Onity Group Inc (ONIT) 2012 Q4 法說會逐字稿

Good morning and welcome to the Ocwen fourth quarter earnings call. At this time all participants are in a listen-only mode. After presentations we will conduct a question and answer session. (Operator Instructions). I would now like to turn the conference over to John Britti, Chief Financial Officer. Sir, you may begin.

Thank you. Good morning, everyone and thank you for joining us today. As our operator said, my name's 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 and then under Events and Presentations, you will see the date and time for Ocwen Financial fourth quarter 2012 earnings. Click on this and register. When done, click on access event.

As indicated on slide number two, our presentation may contain certain forward-looking statements pursuant to the Safe Harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period, or by use of forward-looking terminology that 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.

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 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.

For an elaboration of the factors I just discussed, 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 2012 Forms 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.

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. While I want to spend most of my time discussing the Company's future earnings potential and growth opportunities, it is worth pausing to reflect upon the exceptional expansion Ocwen experienced in 2012. Some of the financial highlights of our fourth quarter and 2012 results are shown on slide four.

In the fourth quarter of 2012, Ocwen earned $62.5 million of net income, or $0.47 per share, on record setting revenues of $236.4 million. For the full year, net income was $180.8 million, or $1.31 per share. All of these numbers are substantial increases over prior year results. Most notably, EPS is up 84.5% year-over-year.

Beyond these excellent results, I want to spend my time on two areas. First, I want to discuss the high quality of Ocwen's earnings as demonstrated by consistently high cash flows that exceed reported earnings. And second, I want to lay out why I believe that Ocwen has excellent prospects for earnings growth, not just over is the short-term but well into the future.

Let's start by discussing the quality of our earnings as demonstrated by our strong cash flow. As you can see on slide five, Ocwen generates adjusted operating cash flow well in excess of our reported earnings. John will provide more detail on how we calculate this later in the presentation.

The best measure of success in business is cash and particularly the relationship between cash and earnings. A large portion of positive cash flow from operations in excess of earnings in the current period should turn into earnings in future periods. Conversely, to the extent current period cash flow is less than current earnings or even negative, this represents a drag on future earnings.

In 2012, Ocwen's adjusted cash flow from operations was $719 million. As a multiple of our market capitalization we are trading at only 6 to 7 times our annualized fourth quarter free cash flow. Very few companies in any industry trade at this low level. We generate high cash flow to earnings through a combination of conservative accounting, and strong operations. The main reasons for our strong cash results are summarized on slide six.

From an operational perspective we generate free cash flow, as we resolve delinquent loans and recover servicing advances. The 15% to 25% of advances financed with equity are included in adjusted free cash flow. To the extent we are able to reduce advances faster than the decline in unpaid principal balance, future earnings increase as interest expense and operating costs decline.

The remainder of the difference in operating cash flow is either earnings being deferred to future periods, in other words, operating cash flow exceeding earnings, or earnings being accelerated into the current period, in other words, operating cash flow less than earnings. We believe that the best measure of earnings is cash since it puts everyone on the same basis and eliminates the impact of differences in accounting policy.

First let's cover those things that Ocwen does not do that create earnings without cash flow. One, we have almost no gain on sale earnings or mark to market earnings on MSRs. As of December 31, the fair value of our MSRs exceeds the carrying value of our MSRs by about $78 million. Two, when we purchase advances at a discount, generally 95% of face value, we do not book the discount to earnings as those advances are collected and then put new advances on the books at 100% of face value.

Generally, Ocwen resolves more than half of its advances on a high delinquent pool in the first year. This practice would result in putting a large portion of the earnings associated with a new portfolio into the first year. To put this into perspective, 5% of the advances that Ocwen owns, as well as those sold to HLSS, is more than $300 million.

Second, let's review our accounting practice that result in earnings recognition that defers earnings to future periods. One, we are conservative in our prepay assumptions which has resulted in MSRs being amortized faster than the decline in unpaid principle balance. Recently for example we amortized our MSRs at about 18% CPR, versus actual CPR of 14% to 15%. Second, delinquent servicing fees booked when collected, not accrued, even though we have near certainty of collection. Deferred servicing fees are superior in standing to advances, and can be financed. As noted in our earnings release, Ocwen has $452 million in deferred servicing fees that do no not appear on the income statement or balance sheet until collected.

In addition to generating high quality earnings, Ocwen has substantial growth opportunities. Before I talk about how we will grow in the future, it is worth mentioning that Ocwen has a long history of growth, as described on slide seven. Over the past 15 years Ocwen has grown its servicing book of business each year by 22% or greater, with the exception of 2004, and the depths of the credit crisis in 2007 and 2008 when we elected not to expand.

On Friday, we laid out conceptually our growth plans and opportunities. Our legacy portfolio for the fourth quarter of 2012 averaged $127 billion. To this we are adding $340 billion of servicing, including sub-servicing for the current Ally Bank portfolio. Moreover, as I will explain later, our portfolios will generate earnings for many years.

In addition to these built-in earnings Ocwen continues to seek substantial opportunities for both near-term and long-term growth. We are still in the middle rather than near the end of the opportunity that has been brought about by the mortgage crisis. As you will note on slide nine, for the entire United States, the number of residential loans in default today is almost the same as the average for the last four years. This reflects the ongoing dynamic of roughly the same number of loans going into default as are resolved each month.

The crash may have happened a few years ago, but the crisis will take much longer to clean up than most expect. In this regard, we are tracking a robust pipeline of identified opportunities over the next 12 to 18 months. We currently estimate this pipeline at $250 billion, excluding the Ally portfolio, on which we are bidding.

A few things I would note regarding our pipeline. First, our history of growth against our pipeline would indicate that we have been relatively conservative in our pipeline forecasts, and second, we have generally seen that when opportunities move out of the pipeline, new ones emerge. This pipeline, however represents only a portion of the overall market opportunity of at least $1 trillion. The most important component of this market opportunity is the ongoing trend of banks selling off noncore servicing assets. We believe this process is still early in its development. Most large banks and several regional banks are just beginning to develop strategies to shed noncore servicing assets.

The main driver of this trend remains powerful. Banks want to reduce the regulatory burdens and costs associated with servicing highly delinquent portfolios and refocus on their core bank franchise. Highly delinquent loans tend to distract management's attention, and harm the bank's consumer franchise. As an example of this trend, we continue to see new interest from banks in sub-servicing, especially for the nonperforming loan portfolios. We are in discussions with several banks, and we expect substantial additional business in the coming months.

Even after the end of consolidation for the mortgage crisis, Ocwen will have substantial earnings for several years. One way to think about Ocwen is as an asset management company. The starting point for thinking of our business value is what we can earn without adding new assets. Slide ten shows the sustainability of earnings over time. The slide shows pro forma index earnings across our largest transactions. The first year is indexed at 100. As you can see earnings rise into years two and three as we bring down delinquencies, collecting delinquent servicing fees, and lowering operating expenses. In years three through five, prepayments - most of them voluntary -- begin to bring down revenue and earnings.

Nevertheless, our earnings have a substantial tail, meaning that even with no new assets, Ocwen should have strong earnings and cash flow for many years, and importantly this gives zero credit to the deployment of the substantial excess cash that we are generating during this period, which can be utilized either for new investments or stock repurchases.

Ocwen's existing book will also benefit from eventual improvement in the housing market and the economy generally. Higher home prices, or lower unemployment, would lower delinquencies and advances and halves interest expense and operating costs faster than current expectations. Loans remaining on our books should ultimately prepay very slowly, as involuntary prepayments make up the majority of the 14% to 15% CPR today.

So with substantial cash flow, a two to three year pipeline of bank servicing divestitures, and large build in earnings in our existing portfolio, what will we do next?

Outside of our nonprime loan servicing business, we have developed prime loan and Ginnie Mae servicing capabilities with the acquisition of ResCap. Homeward provides an efficient origination platform that is currently generating about $800 million per month. While the bulk of the business to date has been correspondent loans, we expect to grow the retail component of the platform very quickly to enhance margins on a relatively small but growing portfolio refinance recapture business.

We are also in the process of developing a vehicle much like HLSS that will move the prime MSRs off our balance sheet. This will further support the prime business by reducing the cost of capital required to buy prime MSRs.

Ocwen is also exploring adjacent lending spaces. We expect to close our acquisition of Liberty Reverse Mortgage in the next 30 days. As discussed in the last earnings call, this acquisition provides us with the number one originator in the reverse mortgage space. While reverse mortgage lending is not large now, it has substantial growth potential in the future. In fact, we are encouraged by recent regulatory changes that we believe improve the program by lowering potential default rates with only minor likely impact on volume.

Long-term we believe that there will likely be a reemergence of the nonprime, or to use the parlance of current regulations, a nonqualified mortgage market. Home ownership rates in America have been dropping since their peak of 69% in 2004. In 2012, home ownership rates were around 65%, but the real rate is much lower, as many homeowners face foreclosure. If one subtracts those in serious default, the real home ownership rate is at a 50 year low of just above 62%.

In addition, the dream of home ownership is fading for are a large number of families, especially younger families. CoreLogic recently reported that almost half of all mortgages being originated today would not qualify for Safe Harbor under the CFPB new rules for a qualified mortgage. This is on top of the rules that already are disqualify most potential first-time home buyers and at least one-third of all potential home buyers. There is not a lack of demand for nonprime lending. Demand at an all-time high. Rather, it is a lack of supply.

With high consumer demand for nonprime mortgages, we expect that private vehicles will develop to meet this demand, and that the government regulation will also seek to accommodate higher rates of home ownership. Ocwen is well positioned for this new environment, as our core competency is managing credit default risk. We believe that the return of moderate risk in the mortgage business is not only good for the economy, but presents excellent prospects for Ocwen to sustain its leadership in the mortgage servicing industry.

One last thing before I turn it over to Ron. We believe that our strong cash flows, low leverage compared to our peers, and the success of HLSS position us to efficiently fund new growth without diluting existing shareholders.

I will now you turn the call over are to Ron to talk more our operational performance and integration plans for ResCap and Homeward. Ron?

Thank you, Bill. I will cover a few areas, including more detailed on our operating results, our integration plans for Homeward and ResCap, and an update on improvement to our loss mitigation capabilities.

Slide 11 shows our success in growing revenues, earnings, and earnings per share over the past three years. Since 2010, we have experienced compound annual growth in revenue and net income of over 50%. Our earnings per share has grown even faster, at a compound rate of over 90%. These rates of growth are a function of our core competitive advantages in loss mitigation and low cost, combined with our industry-leading capability to rapidly scale our operations while maintaining performance.

Slide 12 shows our consistent performance in driving down delinquencies in advances and newly acquired business. Overall delinquency on the portfolio at year end was essentially flat, as continued improvements on the Litton, Chase, and new Saxon portfolios were offset by the boarding of the homeward portfolio. Overall, the pace of improvement on these recently acquired portfolios has met or exceeded our expectations.

Total modifications for the quarter, excluding Homeward, were 19,009. Homeward contributed 4,917 modifications, for a total of 23,926 for the Company overall. The HAMP mod percentage continued decline, reaching 32.7% for the quarter, up from 29.3% in Q3 and 20.5% in Q2. The higher level of HAMP mods reflects the success of the HAMP 2 changes in qualifying more buyers for the program. 77% of Ocwen modifications in the quarter included some principal reduction, with 27.5% of those mods being our shared appreciation modification.

Our servicing integration for Homeward and ResCap is proceeding according to plan. We would expect to move all of Homeward's private label servicing to Ocwen's platform by the end of April. We are consolidating ResCap and Homeward operations in Dallas, and we will closing down Homeward's Jacksonville operation. We are maintaining ResCap locations in Iowa, Pennsylvania, and California. The eventual size of these operations depends on several factors, particularly our success in acquiring new business.

In addition to our ongoing integration and transition efforts, which will result in ongoing cost reductions throughout the remainder of the year, we continue to focus on improving quality through technology improvements and our continued rollout of basic operating principles across the organization. It is important to recognize that in the business of servicing loans, quality and low cost are not in conflict. Quite the opposite. It is difficult to reduce servicing costs without improving quality. Rework is expensive, and we will continue to improve upon our industry leading position for both quality and cost.

On slide 13 we have updated data showing Ocwen's performance compared to others on loans in subprime private label securities. We have broken the PLS data into Ocwen and non-Ocwen portfolios. As you can see, Ocwen has maintained its performance gap versus the rest of the market by both modifying more loans and having fewer modified loans that are delinquent. Ocwen has modified 54.2% of its portfolio, compared to only 48% for other subprime servicers.

Getting more struggling borrowers modified is a critical component of our ability to drive down delinquencies. What is just as important as our ability to modify loans is the persistency of the modifications to remain current. Ocwen modifications that are 60 or more days delinquent are only 26.9% compared to non-Ocwen servicer redefault rates of 37.9%. Note also the trend line is down as we bring more borrowers current.

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. 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 14 shows the percentage of subprime borrowers that made ten or more payments in the past 12 months. As the chart shows, almost 7% of Ocwen borrowers made ten or more payments compared to only about 65% for other servicers. This means more cash flow to investors and lower advance rates for Ocwen. Most importantly, however, it means that more families remain in their homes because of our efforts. At Ocwen, we take jobs seriously because our success in the company is not just measured in dollars -- rather, it is best measured by the number of borrowers we helped keep their homes through a difficult time.

In 2012 Ocwen and Homeward helped over 100,000 families to get sensible modifications that enabled the borrowers to work through their problems. We cannot help every borrower with a modification, but we want to try in every case that it makes sense. Even for those where a modification is not an option, Ocwen has enhanced its programs of assisted short sales and cash relocation assistance to ease the transition for those borrowers that simply cannot afford that stay in their homes.

Ocwen has a history of innovations in mortgage servicing. Ocwen was one of the first companies to use statistical models to improve loss mitigation. We have led the market in the use of psychological principles to improve interactions with borrowers. We also introduced the shared appreciation modification.

We have a new program that will also lead the mortgage servicing industry that I'm proud to publicly announce. We call it Homeowner's One. As you can see on slide 15, this program aims at vastly improving the process of helping homeowners in distress. Homeowner's One will provide borrowers with greater transparency for the various options they have, should they find themselves unable to make their mortgage payments.

With greater clarity and more explicit assistance with short sales or relocation, we hope to ease the difficulties associated with delinquency. Borrowers will be better able to select the option that best fits their circumstances. Moreover, we will simplify the process by using a single package to cover the various options. This program should not only speed up nonforeclosure resolutions, it should increase nonforeclosure resolution rates above our already high standards. Ocwen has nonforeclosure resolution rates of 90 plus delinquent loans of 78%. But we hope to do even better. Ocwen's proprietary platform and strong process management uniquely position us to implement such a comprehensive approach to loss mitigation.

I would like to spend a few minutes to update you on the regulatory front. We support the new mortgage servicing and origination rules established by the CFPB, and we welcome the guidance on mortgage servicing transfers. We continue to have productive discussions with the state regulators, states' attorneys general and CFPB on adopting standards similar to the national mortgage standards adopted by the big banks. Ocwen Loan Servicing and other servicers have been asked to consider a proposal to contribute to a national consumer relief fund. In light of our leadership in assisting struggling homeowners throughout the mortgage crisis, we do not believe such a contribution is necessary, but we are continuing to discuss an appropriate overall resolution with the regulators.

We are also continuing to work closely with the various states on assisting homeowners affected by Hurricane Sandy. We continue to cooperate with the New York State Department of Financial Services to ensure compliance with the servicing standards agreement we signed in 2011. Finally, with our acquisition of ResCap, we are now complying with the national monitoring process for the ResCap portfolio. As we have said before, the ResCap as well as Homeward acquisition strengthen our capabilities as a large national servicer, including enhanced expertise in Fannie Mae, Freddie Mac, and Ginnie Mae servicing.

Now, I would like to turn the call over to John Britti. John.

Thank you Ron. Today on the call I will provide more detail on financials for the fourth quarter and full year 2012, summarize the impact of HLSS on our financials, and discuss our liquidity and funding position.

As you can see on, slide 16 normalized pretax earnings for the fourth quarter were $83.3 million. There were three normalizing adjustments. Ocwen incurred $2.2 million of transaction expenses related to Homeward and ResCap. About $1.8 million of that was for professional services, and the remainder are in servicing and originations.

The second item was a $3.1 million loss we incurred on the sale of residual interest in securitization trusts. This sale accelerated recognition of tax assets, and removed from the balance sheet approximately $50 million of securitization trusts.

The final adjustment was a $1.5 million termination fee associated with an advance facility we terminated upon sale of advances to HLSS. Both of these latter two items are components of other income or expense under the sub component other net.

I also want to briefly go over our effective tax rate in the fourth quarter that is largely related to our restructuring of Ocwen Mortgage Services, Inc. The total effective tax rate was 14.6% in the quarter. As a result of restructuring, however, we took a one-time writedown on deferred tax assets that accounted for 6.5 percentage points of the total. The remaining 8.1% is a reasonable estimate of the ongoing rate for the assets transferred. However, the overall future rate will vary depending upon the mix of domestic versus foreign assets and operations.

At the end of December, Ocwen's liquidity position as measured by unencumbered cash plus unused collateralized financing capacity was $220.1 million, all in cash, on the balance sheet. Our adjusted cash flow from operations metrics shown on slide five is calculated starting with the cash flow from operations number in our consolidated statement of cash flows. From that we subtract the portion of advance reduction that is match-funded with debt.

Next let me walk through at a high level the effects of HLSS on our financials. When we sell assets to HLSS, typically the advances represent roughly 80% of the assets sold. The advances are treated as true sale under GAAP accounting, while the MSRs sold are treated as a financing. That financing raises our interest expense. Keep in mind, however, that we also avoid interest expenses on the advances that we sold.

In the fourth quarter of 2012 total interest expense pertaining to HLSS was $27.2 million. The real net increase to Ocwen of the HLSS financing, however, is only about $13.2 million, as we would have otherwise incurred $14 million of interest on the advances and some operating expenses now covered by HLSS. Based on the large transaction we completed at the end of 2012, and assuming additional flow transactions this quarter, we anticipate Q1 2013 interest expense related to HLSS of about $44 million. The net cost is expected to be about $17 million, with $27 million of avoided advanced funding and operating expense.

A couple of weeks ago we raised $1.3 million in new senior secured term debt to close ResCap. The interest rate on this debt was at 3.75% over a liber floor of 1.25%. This is 175 basis points lower than our previous debt placement. Even so, the new term loan was highly oversubscribed, which is attributed to our track record of success and consistently strong cash flow generation. Refinancing costs are lower than we had planned for -- are lower than we had planned for when we priced Homeward and ResCap, which provides added benefit to Ocwen shareholders.

In addition the success of HLSS in raising new funds to purchase Ocwen assets makes it all but certain that we can execute additional large transactions without raising new equity. Moreover, the increasing efficiency at HLSS in funding advances through the ABS market will continue to improve Ocwen's acquisition of new sales through HLSS.

We expect to utilize cash generated from our portfolio to fund growth. Beyond what we can fund with cash, we believe that between HLSS and additional debt capacity, we could deploy another $3.5 billion in capital without raising into new equity. This would represent almost a doubling of deployed capital. Over the near term, we would expect to pay down debt with excess cash. This allows us to stay prepared for further growth. On the other hand, if we were to find if we were to find that we generate for more cash than we can reinvest at attractive levels, we would buy back equity.

Thank you. And now we will open it up for questions. Operator?

(Operator Instructions). Our first question from Mr. George of KBW.

Hi, good morning. This is Bose George. The first question I didn't know if you actually covered this in the tax comment. Is the 8% tax rate you had this quarter excluding the DTA writedown a reasonable run rate for 2013?

We are not forecasting a run rate for 2013 because it will vary depending on how much of our operations are foreign versus domestic and where our assets are located. I would say to the extent that assets are in Ocwen Mortgage Services, that is a good estimate of run rate.

Okay, great, thanks. Then on the Ally sub-servicing piece, are you able to give us the average servicing fee for that or say if it is comparable to the other sub-servicing stuff you are doing?

I don't know that we can actually reveal that. Keep in mind it is prime loans that are for the most part newly originated and performing. So the sub-servicing fee is probably lower than what you would have historically seen for Ocwen sub-servicing but consistent with similar type sub-servicing for that product in the market.

Okay. Great. And then actually that kind of leads to the question on the returns on prime MSRs that are a little more prime and to the extent that you guys are looking at this portfolio. I mean are there return characteristics different from the more traditional stuff you look at?

We maintain our hurdle rates on new business so we expect to get a return on capital which is commensurate with what we have expected in the past. But you get there a different way.

But the returns are comparable or they meet our hurdle rate but they are lower than the other distressed servicing?

They meet our hurdle rates. They tend to be a little lower than what we can achieve on subprime.

One last sort of industry question. The HAMP modifications are going to hit their five year window like the early first half modifications. And so they will start resetting up in rates. Do you think the industry could see higher redefault rates as that happens?

I think the answer is, yes, but I want to clarify something with -- at Ocwen. I don't remember exactly at what point, but at a certain point in the HAMP program we eliminated on our HAMP mods the step-up feature. So although some of the initial ones that were done do have that step-up feature, the majority of our HAMP modifications do not include that step-up feature and therefore although I think the industry in general may experience some issues with that, as you alluded to, that should be much less on our portfolio.

Okay. That's great. Thank you.

Our next question is from Hugh Miller of Sidoti.

Hi, good morning.

Good morning.

Hey, Hugh.

Just had a couple of housekeeping questions to start with, one being -- can you give us the weighted average unpaid balance during the quarter given that the Homeward transaction obviously would skew things a bit on the end of period?

Given that we only had it for a few days I think it is -- it was about $127 billion on the legacy portfolio.

Got you.

So I would play it only a tad higher than that.

Okay. And then can you also just give us a sense of in this particular quarter that the mix between the voluntary and involuntary prepayments and how that kind of compared to historical norms?

I mean I think if you look at involuntary prepayments for the quarter it was between 3% and 4%. If you look at true payoffs. If you look at our 10-K, what we break it down but we tend to include principal reductions as part of the voluntary prepaid. So I think we are breaking that out in the current 10-K so you will be able to understand a little better. But our voluntary prepayments are very low is the short version.

As we think about that kind of component and the potential for you announcing kind of a rising in the ten year rate and mortgage rate starting to head back up, what type of increase has to happen historically for you guys to see kind of a slower rate of prepays from those types of consumers?

I think on our existing book I'm not sure, particularly the private label book, I don't think we think that rising interest rates will move the date needle much at all. The people that are prepaying in our portfolio will -- are prepaying because of some sort of life event or whatever which is unrelated to interest rates. So I don't see that as a driver on our the bulk of our legacy portfolio.

I mean the only thing I might say if interest rates are rising, generally speaking, you would expect that that is happen in an environment where the economy is improving and home prices are probably also improving. So it is likely that that would actually have a positive effect on prepayments for us because again most of our prepayments are involuntary.

Sure. I guess that segues into a question if we get to a scenario we are seeing kind of rising home prices and lower unemployment, how does that play into your willingness to kind of offer modifications and the extent to which you will offer those, and then thinking about kind of in the terms of the operating costs associated with those items?

Does it really play a factor at all in kind of the level to which you are willing to kind of modify a loan and the amount that you necessarily have to?

Well, it is maybe a little bit of a complicated question but to the extent that in the net present value models you are assuming, out in the future property values will increase. That could actually help some borrowers that may fail the NPV test today to actually not fail it and therefore be able to get a modification today that they might not have been eligible for otherwise. I think as John indicated we would probably think more in terms of the economy as a whole improving, property values improving, less borrowers are likely to go into defaults. We would have less new delinquent loans, and those that are delinquent probably have a higher probability of getting them resolved through a modification or some other means.

Right or naturally which would just be much lower cost to you guys?

Yes, absolutely.

Right. Okay. Okay. And the last question I had was just with regards to seeing the rise in prepayment speeds in this particular quarter. I was wondering if you could provide some color as to what kind of was fostering that increase?

I think there was a modest uptick in voluntary prepays, because we usually run even lower than the 3% or 4% we were to this quarter. And then the other piece, I think, is the principal reduction modifications is having a fairly sizable influence on our overall prepayment rate. Again, that will settle down though, presumably as those modifications mature.

Got you. Okay. Thank you.

Our next question from Brad Ball with Evercore.

Thanks. Just a point of clarification -- the $470 billion pro forma UPB that includes the Ally $123 billion. Has that book been awarded or are you still bidding on that book?

So we are currently -- as part of the acquisition of ResCap, we inherited the sub-servicing of that portfolio, so in the numbers today it is a sub-servicing book. We can't really comment in detail on that transaction except to say that we are definitely -- it is for sale and we are definitely interested in acquiring it but beyond that we can't really say any more.

But you would be acquiring it on a sub-servicing basis?

No, the mortgage servicing rights themselves are for sale. So if we were to acquire it, to acquire the MSRs then we would be putting out capital to acquire the MSRs, but we would be getting a much higher servicing fee than we are under the sub-servicing arrangement.

I see and in the meantime you are sub-servicing it because of the accession of ResCap?

Correct.

Okay. Just reconciling the $250 billion pipeline with the $350 billion that you talked about last quarter, is it just the deals that have been announced since then that have reduced that, or are there other pluses and minuses? And is that $250 billion still predominantly nonperforming or subprime?

It is predominantly nonprime. And I think your assessment, the fallout is largely a function of deals that you have seen trade in the marketplace.

Can you --

Excuse me. It excludes the allied transaction. In other words, the Ally transaction is on top of the $250 billion.

Yes, right.

It would be $370 billion on a comparable basis the last quarter.

John, could you give me a percentage of what amount is nonprime?

The vast majority is nonprime. We don't -- as I think we talked about and I can't remember if it was last quarter or the quarter before we never put the Ally portfolio in our pipeline because we think that would be misleading potentially.

That's right. That's right. And then just shifting to Homeward originations. You mentioned $800 million mostly correspondent originations per month and that you are looking to recapture more. Could you give us a sense as to how quickly the retail recapture capability would ramp? Do you think you will have an opportunity to capitalize on HARP while it is still in place?

I don't think we will necessarily provide a projection but it is reasonable to say that we are ramping up the capabilities quickly. We also have been able to partner with certain lenders, one member and others in the industry to facilitate HARP refinance and have started to generate modest income from that. I think we are in the process of starting to benefit from HARP and we will continue to see that grow as the year develops both from our own internal capabilities and your ability to partner with strategic players.

Keep in mind our HARP-able if that is a word, portfolio has grown substantially, particularly with the acquisition of the ResCap portfolio. We didn't have that much of a HARP-eligible population prior to that.

Right. Okay. Thanks for your time.

Our next question is from Kevin Barker of Compass Point.

Good morning. Could you talk about the NPL transaction $3.3 billion servicing portfolio? Was that one-time in nature or part of a longer extended flow program that you have in place right now?

Are you talking about the transaction with Altisource Asset Management?

No, the $3.3 billion of nonperforming sub-servicing portfolios?

We -- I think we talked about that in the past. Large banks are interested in outsourcing nonperforming loan servicing. And we have been starting to develop it on both the flow basis and on a bulk basis and we would expect that business to continue to grow.

What I mean though is -- was that $3.3 billion one all flow or -- a one off flow or a one-time transaction?

It was a series of transactions.

Okay.

Really starting going back to June of last year we started to have a flow of nonperforming loans under a special servicing or sub-servicing contracts start to flow in. And that was the portion that came in in the fourth quarter.

Right. And they tend to come in in pieces. I can't remember exactly whether that was two or three chunks but we don't get them generally in one big slot.

Okay. And then Altisource residential transaction, the $121 million, could you give us a little color on the details surrounding that and a how that played out?

Sure. So there were certain business lines that were part of the Homeward acquisition that really fit better with the Altisource's business model and we entered into some discussions with them to see if they wanted to acquire those businesses from us. And you know came to terms and sold that to them. So generally they would be similar businesses to what they do today and which are not businesses that Ocwen is in. But they were part of the acquisition and therefore we thought it was in our best interest to sell those businesses and assets to them.

So you physically own the $121 million of nonperforming assets? Were they loans that you physically owned or are can you explain how that played out in the transaction?

I think you are referring to --

Go ahead.

I think you are referring to the nonperforming loans?

That's right.

Yes, the -- we had purchased these nonperforming loans. We retained the servicing and then sold them off. I think it was on February 12 it was about. But I'm not sure what specifically is your question?

Just wondering you are in the business of servicing the loans not actually owning them and putting them on your balance sheet.

Long-term it is more likely we will see that as see Altisource Asset Management as a source of business for us. We would hope and expect that they would grow quickly and generate additional servicing opportunities for us. I think they may also present some investment opportunities for us.

All right. Thank you.

Our next question is from Henry Coffey of Sterne Agee.

Good morning, everyone. A couple of questions. First, the business is changing. You have got private label, master servicing, sub-servicing, agency servicing. Could you give us either now or in it your future tour you filings kind of a more detailed breakdown of the mix for each -- as it evolves and the related fees? Maybe you can even give us a sense of that today.

I think you will get some of that in our filing. I think we have also provided that -- on the last quarter earnings call we provided revenues across the various portfolios. And we can --

I mean the business is changing, and it would be a helpful data point to have.

The next question really has to do with Ally. Obviously you can't talk price, but you are going to have direct experience with a very high-quality portfolio. Ally has valued that at about 80 basis points. Under the assumption that you are able to acquire that portfolio, integrate it, and find a suitable funding vehicle such as some sort of REIT-like structure or something, how would that impact your taste for more acquisitions of that sort?

I think you maybe hit the nail on head. We are looking to see if we can develop an effective funding vehicle for newly originated prime MSRs and to is extent that we are successful in doing that we think that that does expand our ability to acquire portfolios of that nature, particularly now that we have the operating or more operating expertise in that area than we had previously, both on Fannie Mae, Freddie Mac, and Ginny Mae servicing.

Could you wake up one day and be a big six servicer akin to a PHH or US Bancorp or even look at acquiring assets like that?

As Ron said, the extent that we are able to develop a funding vehicle for the prime MSRs, I think you will see us expand more into that market. So that -- and so I -- I don't see any reason -- anything that would impede us from doing that. When that vehicle gets started if and when that vehicle gets established.

Well, great. Thank you very much for your answers.

Thank you.

Thanks, Henry.

Our next question comes from Doug Kass of Seabreeze Partners.

Hi, guys. Good morning. Bill, I found our opening remarks very, very informative and unique and provided a good perspective on the value of Ocwen shares.

Two questions. The unpaid balance is one of the questions. The second question was, Bill, given the ramp-up, given the sharp ramp-up of new business, can you tell us where the workforce was at the end of the quarter that was just reported, compare it to where it was 12 months ago, and give us some sense are to where it will be at year end?

Ron and John correct me with I'm wrong but our workforce at the end of the year was probably flat with what it was at the beginning of the year if not slightly down.

Yeah, that's right. I think if you -- if you are talking about the legacy Ocwen, yes. I mean with the acquisition of Homeward we obviously added people.

And year end 2013 projected?

I'm not sure we are prepared at this point to comment on our headcount expectations. A lot of it will be driven off of various acquisition opportunities that we have. So although we would expect to make significant improvements in our cost structure and there will be areas where we are able to find efficiencies and consolidation particularly in some of the staff-type functions, we actually would hope that our growth is going to continue and so as we are becoming more efficient and lowering head count there would be reasons to be growing it as well due to acquisition opportunities.

Okay. One last thing, if you don't mind. Assuming interest rates are flat in the next 9 to 12 months, is there any room more in reducing cost of capital for the Company?

Well, cost of capital the components -- we will continue to work very hard and I think we will be successful at reducing in our advances, reducing delinquencies and as a result reducing advances. So the interest expense will come down over that period of time. Our cost of capital will continue to -- our implicit cost of capital with HLSS because of the decline in interest rates in terms of financing RMBS and future portfolios will be down with regard to that. And we will look at the -- in the prime space and some of the other spaces we had with the new vehicle to try to effectively reduce our cost of capital for carrying those positions.

So we have some structural changes I think we can put in place. Unless we get a lot more new business we will have paid off a major portion of our senior secured term loan which would in fact raise our effective cost of capital because we would because we will be substantially deleverred over the period. A lot of it will relate to how much new business we get, obviously the extent new business grows rapidly. Then SSTL will be refreshed and you know go a little higher over that period since we are substantially underleverred compared to the other are players in the industry.

Thank you, Bill.

Our next question comes from Mike Grondahl of Piper Jaffray.

Hey guys. I would just Bill and Ron's maybe thoughts on this. Your $250 billion pipeline -- is it reasonable to assume that 50% or greater of that could get announced and decided over the next six months?

I will wait for Ron to answer on that.

Yes, that is reasonable.

Would you take the over or the under on that, Ron?

What we have tried to do when we give a pipeline number is make sure that they are transactions that are active and there is dialogue. They are obviously in different stages. Some could be towards the end of negotiations or bidding and some could be more towards the earlier parts. But I think over a six month timeframe, which is I think what you said, I think we are -- you would look at the over on that.

Okay. And then just as you are sitting down with the various sellers, what are the two primary wishes or desires that they have?

Well, I don't think you can have that discussion without saying price is always important to them. So whether it is a lower sub-servicing fee or a higher MSR price, I don't -- whatever is going on in the market that still is a large driver. What we have talked about in the past, we continue to see banks of various sizes looking to refocus their business model and focus on the core, their core customer and if they can find opportunities to shed noncore servicing customers, they seem very open and willing to do that. So those are usually kind of the things that are going on in those discussions.

Okay. And then one last question. Just on the last call we talked a little bit about the potential for co-issue business on the origination and servicing side that you guys were thinking about or looking at. How is that progressing?

I think it is a component of our overall strategy of acquiring MSRs in the prime space to the extent that we can fund them efficiently and we can get them at attractive levels we are looking to acquire either through small bulk bids or co-issue arrangements servicing as well.

Great. Thanks a lot, guys.

Our next question is from David Haas with Moore Capital.

Hi, guys. Just a couple of questions. First on the prime MSR, really around strategy and structure. And so just quickly, would that -- that structure assumingly would be outside HLSS but who would manage that process? Who would manage the assets?

We would just as soon not comment on that yet until we are ready come to market with it, if we might.

Okay. Okay. I guess this is a follow-up would be there are any hurdles potentially to, what are the hurdles so setting something like that up?

Well, there obviously you can always set it up. What we are trying to do is to come up with a vehicle that will substantially reduce the capital cost that is currently present in the market. So it is all a matter of degree. How far do you want to -- how much effort and time do you want to dedicate to coming up with structures that are in fact improvements over what is the current technology in the market? And each one of those independently sets up a set of series of requirements that you have to meet -- whether they be structured from a tax efficient perspective, from a security, from the standpoint of the security interest that the instrument you will have compared to others. What percentage you are able to get within that vehicle? And also what kind of approvals do you need to move those assets around from the various agencies that are required?

So there is a whole series of issues that are differentiated by the structure that you pick. So what is it something like best defeats better. You don't want to give up better just to get best.

Yes.

I think we a huge flow diagrams on what different structures and he we can do and what those options are. I think we are coming closer to a view on to exactly how we can structure that product. Hopefully it will be an important part of our strategy going forward. Ocwen wants to continue to maintain its capital-light position. We don't believe our shareholders want us to be taking risks in terms of assets that can have movements in value with regard to them, nor do as a large shareholder, do I want to take those risks on or balance sheet. So if we can get that solved I think you will see us be a very effective competitor.

The acquisition of ResCap was a great acquisition because they are probably one of the highest regarded prime servicers out there in the marketplace. We very much like to have that quality within our operation and as a result they are also lower cost in prime space than we are. Quality and cost are not in conflict at all. So we are happy with the platform. We needed to come up with a more effective capital vehicle that gets that investment to the appropriate parties in the market.

Got it. Okay. And so just not to ask the same question twice but you mentioned with respect to Altisource Asset Management potential co-investment opportunities. Is the prime MSR sort of amongst that menu of co-investments or were you referring to something else?

I wouldn't put a whole lot of weight on that. We are not trying to -- first of all, Altisource Asset Management may have a vehicle underneath it to do something but won't be investing itself in it. We are looking at other asset management vehicles once we get the are residential one fully ramped which we will be talking --

Yes.

I shouldn't really spend that much time on Altisource, and Ocwen is not really looking to make substantial co-investments with other parties.

Understood, okay. And just last quick question. This is really more of an Ocwen question. But in the transfer of assets out to Altisource ASPS, they were able to help you pay for one of transactions that you recently did. When you look across your pipeline of $250 billion which is largely sort of PLS, do you have any insight into the structures within that pipeline? In other words, are there the businesses similar to that which Altisource bought from you so that they could potentially help you purchase or transact on the pipeline? Pay for ostensibly?

I wouldn't say that the two transactions that we did were unique but they he certainly are the exception rather than the rule.

Got it.

Doesn't mean it won't occur again within transactions but it is not something that occurs on every single -- would necessarily occur on every single transaction but it potentially -- likely will occur on one or two others.

Got it. Okay. Thanks. Very helpful. Appreciate it.

Our next question is from Kenneth Bruce of Bank of America Merrill Lynch.

Good morning. Or good afternoon, I guess. My first -- my first comment is just that, it is a comment. I guess you pointed out, Bill, in your remarks, that you have got the a lot of cash that comes back to you, fairly high quality problem in that your cash and capital turns over as quickly as it does. And I guess the real challenge is just identifying high return investments to prolong that earnings trajectory and hence our freakish obsession with the pipeline.

And I really appreciate the discussion you have given around what the longer-term opportunities will be. I think that is important for investors to understand, and as the mix of the business changes we will look forward to seeing some enhanced disclosure just so we can think through that. I think it will be important for us to understand how that return on capital to a degree that is coming from different components is ultimately represented in the P&L. So I look forward to that.

But I guess the one clarifying point you have on slide eight, a trillion-dollar opportunity, and I'm wondering if that is specific to Ocwen or if you just think that the total portfolio of distressed servicing will be $1 trillion dollars?

How we arrive at that is to look out in the market and say today there is about $1.1 trillion of seriously he delinquent loans in REO and make the heroic assumption that a portfolio that is sold that is distressed will have 25% delinquent within it, so that would lead to about a little over $4 billion market potential. And we, without giving any forward-looking statements, we believe that maybe a quarter of that or more will actually trade, so that is how we get to the trillion.

Great.

It is across the industry. I mean it could be more. It could be less. You really are very much being, it is crystal ballish when you come to numbers of that size and what that means for the transformation of the industry.

I understand. I just want to make sure I wasn't misinterpreting the numbers. That's helpful to know. As you described an opportunity that is probably going to arrive at some point in the nonagency or nonqualified mortgage market, do you see Ocwen participating in that as an originator and issuer in the securitization side, and then that Ocwen will retain the servicing, or do you see yourself more as a counterparty to others' transactions as that market develops?

Certainly we see ourselves as a servicer in that space. I mean I think that most -- a lot of our growth over time has been being the servicer for people who are originating loans. We certainly, first of all, are trying to think about ways to try to stimulate that market because we think there is a real need over time. Homeownership is falling about 1.5% a year, primarily because only 35% of the population can actually afford a new mortgage, which is pretty much we believe at an all-time low.

That is not to say we would ever condone, I was very negative about subprime lending from 2004, on because it made who sense what was occur. I think in a prudent way if you come back and can provide mortgages to people that can responsibly handle those mortgages I think that makes a lot of sense to try to participate within that market.

We have to be careful, though. I abhor a gain on sale and as John always reminds me, if you have it the auditors require you actually to book it or write it up to those levels. So I think we are going to have to think about how we do that so we keep our balance sheet relatively pristine.

Understood. And are there -- it may be premature for this but can you describe at all about the P&L or balance sheet impact for homeowners, one, will be realizing it is probably small at first, but just to understand how that may differ from any other modification or other type of program?

I think it is difficult to make my projections. I mean the intent is, what we are hoping to be able to do is to it help in particular help those borrowers that may not today be eligible for a modification transition faster and more effectively than going through all the way through the foreclosure process, so through short sales and other means. Hopefully with the single package concept, too, there may have been borrowers who today could be eligible for modification, but for whatever reason are not engaging to the level that they should, and therefore may be missing some opportunities. So that is why I think we indicated should be some pickup on modification side as well.

But again, it is really difficult to project anything but ultimately we think it will help us when you look at from our side accelerate reduction in delinquencies, reduction in advances, and lower operating costs on a go-forward basis.

Ron, I think, too, it gets -- it is -- we have a metric that we try to do first call resolution. Because if one looks at your cost structure, a large portion of your cost is really associated with people you don't solve their problem the first time you have is them on the phone. And it is a real -- it is quite a substantial concentration of your calls are on a very small portion of your population.

To the extent that we are able to offer everything right up front to them and give them the complete package, I think we increase customer satisfaction significantly. We drop foreclosures and we also drop, we hopefully significantly reduce foreclosures, and at the same time reduce our operating costs.

Got it. Understood. Okay. And last question, promise. This whole Ginnie Mae opportunity I think is poorly understood by the market. Can you maybe frame that out for us just so we better understand that?

Well, there is definitely a lack of -- when you say the Ginnie Mae opportunity, I want to make sure I understand what you are asking.

Sure. I guess looking at some of the international statistics I think FHA delinquencies are 16%, 17% and I think that area is going to be potentially be an area where somebody with your particular skillset can really take advantage of that market, so to speak and just looking for that to be framed out so we understand what that looks like.

Okay. It is a little difficult to say. That is one of those opportunities that when you step back makes a lot of sense to go forward in the marketplace. But it may be one that takes time to develop because there are just approvals and structural issues involved that will have to be dealt with. But I think with the acquisition of ResCap and Ginnie Mae expertise that we picked up combined with Ocwen's historic goal, loss mitigation expertise, it is a great combination of systems and talent and processes that could have a meaningful impact on what is a difficult market right now.

But again it is going to be a matter of how transactions get structured in order to enable those delinquent loans to move from an existing servicer to another whether it is through sub-servicing or some other mechanism, that I think will still take a little bit of time to develop. But I do think it is a very meaningful opportunity.

Okay. Thank you very much. Appreciate all your comments this morning.

Our next question is from Ryan Zacharia of JAM.

Hi, guys. Thanks for taking the question. Just a few of them. So I think following back on someone else's question the Resi transaction where the loans were actually purchased from Ocwen Loan Servicing and I think someone just wanted to know Ocwen like bought nonperforming loans and what the structure was and how that happened?

I will take the question. We had one of the clients we would like to have as a long-term really is Altisource Residential. We had extra cash at that particular point in time. And we were able to earn a very nice return on that cash during that period of time with respect to that so that whenever Resi wanted to try to acquire assets, we were able to basically sell those to them.

I think we can also say, too, that the seller of that product was also somebody that we are looking to develop a bigger relationship on the servicing side and it was a good opportunity to execute a transaction and further that relationship.

Okay. But in the future is it contemplated that Resi will purchase directly or still going to be is Ocwen still going to be a conduit?

Resi will purchase directly.

And then just following up on the pipeline. I just want to make sure are that I heard you correct, Bill. Last quarter was $350 billion but included the Ally $120 billion. This quarter is $250 billion but it excludes the Ally $120 billion. So net-net the pipeline actually grew $20 billion even though both traded and that was $300 billion?

Right.

Actually, I think you got that I think last quarter we said that it did not include.

You said it didn't include ResCap. I'm talking about the Ally.

It didn't include the Ally. We said last quarter it didn't include Ally as well. It didn't -- the Ally portfolio was not in the $350 billion and it is not in the $250 billion either.

So the pipeline did shrink by $100 billion?

That's right.

And that is I guess then due to the portion of Bofa that you thought was relevant for you guys?

Correct.

Okay. And then just on the tax rate so the 8.1%, is that a result of 100% of the businesses in Q4 being within the Virgin islands?

No. It is a function of a substantial portion of the assets being owned by Ocwen Mortgage Services.

So is it always timing differences, assuming you stop growing and you integrate the platforms that you have purchased now, will your tax rate always migrate down to some level like this?

Well, we are not making specific forecasts about our future tax rate. But I think it is fair to say that to the extent that the assets would be in Ocwen Mortgage Services, Inc. we think that that is a good estimate of the future you tax rate.

And the only reason they wouldn't when it Ocwen Mortgage Services, Inc. is because you just bought them and haven't transferred them? I'm trying to get a sense for what created the volatility.

Or the extent we have operating companies that don't -- that are US-based.

Okay. And then just a question, final question. If HLSS starts trading kind of inside of your senior secured term loan from a yield perspective, how does on a go-forward basis does Ocwen start to benefit from that? If basically the effective cost of the capital, the market we are saying, is less than the 8% it originally came out at. Do you start negotiating, you know, more favorable deals for Ocwen?

Well, the extent -- keep in mind that the HLSS is a combination of both SSTL and equity. And you know, we were -- we are obviously he interesting in becoming noncapital intensive and having to that transaction. So there is at some point, one needs to take into account that relationship. But overall your blended cost of capital was still -- would still be much higher than that.

Okay. Thanks.

Your next question is from DeForest Hinman of Walthausen & Co.

I have an accounting question. You had mentioned that the slight gain on sale but now you guys are disclosing a separate line item on the balance sheet for mortgage servicing rights at fair value. So are we going to be seeing a gain on sales going forward because of the Homeward and the ResCap transactions, and if we are where is that going to show up in the income statement?

We are going to have to book gain on sale for the origination related business. And it will show up -- it will actually break out the lending business probably on a go forward basis as separate segments so you can understand that.

Okay. Thank you.

Our next question is from Chris Gamaitoni of Millennium.

Thanks for taking my call, guys. Could you let us know the gain of sale on the Homeward correspondent business that occurred in the quarter? Gain on sale margin?

Not very much affected our earnings because we only owned the company for four days.

What were they earning, so that we can just look at origination number and try to estimate a revenue number.

I don't have that number handy.

Of the pipeline, did you break down what percentage is agency versus private label?

We did not.

Would you be willing to do that?

I think to the extent that I think we talked about it doesn't matter what a loan looked like at birth, it matters what it looks like today. When we look at our pipeline since we would describe our pipeline as largely nonprime it is really more about a function of the delinquency of the underlying loans. So highly delinquent GSC pools are as much of interest to us and make up a chunk of the pipeline but they are similar to subprime pools in terms of economics for the transaction.

So you purchased the MSR cheaper because the base servicing fee is cheaper, is lower?

Right or our sub service the underlying nonperforming loans. Either way the opportunity is the same for Ocwen.

Okay. Thank you.

At this time there are no other questions.

Thank you very much.

Have a great day.

Thank you.

This does conclude today's conference call. You may disconnect your phones at this time.