP 2 went live in June, one of the requirements was you needed to -- since it's added new eligibility requirements. If you had loans that say were in non HAMP kind of process, because they didn't qualify for HAMP 1. You needed to kind of pause, pull those back in. Re-evaluate them for the new HAMP program to see if they qualified or not. All of that took some rework and time to do it. I don't think we were any different than anybody else out there. It was not a procedural problem. It was just a procedural requirement based on going live with HAMP 2 in June.

Now, it's sort of back to the fourth quarter. It would be sort of back to our normal flow on that front?

Yes.

If you had a mortgage originator, which you will have, HARP would be part of your equation as well. Correct, it's just that's an opportunity that --?

Yes, that remains an opportunity for us, yes.

Two other questions. One real simple. John, you mentioned what your liquidity currently was. I was actually that. That is when I was giving my name into the operator.

$464 million.

What was it again?

$464 million at the end of the quarter.

Then is it fair to characterize your view on ResCap that the government business and the GSC business will stay with the existing platform and the private label servicing will migrate towards your offshore platform?

Yes, I look. Yes, I think that's a fair assessment. I mean, long, long-term, we'd like to -- that would be most efficient to operate on a kind of a single technology platform. Out there in the future that's where we would want to get to. But, we get tremendous amount of management and staff capabilities in the GSC and Ginnie Mae world with these acquisitions.

We want to capitalize on that and position ourselves well for some of the other transactions that are out there and are going to be coming down the road. The mix of business is changing. It's going to change sort of the -- what's on mainland USA -- US and what's not. But, it all is kind of by design with a long-term plan to position ourselves. Really to be the best qualified, both management wise, technology wise, cost wise, funding wise, or future opportunities that are out there.

No, that's helpful. Then the master servicing business. It's 6 basis points. We're kind of watching numbers go back and forth. Is there any -- is the cost 50% of that revenue stream or very small.

What I can say is there's not a lot of people stacked against that piece of business. The cost shouldn't be too high. I don't think we're going to give kind of much more on that now. But we're happy to have those capabilities. Right now it's kind of been a runoff type of business.

But, to the extent the market does evolve, and change, and maybe private label securities start to grow again. It could be very good capabilities to have kind of as the mortgage business continues to evolve. Again, it's another capability that we've now added into our arsenal that we didn't have before. We're excited about that.

Thank you very much for your help.

You're welcome.

Thanks, Henry.

Sorry, DeForest Hinman with Walthausen & Company.

Hi, I just have one question. Can you walk us through the interest expense? You had the matched funding advances decline by about $1.2 billion sequentially. Yet the interest expense is relatively flat. I know you mentioned I think it was $7 million net from the HLSS transaction. But I'm wondering if is there some original issue discount expense that was accelerated in there? Or am I missing something?

Yes, there was some related to the retirement of our [10 and 7/8] securities as well.

Okay. But, I mean, I'm looking at. I mean, I guess just maybe a blended interest rate type thing. Where I think in the past it was more around [6] and change. Now in this quarter it's much higher than your estimating balance for the debt.

Well, and again that it, a chunk, it is. I think the main difference in probably the numbers is the HLSS component, which shows up as financing. Because it's actually -- it actually increases our overall interest. Or shows up as $14 million. When I told you it was, I was netting out a savings on the advanced fundings that moved off of our balance sheet. But we still end up incurring the equivalent of $14 million -- or the full $14 million.

Okay, thank you.

Hugh Miller with Sidoti & Co.

Hi, good morning. I just had one quick follow-up question on that point with regards to, I think you guys mentioned it as my phone cut away. But would the relationship between match funded advances relative to the UPB, which obviously came down in the quarter? Just getting some sense as to how we should be thinking about that relationship in the ensuring quarters?

I'm not sure I understand the question.

I'm just, the reduction in match funded advances, which we saw come down from the second quarter. How we should be thinking about that on a going forward basis.

I mean, advance is -- the things you have to keep an eye on is we would expect that we would continue to drive down our advanced levels just from continuing to bring delinquencies down. But then you're going to have to the extent we're able to sell more assets to HLSS, which we hope we'll be able to do. That will also bring the advanced numbers down.

But when that occurs as John was trying to point out, you have then an increase in interest expense related to kind of the financing of the MSRs in effect. There's a number of dynamics going on there. You'll just have to kind of watch for when we do sales to HLSS. Maybe we can do a little better job of trying to get some guidance on what that will look like going forward.

Okay, thank you very much.

David Haas with Moore Capital.

Hi, just a quick question. You guys did discuss on the [ASPS] call as well as briefly on this call. Just the, that there will be business from Homeward coming into Ocwen that are similar to the services provided by Altisource. But what about the ResCap piece? Are there similar structures within the ResCap platform that are sort of redundant with what Altisource does for you?

That's yes.

Okay. Is it the same? Is it the same sort of construct where you'll have to sort of assess what can be done well within Ocwen from ResCap? Or, what can be done better at Altisource? Is there? I guess really the question I'm asking is there a cost save in transferability opportunities from the ResCap piece over to Ocwen and therefore Altisource?

There are and we can give you better clarity on that in the next earnings call.

Okay, terrific thank you.

You're welcome.

Kevin Barker with Compass Point.

Yes, I just had a follow-up question on the $1 billion of originations you expect from Homeward. You did about $3.6 billion of flow program that was brought on this quarter. Correspondent One, that's also going to be integrated, what we were talking about with Homeward. Can you just give us an idea of the amount of organic inflows that you expect with combination of originations and flow programs in 2013?

Well, first of all make sure that you, that $3.6 billion of flow subservicing is a very different animal from newly originated correspondent loans. I mean, those are completely different, right? I mean, one is coming in as brand new newly minted loans. The other is or 100% delinquent loans coming through subservicing.

But, I think that what -- right now, the direction we've given I think is as much as we'll give for the time being, which is that we do expect that this correspondent lending platform will ramp up to early next year to about $1 billion a month. But we do think that there's more upside over the long-term to continue to grow our organic capability.

Essentially $1 billion all in from Correspondent One and Homeward from origination standpoint is how we should look at it in the beginning of next year?

Yes, I think that's a good -- that's the place to start.

Let me caution you also that the profitability on prime product is about 10% of what sub -- or non-prime is. It's, whereas we're interested in developing that channel. We think we'll make good money on the origination side. It's not a -- and you'd have to originate an enormous amount of prime to create an ongoing -- meaningful, ongoing revenue stream. That's what why always talk about -- we talk -- why we don't like to talk about UPB.

One analysis we did on the most recent acquisition in ResCap is that if you took this common size prime and non-prime portfolio there. The non-prime would generate a $100 of profit, say, over the next six years, heavily in the first four years. The prime would generate $10 of profit, $9.50 of it would be in year one primarily because of HARP 2. There are radically -- you would have to ask what type of UPB is it in order to really build your models.

Just to put that in further perspectives, the sub prime -- the subservicing business from a profitability standpoint is probably about 2.5 times as profitable on a UPB basis as non-prime.

Okay. But it may be some of the other things to touch on, John. Just two, we mentioned in our prepared remarks that we're hoping to add another bank into that subservicing, special servicing process. We also, you'll note that we announced that we have done some acquisitions of some $2.2 billion of Fannie Mae. That's ours.

There are a number of opportunities we're seeing in the market we kind of co-issue opportunities. There's a variety of different channels that we're working on in addition to the big bulk acquisitions. That kind of in the end are similar to correspondent business. But they just come through in different ways. It's $1 billion that John mentioned is what we expect at least in the early part of next year related to Homeward.

But there's a number of other different channels that are a little harder to project what they're going to be. But that I think we've made good progress on this year and, or starting to see some of the fruits of that labor here in the third quarter and into the fourth quarter. I don't think the $1 billion is the only amount of flow that we can expect. It's just a little hard to project what it's going to be.

That's one critical element of that whole strategy is the ability to create another HLSS product that will basically take that product and with -- if you're trying to return 20% plus returns on equity, that's very difficult to achieve in the prime space, whereas you can still create a very attractive low to mid-teens yields, conservatively within the net space, the extent that we can actually develop that and bring it to market successfully.

Altisource also has the Lenders One Network which this year will produce 12.5% of all mortgages originated in the United States. Our amount of origination is less related to availability or to be able to attract the business. It's more related to a pricing process capital determination. That's the gaining factor.

Okay. With these flow programs, and you have another bank coming on. You did $3.6 billion this quarter. Presumably, it could be somewhere near that or close to the $3.6 billion. How long do you see that lasting? How long do you see some of these programs playing out, given, it's mostly delinquent and foreclosed loans -- I mean, mostly delinquent loans?

If you look at delinquency today, it's still up around -- I get the year a little wrong, but it's probably around '09 levels. I mean, we're maybe 25% off the peak. But we're still running at levels that are many multiples of historical experience. We're five years into this crisis if you will or recession. We've seen nominal recovery -- nominal reversion to the mean with respect to the level of foreclosures. We're not at the 7th or 8th inning by any stretch of the imagination unless there's a radical shift in the underlying income levels of the population.

Okay. Just going back to the tax rate real quick. You said you're probably running on right now close to high single digits with the tax credits from the Virgin Islands. Could you give us a little bit of understanding around what percentage of your operations will be US based versus foreign based? How we should look at that from a tax rate perspective given that, the mix of your business is going to change quite a bit?

That is a blended tax rate based all these, all the countries that we're in today, and where assets are. Now, the only reason we said it might be higher is that in fact if you kept more assets on Ocwen's books as opposed to immediately transferring to OMS. But it said waited until HLSS did another transaction, transfer that directly. That pro rata portion would be bearing an interest rate of closer to the effective rate of 35%, perhaps a little higher with the deferred tax assets. But it will only be for that [and I rank] them between the time you board it and the time HLSS is prepared to take it on board.

In the near term we probably could see the tax rate a little bit higher. Then over time as it goes under OMS it probably gets back closer to high single digits. Is that the way we should look at it?

That's right. You'll see periods of time where there's more inventory in the US at a higher tax rate. You can just multiply the 36 times that amount and figure out what that number might be.

Okay. Thank you very much.

We may have a little more domestic content for some of the products. That will see you transfer pricing with respect to that. But that's not an enormous driver of the number. But the effective tax rate in the VI is 3.75%. We think high single digits is a good weighted average for all the weighted taxing jurisdictions that we're in.

That's something we can rely on longer-term, 2014 out of high single digits tax rate is the way we should look at it?

Yes, we're being conservative. We're saying 10%. If you use 10% of your numbers, I think -- I don't think you'll be disappointed. You will be slightly lower than that and slightly higher than -- well really around -- under that range in the fourth quarter because not all issues -- not all elements have been moved at the present time. But to the vast majority will have been.

Thank you very much.

Bose George with KBW. Your line is open.

Great, thanks. In terms of the funding cost for the step that you're going to fund with this HLSS type vehicle, is it too early to determine what kind of funding costs you can get for that?

Are you talking about prime one with regard to that?

Yes, the prime piece, exactly, yes.

We'd prefer not at this point and time to comment on that. I think we have some interesting parts of the structure that will make it attractive and make it competitive with comparables within the market. I think that's as far as we're prepared to go at this time.

Is it safe to say that it's probably more expensive to fund prime versus sub-prime?

I think that's as far as we're prepared to go at this time.

Is it safe to say that it's probably more expensive to fund prime versus sub-prime?

I would expect it to be because the volatility of prime is -- most of it's an MSR. The vast majority of -- there's virtually no advances, it's all MSR. And prime MSRs are far more volatile than non-prime MSRs.

Okay, great. And then just one last thing. Do you have the average servicing portfolio number for the quarter handy?

I mean, we started the quarter at [127.8] and we ended it right around 127. so I think if you use 127, you'd be pretty much spot on --.

Okay.

-- maybe a little more.

Great, thank you.

And at this time I'm showing nothing further.

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