Onity Group Inc (ONIT) 2013 Q2 法說會逐字稿

Good morning and welcome to Ocwen second quarter earnings call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question and answer session. (Operator Instructions)

This call is being recorded. If you have any objections, you may disconnect at this point. Now I will turn the meeting over to Chief Financial Officer, John Britti. Sir, you may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us today. My name is John Britti. I'm Executive Vice President, 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 Presentations, you will see the date and time for Ocwen's Financial Second Quarter 2013 Earnings. Click on this link. When done, click on Access Event.

As indicated on Slide 2, 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 using -- or by use of forward-looking terminology. They may involve risks and uncertainties that could cause the Company's 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 2012 Forms 10-K and first quarter 2013 form 10-Q.

If you would like to receive our news releases, SEC filings and other materials by email, please email Linda Ludwig at linda.ludwig@ocwen.com.

Joining me today for the presentation are Bill Erbey, our Chairman; and Ron Faris, President and Chief Executive Officer.

Now, I will turn it over to Mr. Erbey. Bill?

Thank you, John. Good morning and thank you for joining today's call.

This morning I would like to first review the key characteristics that make Ocwen a unique company, including our best in class operations, strong cash flow and ability to grow without dilution.

And second, discuss our current outlook for growth and why we're excited about Ocwen's prospects, especially as the economy improves.

Third, I'd like to discuss why we believe that conservative accounting and value not on our balance sheet may obscure Ocwen's relative worth.

After my comments, Ron will discuss the regulatory environment, review our recent financial results and provide an update on our operations, including acquisition integration.

And finally, John will provide additional detail on our second quarter results and liquidity position.

Let me begin by reviewing what makes Ocwen uniquely successful in the mortgage servicing space. First, Ocwen enjoys substantive and sustainable competitive advantages within the servicing business, both in terms of cost and performance.

As shown on Slide 4, Ocwen's cost to service non-performing loans is 70% lower than the industry average. Moreover, the design of our systems and platform allow us to manufacture new capacity more efficiently and effectively than other servicers.

We can take people with strong empathy, language skills and intelligence and have them producing as world-class home retention counselors within 90 days.

Slide 5 shows the results of our ability to scale our platform. Ocwen has a superior track record of successfully boarding large new servicing portfolios and substantially lowering delinquencies and advances.

Our ability to lower delinquency further enhances our operating cost advantage in two ways. As delinquencies fall, so do advances and interest expense on related financing. Secondly, as delinquent loans are more expensive to service than non-delinquent loans, further reducing delinquencies lowers our operating expense and improves our margins.

Another unique feature of Ocwen is that we generate strong operating cash flows that exceed earnings as shown on Slide 6. This is a function both of our solid operating performance and conservative accounting policies that tend to understate our earnings compared to other servicers.

Slide 7 shows some areas where we differ from our peers on accounting policies. I will elaborate on some of these later.

Lastly, our balance sheet and access to capital provide ample resources to acquire new assets without earnings dilution. We closed two very large transactions and we've announced a third to close within a period of less than 12 months. And we have only issued a small amount of new equity as part of the home repurchase because the seller wanted to invest with us, not because we needed additional equity.

As our portfolio continues to grow, we expect further growth in excess cash flow. We intended to fully access cash in the following order of priority.

First, to support the growth of our core servicing business. Second, to expand into similar or complementary businesses as shown on Slide 11 to meet our return on capital requirements and where we can develop a competitive advantage utilizing our core strengths. And third, repurchase shares. John will provide more information on potential share repurchase later in the presentation.

Now let's turn to our current outlook on growth. We believe that the improving economy and changes in the regulatory environment bode very well for Ocwen's performance and future ability to acquire assets.

The stronger economic environment we are entering should lower delinquencies and slow prepayments as described on Slide 8. Sustained home price appreciation along with higher mortgage rates is almost a best case scenario for our earnings.

To provide a better understanding of what happens to repayments on a non-prime portfolio as delinquencies fall, see Slide 9. We show the historical drivers of prepayments on non-prime mortgages. Note that voluntary pay offs have historically been in the low single digits.

Delinquencies have accounted for most of Ocwen's non-prime CPR. This is because despite the lowest mortgage rates in generations, most non-prime borrowers have little ability or incentive to finance --refinance.

More than half of our non-prime borrowers have had their loans modified and their interest rates are typically around 3%. Even borrowers with an incentive to refinance have little ability as they cannot qualify for a new mortgage. So it is likely, in our estimation, that were delinquencies to go down substantially, then non-prime CPRs could fall to single digit levels.

Before I talk about how we view our prospects for adding new assets, it's worth noting on Slide 10 that Ocwen has a solid history over an extended period of time of adding new business.

For over ten years, every time Ocwen has executed a large transaction, some industry observers have speculated that it will be our last and that we will just be a melting ice cube, despite being one of the few businesses that has a predictable recurring revenue stream extending at least a decade.

So let's talk about our growth model that we've laid out on Slide 11. At the end of June, our servicing portfolio was $436 billion. In addition, we've announced or expect to close on at least another $90 billion in new MSRs, or subservicing rights, in the second half of this year.

More importantly, we continue to see a sizeable pipeline of potential opportunities. We currently have a pipeline of $400 billion, which is up from last quarter, despite eliminating the deals we recently won.

Note that the actual volume of deals we are pursuing is much larger. Our pipeline reflects a realistic assessment of what we believe will come to market and what we believe can pote -- we can potentially win.

Moreover, we continue to believe the overall size of the opportunity is at least $1 trillion over the next two to three years. The opportunity set includes both large and small transactions. The mix is still tilted toward MSR acquisitions but we will continue to grow our subservicing portfolio as well.

We are seeing strong indications that large and small banks are accelerating their plans to reposition their mortgage servicing portfolios and shed legacy assets. Banks continue to look to sell off or subservice noncore servicing aspects -- assets. Later, Ron will provide some additional detail regarding our pipeline.

As the largest non-prime servicer, we believe trends that support a greater participation by private capital in the mortgage industry are very good for our business. Several recent developments suggest that the longer term development of a private mortgage market may emerge even more rapidly than we had assumed.

On the GSE front, there now appears to be a greater probability of GSE reform with an emerging bipartisan consensus to shift more of the prime space to private capital. Bipartisan FHA reform appears likely to shrink the volume of Ginnie Mae's and support use of special servicers.

The administration is supporting substantial guarantee fee increases at Freddie and Fannie. And this, along with our pilot to sell off mortgage credit risk, will provide a greater opportunity over the near term for private capital to re-enter the market.

The bipartisan Corker-Warner Bill has developed an apparent opening to move forward long-delayed actions on the GSEs. We believe the likely outcome of any legislative changes is a greater role for private market capital and that presents opportunities for Ocwen to expand further in the prime servicing space.

We've also been making progress in our efforts to lay off the risks and reduce the costs associated with funding prime MSRs. We expect that this will lower the risk on our balance sheet and improve our competitiveness in the prime servicing business. We hope to announce more on this very soon.

HLSS and our efforts to sell off prime IR risk represent an important part of Ocwen's strategy, Ocwen's focuses on managing operating risk and selectively credit risk. Long term, we prefer to distribute interest rate risk to investors focused on managing such risk.

We've also seen increasing interest in expanding the credit parameters of the mortgage market with new investors looking at various products that are currently not available. As we discussed on prior calls, the demand for non-prime mortgages is at an all-time high.

With rates and home prices rising, it's not surprising the variety of existing lenders and new entrants are exploring ways to prudently meet the demand. So far, the amount entering the market are very small. But as we have said, we expect the non-prime market to emerge slowly over the next three to five years.

As the largest servicer of non-prime assets, we see this market as a sizeable long term opportunity for Ocwen to continue to acquire new mortgage servicing assets.

As I have also previously mentioned, we've invested in adjacent spaces such as reverse mortgage and we're considering other business lines to augment our growth. The competitive advantages we enjoy in non-prime servicing are highly transferable to other adjacent industries which we believe provide attractive growth opportunities.

Finally, let me address our balance sheet which is substantially under-levered relative to our peers as shown on Slide 12. Our balance sheet is even stronger than it appears based on our conservative accounting principles.

There are several points I have made on my previous calls. First, with the exception of a small percentage, Ocwen carries its MSRs at lower of cost or market or low-com rather than at fair market value.

As a result, Ocwen will never show an earnings write-up on about 95% of the owned MSR portfolio. Instead, we amortize these MSRs. Actually, we've been amortizing our non-prime MSRs at a rate of 18%, which is above actual CPRs of 12% to 15%, creating excess value not shown in our earnings or on our balance sheet.

As of June 30th, 2013, the fair value of our MSRs exceeds the carrying value by $637 million as shown on Slide 13. Fair market value is estimated using average industry costs to service that are more three times higher than Ocwen's cost on non-performing loans.

If we were to use actual servicing cost, ignoring our resolution performance advantage, our MSR value would be another $832 million higher. Combined, there's almost $1.5 billion of value not reflected in the book value of our MSRs.

Second, Ocwen only recognizes servicing fees as collected, rather than accruing delinquent servicing fees. At the end of the second quarter of 2013, Ocwen had over $511.8 million in delinquent servicing fees that, unlike many servicers, have not been recognized as revenue. And therefore are not on our balance sheet.

And third, with respect to acquired advances, we believe our accounting policies are conservative in that they do not pull earnings forward. For example, when we purchase advances at a discount, say at 95% of face value, we do not book the discount into earnings as those advances are collected. And that put new advances on the books at 100% of face value.

Since top performing services typically resolve 60% of advances in the first year, this practice accelerates earnings into the first year following an acquisition.

If Ocwen had paid exactly the same overall price for Homeward, ResCap and OneWest but acquired the advances at a discount while paying more for the MSRs, we could accelerate approximately $150 million of additional after=tax earnings in this manner in the 12 months following the acquisitions. Rather, to the extent we acquire advances at a discount, we amortize the earnings over the life of the MSRs.

For all of the above reasons, our cash flow exceeds earnings. And over time deferred earnings should appear as net income. Moreover, Ocwen's debt to equity level is over-stated relative to peers that mark MSRs to market, record the first servicing fees and recognize advance recoveries.

I'll now turn the call over to Ron to talk more about the regulatory environment and our operational performance, including an update on integration of recent acquisitions. Ron?

Thank you, Bill. I will cover three topics this morning. First, I'll provide additional details on our progress toward a possible agreement with state and federal agencies.

Second, I will review our financial and operating results including an update on the Homeward and ResCap integration efforts. Finally, I'll talk about our recently announced acquisitions and new business pipeline.

Let me start by updating you on the progress we have made with various state and federal agencies, including state attorneys general, state regulators and the CFPB.

As we had previously disclosed and discussed, in February we were requested to consider a proposal to contribute to a consumer relief fund that would provide cash payments to former borrowers who were closed upon by Homeward, Litton and Ocwen Loan Servicing.

At the time we estimated our net maximum exposure of $135 million. We were also asked to consider agreeing to the National Mortgage Servicing Standards, along with a monitoring process which we are already partially subject to as a result of the ResCap acquisition.

We are pleased to report that we have made significant progress towards an overall agreement. As such, and in accordance with GAAP, we have recorded an expense of $52.8 million, which we believe will be adequate after taking into account indemnifications we have from the sellers of Homeward and Litton. We look forward to finalizing this process, which we expect will occur very soon.

As the fourth largest residential mortgage servicer in the country, we will continue to strive to be the best we can including helping as many families as possible remain in their homes and avoid foreclosure. While at the same time improving loan portfolio performance.

Since 2009, Ocwen has helped over 340,000 families to get sensible modifications, enabling borrowers to work through their challenges and avoid foreclosure.

Moving on to our financial results for the second quarter. Slide 14 presents our second quarter highlights. We generated record revenue of approximately $530 million, which is up 151% compared to the second quarter of 2012. And up 30% on a sequential basis over last quarter, primarily due to having the ResCap portfolio for a full quarter. And the acquisition of MSRs associated with the Ally GSE portfolio.

Our net income of $76.7 million is up 71% from the second quarter 2012 net income. Our net income includes the impact of the settlement charge and transaction-related expenses.

Normalizing for these expenses would have yielded pre-tax income of $165.9 million for the quarter, representing a 64% increase over Q1 of this year, and a 130% increase over the second quarter of 2012. John will discuss normalizing items in more detail later.

On a per share basis, we reported $0.53 per share in the second quarter 2013, which is up 66% compared to the second quarter of 2012. Taking into account normalizing items at a 12% tax rate, we would've generated total normalized EPS of $1.01.

For more details on our financials, please refer to Ocwen's second quarter 2013 10-Q which we expect to file on Monday, August 5th.

Our integration of the Homeward and ResCap portfolios are proceeding according to plan. All of the remaining Homeward loans were moved to the Ocwen platform early in the second quarter. And we are seeing a substantial pick up in performance.

As we expect to see continued improvement in the Homeward portfolio in coming months, we believe that most of the Homeward integration-related costs are now behind us.

The ResCap transition to the Ocwen platform has begun with the transfer of a portion of the private label securities loans from the former ResCap platform to Ocwen's platform in early July. We expect to have moved all of the private label loans by the end of this summer.

As these loans have the highest delinquencies, they represent the largest opportunity for improvement in performance and cost. We should also incur much of the transition-related expenses for ResCap in this period, though there is a large expected contract breakage expense of about $20 million that will be incurred only when we finally move everything onto Ocwen's platform in the first half of 2014.

Turning to our portfolio performance, let's begin with the delinquencies. As shown earlier on Slide 5, our trend for delinquencies on recently acquired portfolios has been in line with expectations.

The Homeward portfolio that was largely on the Ocwen platform for the entire quarter experienced a 3 percentage point improvement in non-performing loans from the end of March to the end of June.

We also continued improvement in the Litton portfolio with a 1.3 percentage point improvement in non-performing loans over the same period.

Loans on the ResCap platform showed slightly higher delinquencies with total delinquencies rising about three-tenths of a percentage point to about 10.5%. This is consistent with overall industry data that indicates a rise in June delinquencies. This also appears to be a seasonal pattern.

The ResCap loans have lower overall delinquency, given the preponderance of high-quality agency loans on that platform. Ocwen's overall 90 plus delinquency rate at June 30th, 2013, was 14.4%, representing a six-tenths of a percentage point improvement compared to March 31, 2013.

Total modifications for the quarter were 28,137 across all portfolios, representing a 16.3% increase over last quarter. HAMP modifications were 39% of the total. The growth in HAMP modifications, which had been as low as 15%, is a result of changes made to the program by the government last year.

We are heartened by these results as a two year extension of the program that had been slated to end this December.

In the quarter, 52% of the modifications completed included some principal reduction with 21% of those modifications being our proprietary shared appreciation modification. We expect to modify 28,000 to 30,000 loans in the third quarter of 2013.

On average, modifications reduced borrower payments by about $600 per month, allowing borrowers in distress to keep their homes. Modifications also support recovery of the broader housing market by reducing the number of distressed sales.

In every case, these modifications provide positive net present value to inv -- to RNBS investors versus the very expensive alternative of foreclosure and REO sale.

Ocwen's innovation in loss mitigation continues to show up in our superior results versus the industry. On Slide 15 we have updated data showing Ocwen's performance compared to others on subprime loans based on private label securities data.

We have broken the PLS data into Ocwen and non-Ocwen portfolios. As you can see, Ocwen both modified more loans and has fewer modified loans that are delinquent.

Excluding recently acquired loans from Homeward and ResCap, Ocwen has modified 56.5% of its PLS subprime portfolio, compared to 47.1% for other subprime servicers.

Getting more borrowers into loan modifications is a critical component of our ability to drive down delinquencies and improve RNBS performance. Ocwen has also had better performance on modifications with those that are 60 or more days delinquent and only 24.1% compared to the non-servicer re-default rate -- non-Ocwen servicer re-default rate of 34.8%

I would also point out that our superior performance is consistent when lined up against any large subprime servicer. Others are a little better than average, but none are better than Ocwen. Our better performance is a direct function of our industry-leading technology platform and the innovative use of psychological principles that enable Ocwen to deliver modification programs that increase both borrower acceptance rates and adherence.

This analysis is consistent with multiple third party studies which show Ocwen modifies more loans and has lower re-default rates.

Constant Prepayment Rate, or CPR, on the overall portfolio averaged 20.8% in the quarter. But as discussed earlier, the CPR on nine -- non-prime loans is far less interest-rate sensitive than prime loans. The CPR on non-prime loans averaged 13.4% for the quarter, as compared to 26.1% for prime loans.

Slide 16 shows prime CPR broken into its components. We have used ResCap data combined with ours to show trends as our prime portfolio was small until the past several months.

As you can see, historical prepayment rates for prime portfolios were far more volatile than non-prime. Some of the recent prepayments are HARP refinances in our prime portfolio that we have induced through our marketing efforts.

Such HARP prepayments are positive for both near term and long term earnings as we earned fees on HARP originations and get back a lower note rate loan with a borrower who is typically underwater on their mortgage. The new servicing is therefore less likely to prepay in the future.

In April, as previously announced, we acquired Liberty Home Equity Solutions. Liberty is the originations leader in the reverse mortgage lending market with a 17% market share as of June.

As shown on Slide 17, Liberty's profits are so far better than expectations, delivering over $4.3 million of pre-tax income in the second quarter. We would expect some decline in overall profit later this year as program changes by HUD take effect. As we've said in prior calls, we believe these changes will be beneficial to the program over the longer term.

On the forward mortgage market side, the Homeward correspondent lending business volume fell to $1.5 billion of funded loans in the second quarter 2013 with roughly flat margins since the end of Q1.

Overall, pre-tax profitability of our forward lending operations was $5.8 million in the second quarter, with most of the profitability generated on HARP refinance volume.

Ocwen's own direct consumer operations doubled in volume, though most HARP volume is still generated from partnerships. As we have said in the past, we expect the HARP contribution to ramp up in the second half of the year as long as rates do not rise substantially.

Moving on, let me update you on our recent transaction activity. In the second quarter, we announced our acquisition of OneWest's $78 billion servicing portfolio. OneWest's portfolio is mostly all Alt-A project -- product originated by the old IndyMac. Approximately 60% of the UPB is private label, and 40% is agency, mostly Fannie and Freddie product.

The agency product is higher delinquency than typical agency portfolios both because of its largely a seasoned portfolio and because of the poor performance of agency Alt-A programs. The average annual servicing fee on the OneWest PLS is about 35 basis points annually and 28 basis points for the agency loans.

We are not acquiring any of OneWest's operations, so our integration costs should be small. This business is expected to close in stages in August and September.

We also signed an agreement with Greenpoint to acquire their $8.3 billion servicing portfolio. The portfolio is largely Alt-A loans with an average servicing fee of about 26 basis points. In this case, it is about 98% private label with a small Fannie portfolio. We expect this transaction to close in the fourth quarter.

On July 1, we boarded $3 billion of subprime loans from a large bank under a subservicing agreement -- arrangement. We expect an additional deal in September of about the same size. In general, we believe that we will continue to see a flow of high risk subservicing or non-performing loans to special servicing from large banks.

Indeed, we believe that use of large specialty servicers will become the norm for the mortgage market of the future.

As Bill mentioned, we have a substantial pipeline of opportunities that we are tracking. It does seem that as the transactions trade or drop out of the pipeline, new opportunities emerge. This is not surprising, as potential sellers are often well aware of how many deals are in the market and they have operational and economic incentives to manage the flow.

We believe the profitability of our pipeline opportunities should not differ materially from what we have seen in past transactions.

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

Thank you, Ron. Today on the call I will cover three areas. First, I will provide more detail on our normalized results for the second quarter 2013. Second, I will discuss our funding of liquidity including the impact of HLSS on our financials. Finally, I will use our latest OneWest transaction to discuss better ways to model Ocwen's earnings.

As you can see on Slide 18, normalized pre-tax earnings for the second quarter 2013 were $165.9 million. There were three main areas of normalizing adjustments.

First, we incurred $26.5 million of transition-related expenses related to Homeward, ResCap and Ally. These expenses include such things as severance costs, legal expenses and other costs for transitioning loans onto the Ocwen platform.

Second, as Ron has described, we included a $52.8 million net charge related to our possible regulatory settlement. Note that the amount we booked is $66.4 million, but $3.6 million was booked to goodwill as an adjustment against the Homeward purchase.

Third, the adjusted income to remove $900,000 of contribution from discontinued operations, this was primarily contribution from loans we currently subservice that will transfer to Quicken in August as part of the Ally transaction.

On Slide 19, we break down the normalizing adjustments across the more detailed line items of the income statement.

As Bill showed earlier, accounting differences can cause large variances among companies. For example, we book all but a small portion of our MSRs at lower of cost or market. Given the run up in rates in the past quarter, Ocwen would have booked an estimated $219 million of additional pre-tax income had all our MSRs been carried at fair market value.

Also, if we were booking as income 5% of advances collected for newly acquired portfolios at Ally, Homeward and ResCap, we estimate we would've added another $17 million to $20 million to pre-tax earnings.

The cumulative effect of just these two changes would've raised our Q2 normalized pre-tax earnings to over $400 million, which is shown on Slide 20.

Turning to liquidity, Ocwen ended the quarter with $440 million in cash on the balance sheet, having borrowed fully against our advance lines. We were per -- we were due -- we did so in preparation for closing the OneWest transaction.

As you know, our balance sheet can fluctuate quarter to quarter depending on the timing of transactions. On July 1st, we raised money through a sale to HLSS in advance of the OneWest transaction. We considered this prudent given the redu -- the recent volatility in rates.

We are currently carrying over $1 billion of liquidity on our balance sheet in cash and unused collateral funding capacity. Related to that point, let's discuss the impact of HLSS on our financials.

In the second quarter of 2013, interest expense pertaining to HLSS was $49.9 million, which exceeded our guidance of $47 million, primarily due to lower than expected prepayment rates on servicing sold to HLSS.

After considering the advance financing costs that Ocwen would've borne absent the asset sale to HLSS, the net increase to Ocwen's interest expense is estimated at $21.5 million, which represents approximately a 6.8% cost of capital to Ocwen on the $1.2 billion of cash provided by HLSS through the end of June 2013.

The net cost is closer to 5% when taking into account deferred tax assets accelerated by the sale to HLSS. Of course, the additional benefit to Ocwen is the freeing up of cash, which has contributed to our ability to add over $300 billion of UPB to our servicing portfolio over the past 12 months without issuing new common equity.

This will increase to another $86 billion when the OneWest and Greenpoint acquisitions close. Investing the $707 million of cash Ocwen received on July 1st when the asset sale to HLSS. This will, however, present a bit of a drag on our in -- in Q3 as interest expenses for HLSS will be mismatched for about 45 days versus the income gain from the new assets.

We expect total interest expense attributable to HLSS of $73 million to $75 million in Q3 2013. The total capital deployed across these two transactions is approximately $1.3 billion. Looking forward, we believe that between HLSS and additional debt capacity we could acquire another $4 billion to $5 billion in assets in the near term without raising additional equity. Or roughly speaking, two more deals the size of OneWest.

This capacity will increase over time as we generate operating cash flow. As Bill indicated in his remarks, we continue to review opportunities to deploy capital and our pipeline remains quite large.

Investing in new opportunities will always be our top priority use of capital. We do expect, however, that we will soon reach a point where we can both find growth and return cash to shareholders through the stock repurchase program.

Were we to execute such a program, we are confident we could repurchase at least $900 million of stock without generating any adverse tax consequences. And we expect that number to grow over time.

Finally, I'd like to walk you through how we think about modeling Ocwen's servicing business. This is particularly relevant as our recently announced transactions are a perfect illustration of how many models have been built purely on basis points can lead modelers astray.

The OneWest and Greenpoint transactions have delinquency rates much like the subprime deals we've done in the past, but as Alt-A deals the loan balances are approximately double what we typically see in a subprime transaction.

As a result, costs and basis points will be much lower. These deals also have lower servicing spreads. The only thing that's reasonably consistent is the margin on revenue. As I've argued in the past, basis points models are very good at estimating revenues but lousy at estimating costs.

Costs are driven primarily by the number of loans and their delinquency status. I would recommend that if you are modeling Ocwen's non-prime servicing business, you could estimate revenues and basis points using historical averages or the data we provide on revenue for newly acquired portfolios. I suggest, however, using our historical normalized EBIT margins to estimate operating costs.

For operating expenses on prime performing portfolios such as Ally, I suggest looking at comparable metrics for other large companies that service largely prime performing loans. Interest expense should be estimable based on our disclosures for debt expenses. Our recent tax rate is probably a reasonable indicator of future taxes.

We expect to provide supplementary disclosures on our portfolio this quarter that should be helpful in your modeling. Thank you. And now I will open it up for questions. Operator?

All right, sir. We will now begin the question and answer session. (Operator Instructions) Mr. Mike Grondahl. Sir, your line is open.

Yes, thanks for taking my questions, guys, and congratulations on the quarter.

The first one is really, there was some new language around the pipeline kind of being probability weighted. Could you kind of explain the for us? And could you talk a little bit about the mix between non-GSE and GSE in the pipeline?

Mike, I think as we mentioned in the past, we don't, for example, put much weighting on prime deals that we see.

So as an example, the Ally transaction which we knew we were going to be a bidder on was never -- never actually showed up in our pipeline. We tend to discount totally prime deals in our pipeline. In some cases affecting no value on them at all, even though we know that they're coming to market. And most of our pipeline is not, for that reason, prime. It's mostly non-prime.

Okay. And is any of the $400 billion sort of exclusive to you guys?

Well, you know, Mike, when you go through a process, in some cases they can be exclusive deals. In other cases they can evolve to that point. But it's -- it would be hard for me to say much more than that without probably giving away too much.

Okay. And then just one more question maybe for you, Bill. Clearly your capital light strategy is working. And what I mean by that is if we track your ROE really just on a normalized basis, a year or two ago it was 12%, 14%. In the first quarter I think it was 20%. And then in the second quarter here it was about 33%.

Where can that go, Bill? I mean, how much more juice is left there?

Well, I think the big change that we're talking about, Mike, is the ability to find a very capital-efficient way to -- for a vehicle that would perform much like HLSS performs in the non-prime space.

To have a comparable vehicle in the prime space that would give us lower -- access to lower cost of capital than is present in the market today. And we're cautiously optimistic that we're fairly close to achieving that.

In which case we could effectively off -- basically do the same thing with HLSS is to sell all of our prime assets into that vehicle. So essentially we will then have tools on both sides of the business to make ourselves a ca -- have a capital light structure.

So it can go quite a bit further than where it is today if we're able to achieve that goal.

That's -- then ROE, it does keep going up. Hey, great. Thank you, guys.

Thank you.

Mr. Henry Coffey. Sir, your line (technical difficulty).

John, I heard the information on the buy-back saying that you had about $900 million of stock you could buy back without triggering adverse tax consequences.

Is that because you simply just keep the assets on shore? Or how does that dynamic work?

No, it's -- that's a function of the -- of where the capital resides.

And then -- but I wasn't able to catch. You were talking just before that about sort of the amount of sort of thing you could buy with the resources you had on hand. And I just didn't catch those numbers.

So we thought there was $4 billion to $5 billion of total assets or maybe another way to think about it would be roughly two more OneWest size transactions.

Meaning you could buy $4 billion to $5 billion of MSRs?

Well, total assets. Because that often --

(multiple speakers) -- MSRs in advances.

And that's on --

Right. Right. All right. Thank you very much.

Thanks, Henry.

Mr. Daniel Furtado. Sir, your line is open.

Can you help us just kind of broadly think about when we look at this very nice delinquency improvement how it breaks down between, say, modifications and just, I guess for lack of a better word, organic improvement in the underlying credit performance in the current environment?

This is Ron. I don't know that we have specific information on that. But I do think it is a combination of a variety of factors.

Maybe with the exception of June, we've generally been seeing an improvement in current loans staying current. So less loans rolling into delinquent status which helps keep overall delinquencies down.

As we take over the portfolios our capabilities that we discussed in my prepared remarks are what allow us to do generally -- improve upon the performance of the prior servicers. And help more borrowers stay in their homes through modifications that are MPV positive for investors as well as sustainable by the borrowers.

And so we continue to improve upon that. We continue to improve upon portfolios that we acquire. And then lastly I think we continue to make progress, I've talked about this I think in earlier calls, in improving our REO disposition timelines and improving our execution of short sells where appropriate.

All of those things help contain and drive down delinquencies. So I don't have specifics as to how much is in one of those components. Modifications is definitely the largest driver of it. But it is a -- those three or four factors are all driving the better performance.

Understood. Thank you. And then how should investors think about kind of the incremental margin or operating leverage when you think about new assets coming on board?

I assume there's some incremental operating margin. Or is that not the correct way to think about it?

Yes, I'm sorry, you mean operating leverage in terms of --

Yes. I'm sorry, operating leverage. I said margin. I meant, yes, leverage. I apologize.

(multiple speakers) Well, I think that that's true, yes. And I think we do expect some operating leverage as we bring on new portfolios. But I -- at our size, those -- that operating leverage is a little less than it was when we were much smaller.

And I think a lot of it relates to -- just to different technology enhancements and different process improvements, is really why -- from this point forward where you'll see margin enhancement.

Understood. Thank you.

It's also absorbed a tremendous amount of additional cost related to the current environment in terms of processes and procedures that are -- that people are focusing on. But you can still see, I think, there's still room for significant process improvements to do it faster, better, cheaper.

Right. Okay, thank you. And then finally, to -- I don't know that you necessarily have any data. But just kind of a broad outlook or assumption. I know there's been recent talk about HAMP re-default rates going up.

I know your organization is substantially better than the industry as a whole. But how are you thinking about HARP re-default rates? And ver -- vis a vis expectations that you see out there in either of the whole loan or MSR markets?

Well, I -- we don't have as much experience with the HARP program I think as others. And recognize that when you HARP a loan, it -- the loan has to have been current for the 12 prior months.

So we would tend to expect that those loans will perform quite well. Because -- both because any loan that's made all of its -- made the prior 12 payments is probably a low-risk loan to begin with.

But then you're moving the person into a lower cost mortgage. So generally speaking we should expect the performance of HARP loans to be pretty good. But we don't have (multiple speakers) -- frankly, nobody has a long track record of it. So I don't know that we would have a better estimate than anybody else.

Yes. No, I was just trying to get some -- (inaudible) more the feel than GPS coordinates, frankly. Thank you for the commentary. I appreciate it.

You're welcome.

Mr. Kevin Barker. Sir, your line is open.

Could you speak about the Slide 22 and the cash -- the adjusted cash flow from operations of $295 million. If we were to back out the amount of mortgages sold going into that cash flow number, what would be the free cash flow number?

Well, I think what I can do is I could tell you that gain on sale contributed about $115 million positively to cash flow in the first quarter. And it would've had a negative $40 million impact in the second quarter. If that's what you're referring to?

And so I didn't put that on the chart and I won't try to do the math here on the phone. But with those two numbers my guess is you could figure it out.

So essentially it would be -- if you pulled out the cash flow associated with origination s it would be $40 million higher than what is disclosed on the slide?

Yes, that's right. And the first quarter would've been lower.

Okay. And then how does the transactions with HLSS affect the adjusted cash flow from operations?

Well, the biggest impact would be as we remove advances to HLSS, our opportunity to generate cash by reducing advances on those goes away. But I -- but otherwise then it does affect our operating (multiple speakers) --

And not disclose -- and not disclosing the $243 million.

Yes, it's all that. It's -- yes, I mean, you can come up with your own number. That's why I -- and I think we -- the forecast interest expense on HLSS is your best indicator of how that'll flow through our income statement.

And then when we think about the $400 billion pipeline, does that include a big piece of Ginnie mortgages? Or is that primarily non-agency MBS servicing?

It would be primarily non-agency. But it would include some elements of whatever's kind of tied to delinquency GSE product as well as Ginnie Mae product.

And that's not the -- that's -- the pipeline. That's the weighted average probability assessment of what we'll win.

Okay. Thank you.

Mr. DeForest Hinman. Sir, your line's open.

I had a question on the number, the $52.8 million regulatory charge. It sounded like you mentioned an adjustment to goodwill around the purchase price of Homeward.

I know there was some loss sharing or however you want to phrase it in the contracts. The purchase contracts (inaudible) both Homeward, Litton. I think those terms are also in Saxon. So can you help us get a better understanding of what the actual total charge is relative (multiple speakers) to what we're actually putting the accrual for?

Yes. So first off let me just clarify something John said in his remarks. Ocwen actually expects its contribution based on the best information that we have today to be about $66.4 million. That would be our net contribution.

And what John said in his remarks, just to clarify it, $13.6 million of that was put up as an adjustment to the kind of the goodwill from the Homeward acquisition. And so the expense that flowed through was $52.8 million.

Without getting into specific details, since this is not a finalized agreement, the overall settlement amount is larger than that. And in the case of Homeward and Litton, there will be contributions from other parties to make up the additional amount.

Saxon is -- was an [AFIT] purchase and therefore not really subject to this. So it's really only Homeward and Litton. But I -- probably not appropriate to get into kind of the overall numbers. But you have the information that we think -- the best information we have on what Ocwen's component will be.

Okay, that's helpful. And then just building on that line of questioning, obviously this industry and a number of associated players have had a lot of legal overhangs. And they've had to pay fines and settlements. And obviously this is some sort of negotiated thing that's occurring.

But what is the give-back in terms of what Ocwen would be receiving in terms of either federal investigations or even the state level investigations from some of the AGs? Is there any settlement of any of those outstanding issues? Or are those still open, potentially?

Okay. Because we're not finalized here, it is a little difficult to get into great details but this is intended to put behind Homeward and Litton and Ocwen various examinations and other things that have occurred going back to when the mortgage crisis and other things hit.

So we -- but from that standpoint we think we are clearing up some of the overhang from some of our acquisitions and from our own portfolio. And can focus more on just the go-forward basis.

But again, difficult to get into too much detail because we don't have anything finalized at this point. But I think hopefully that gives you some idea.

No, that's helpful. And my last question will be on single point of contact. In terms of that, it sounds like we've had some success by, in fact, not having single point of contact when we're working on the modifications.

Are we going to be able to maintain that going forward?

Well, let me clarify something. We do utilize single point of contact. And generally speaking that's prescribed by HAMP and other programs.

We do have an -- we think a better single point of contact model. We refer to it as our appointment model. So if a borrower is looking for assistance, they are assigned a specific relationship manager.

But generally the way we work it is we have the cus -- we set an appointment or a series of appointments up with that customer, with their single point of contact in order to -- in a more planned out fashion, giving both sides time to prepare for those appointment calls so that they're more productive.

We do have expanded capabilities where if for whatever reason their relationship manager maybe is not available at a convenient time for them, they can request to speak to another relationship manager that has a more convenient time.

So there's flexibility built into our model. But I don't want anybody to be misled. We do utilize a single point of contact model. It is different, though, and we hope and think that it is better than what others in the industry are using.

As a matter of fact (multiple speakers) -- excuse me. We put in a single point of contact before it was even requested. (multiple speakers)

I think I understand that. But with the negotiations that we're having, can we still use that program going forward?

Yes. We have no reason to believe that our program will not -- will have to change because of anything we're discussing. Particularly the fact that we're getting better results. I think nobody in this process is interested in hurting our good results. So we don't expect there to be any issues with that.

Okay. Thank you.

Mr. Vik Agrawal. Sir, your line is open.

I wanted to know, we had the -- what were the drivers behind the increase in the amortization, given that the CPR was only increased 70 basis points?

I'm sorry. I lose -- I missed the last part of your question.

I said that given that the CPR only increased 70 basis points, I want to just understand what was the driver of the amortization increase?

You mean the dollar amount of the amortization increase?

Correct.

Oh, I don't -- so we had -- first of all, we had -- we acquired the ResCap portfolio on February 15th. So you had really only half a quarter where you had a full quarter this period.

We also acquired the Ally MSRs on the -- basically the first day of the quarter. So you had a full quarter of amortization on that portfolio, which would not have been there at all in the first quarter. And, John, if you have anything --

I also think that there were some loans that off-boarded that we've -- I think we had a portion of the Quicken deal de-board in June. We had some subservicing de-board in -- that was anticipated as part of the original Ally transaction. It just didn't happen until this quarter.

And we had a GSE portfolio that de-boarded to -- because we had been subservicing and another player bought the MSR. So -- and that totaled -- again, it happened at various points in the quarter. But I think it was a little over $10 billion. But among those.

So that's probably what's maybe messing up your numbers.

Okay. And second question I had was, while we know that you carry more than 90% of the MSRs as low-com, how do you anticipate carrying OneWest's?

Low-com.

Okay. Great, thank you for the qu -- for the answers.

You're welcome.

Our next question comes from the line of Mr. Bose George. Sir, your line is open.

Yes, good morning. Actually, just a follow-up on the servicing transfer. Actually, how much of the Ally--of the Quicken portfolio is left to transfer in the third quarter?

I actually don't have the exact number on that.

But in terms of the unpaid principal balance, we should think of that coming down by that amount during the third quarter, right?

There will be an additional amount that we expect will transition out we believe by August.

Okay, great. And then, actually, just--on your consolidated income statement, you have $19.9 million in other income. And I was wondering where that goes when you move to the segment breakdown?

Sorry, what was the line you're referring to?

--On the consolidated income statement it said $19.9 million other income gain. And I'm just wondering when I move to the segment where that flows through on the segment side? It's $19.903 million in the consolidated income statement.

Yes, let me check on that. I want to be sure that I give you the right answer. I'll try to answer that a little bit later in the call.

Okay, sure. And then, actually one last thing. On the mortgage banking revenue, I just wanted to confirm as that number grows, does that get the same tax rate? Do we have to think of a different tax rate for mortgage banking income?

Generally speaking, that--it should be higher because a lot of--any lending operation is going to have a proportionately larger amount of their operations associated with U.S.

But it still won't be a full tax, but it will be somewhere in the middle or--?

--Well, I think right now you would expect a full tax rate.

Tax rate on that piece. Okay. Great. Thanks.

And I think the main driver of that $19.9 million is as we take Ginny Mae loans onto our balance sheet and sell them back, that tends to drive income as well as some losses through that corporate--.

--Okay, so there are expenses on--related to that on the expense side as well?

Yes. I mean, if you--.

--Okay, second follow-up.

To include it, it should be included in the servicing segment. If you're trying to figure out whether it's an origination or servicing, most of that should be included in the service segment with some portion maybe being in corporate.

Okay, great. Thanks a lot.

But it's the--you'll see--it's on our balance sheet. You see a fairly sizeable jump up in those loans held for resale.

Okay, great. Thanks.

Our next question comes from the line of Mr. Henry Coffey. Sir, your line is open.

Yes. I was wondering if you could talk a little bit potentially about the prime vehicle as well as the whole issue of refi and recapture. Is that something you're going to do? Obviously, that's a big part of managing that. Is that something that you're going to do internally? Exactly where are you in the process of building that out? And if you could give us a sense--sort of unrelated, but on HARP margins, what did the margins look like at retail versus where they were in the March quarter?

Henry, I think maybe there's a little bit of this for all three of us to answer. Let me start by just giving you some idea of our approach to recapture and HARP and what we're building. So as you're aware, we had limited origination--direct to consumer origination capabilities. With the acquisition of Homeward we announced that we were going to try to start to build that process out. And we've been spending a lot of time and effort in building out our direct to consumer capabilities. I think we said in the prepared remarks that the amount of loans closed doubled in the second quarter over the first quarter. It's still relatively small though, and as a result, we're working with other originators in the marketplace to partner with them to serve our customers. And so, the larger volume and larger kind of revenue items are coming from our partnerships as opposed to what we're doing directly.

Over time, we hope to continue to build out our direct capabilities and we'll capture more of that directly. As far as the margins go, I don't know if John has anything to kind of share on that. It's a little difficult for us to say because in working on partnership is there's going to be some sharing. And then, on what we do direct since we're so early on in the process and our volumes are relatively small, I'm not sure I would use that for anything going forward. But, John?

Right. I think that's right. Actually, quarter-to-quarter our margins were roughly flat in HARP. But again, I'm not sure that's a good indicator of what's going on in the marketplace. I think it's more an indicator of the fact that we're still ramping up our operations and our capability.

And in the partnership situation, is it fee sharing or cost sharing or how is that structured?

Yes, it's probably not--I mean, there's--let's just say there's a variety of different ways those are structured. And again, some of it's proprietary and confidential. So I don't think we can--we want to get into all of that here. But there's a variety of different structures that we've utilized and continue to look for - what serves our customers best and what provides the best shareholder value.

And so, what I'm gathering from this is that you're working with multiple parties?

That is correct.

Great. Thank you very much.

Our next question comes from the line of Mr. Ryan Zacharia. Sir, your line is open.

Thanks for taking the question. I just want to understand a little bit more about the $3 billion subservicing that came. It looks like it was from Flagstar. They had mentioned that their cost to service that segment of loans was $30 million. So I guess I just want to understand how the economics work to you when the value proposition for a bank like that is so great, and how replicable you think that is. How many banks have similar small segments to their portfolios that you guys could service so much more efficiently and where the value proposition just makes so much sense to those banks?

First off, the information about where it's coming from is not correct. So we're not at liberty to say where it came from, but we'll just say that is not accurate on where you're saying it came from. And generally speaking, I think it's not what--generally, our special servicing and subservicing arrangements are not so much driven by the fact that we can do them way more efficiently than the larger banks. But many times we can do it more effectively. They need assistance on dealing with large chunks of delinquent loans, whether they be a GSE delinquent portfolio or just a subprime kind of PLS type of situation where there's 30%, 40% delinquency rates and they're just not fully equipped to handle that.

So the driver is not so much about providing the other party massive cost savings. It's more about providing them a more effective way of dealing with that particular group of loans. As we point out, we do a very good job of loan modifications, of short sales, of REO timelines. They basically are able to tap into that and free up those resources on their end to focus on things that maybe are more strategic to them. But it's not necessarily driven by cost.

Okay, thanks.

Our next question comes from the line of Mr. Hugh Miller. Sir, your line is open.

Hey, 'morning.

'Morning.

I was wondering, I guess as you guys get into doing a bit more in the servicing of prime mortgages, can you just talk about to what extent, if at all, the analytics that you have and the strength that you are able to generate for the subprime space is transferable at all to the prime space? Is that at all a potential benefit for you guys as you start to do a little bit more business in that space?

I think from the cost side of the equation, it's very transferrable and we have very good understanding of what our cost structure is, regardless of whether it's prime or subprime loans. So from that standpoint, I think that it fits very well. The prepayment risk and kind of interest rate exposure on the prime portfolio compared to the subprime portfolio does not transfer over as well. I also think Ocwen is not going to portray itself as the absolute expert in that part of the modeling or whatever.

And that's one of the reasons why in Bill's remarks we commented that what we'd like to do is only really manage the operational risk component and maybe in select circumstances some credit risk, and really move the prepayment and interest rate risk to other parties that are much more advanced and--in that, and who are looking to manage that kind of risk.

And so, we're, if anything, cautious when we think about the interest rate risk side of things and how we go about modeling. And again, we are looking to actually reduce that risk on a go-forward basis.

Okay.

In most of the pools that we win in the prime space are pools that are not pristine prime. They're--they tend to have more delinquency associated with them. So they--to an extent, they're much closer to subprime than in terms of say a newly originated prime mortgage.

Great. That's very helpful. And then, I was also wondering, with the steepening of the yield curve that we've seen and for commercial banks likely to be a bit of a positive for their margins, does that--do you think that plays a function at all with their kind of now desire to possibly monetize the MSR assets on their balance sheets, and then, for once the pace at which they'll shed them? Or is it just the reputational risk is still kind of driving them to continue to look to offload?

I think it's more a function that they want to focus really on their core business and their core client base and those assets that require much more--a much heavier servicing component to them, they're just making a strategic decision that they want to deploy their resources where they have competitive advantages. And I don't think this--I don't--wouldn't subscribe to the steepening in the yield curve per see driving it. I think it's a far more fundamental shift in the way many of the banks are looking at the servicing business.

Okay. And then, one other question about--obviously, a lot of questions on the pipeline and just talking about obviously that you are--it's probability-weighted. Can you just give us any sense about from a qualitative standpoint, how discounted you guys are viewing that pipeline? Would you say that it's somewhat discounted or heavily discounted? Just trying to get a sense of what the pipeline is above and beyond that $400 billion in total.

The pipeline would be much higher if we didn't discount it.

Okay. So you'd say it's heavily discounted.

I think that we--look, we hear about transactions and in many cases we hear about much larger transactions than we're willing to put into our pipeline because in many cases based on our experience we know that something smaller is likely to materialize.

Got you.

In other cases we have--we put in the full amount of it, but I think in total it's a substantial discount.

Sure. And my last question, and I apologize I missed the discussion here. I know you guys mentioned that complementary businesses is likely to take a front seat to share repurchase at this point. But can you just talk about kind of the businesses that you guys see at this point as being attractive for you to move into?

We'd prefer not to do that because we might affect negotiations in pricing.

Sure. Understandable. Okay. Thank you very much.

Thank you.

Our next question comes from the line of Mr. Ken Bruce. Sir, your line is open.

Thank you. Good afternoon. My question is maybe more strategic in nature. I guess I'm very interested in knowing now that you've built this top five servicer how you're looking at the originations business. I think you've been somewhat reluctant to go deep into that piece of the mortgage value chain. But could you discuss what you're thinking around that area, please?

Sure. I mean, there are two aspects of the origination space where we don't think we have a competitive advantage. And that's--as a result that historically has made us cautious in terms of wading into that market. I think that the one we discussed heavily on the call here is really understanding prepayment and interest rate exposure. I mean, that's something that we don't think we're world class at. We think there are other--many other players that spend a great deal more resources dealing with it. So we're going to try to basically come up with a business model where we don't take that risk. Other people who are more adept at it will take that risk.

I think the other part of it is that through other strategic allies have a very interesting distribution model. I think Altisource owns Lenders One, which has grown to 11% of the entire mortgage origination market, mostly retail. We think there are ways that we can participate with the members and provide more value to them and at the same time be able for us to build a fairly strong origination capability with them. So we're not--we don't think we'll necessarily ever be the largest having our own mortgage brokers, but we will build that capability definitely. But also, we have access to the second largest retail origination capacity in the industry.

Okay. And does--when you think of origination in the context of the prime HLSS vehicle, I mean, does that--is there any interplay between how you look at that? I mean, it would seem that when we look at other vehicles that are set up around prime excess MSRs, the ability to effectively recapture or otherwise reduce some of that sensitivity to rate to this is an important feature. And does that play in your overall thinking around prime HLSS?

We--I mean, obviously, being able to have access to distribute that exposure to other people who wish to buy it will help us accelerate the business much more rapidly. I mean, we are very cautious about taking prepayment risk. So definitely the ability to put that in place not only makes Ocwen far more capital light, dramatically so, but it also enables us to grow significantly within the origination market. We would not feel comfortable dramatically ramping up our origination capability and putting prime MSRs on our balance sheet and suffering mark to market exposure.

Right. I understand that and that's why I'm just trying to reconcile some of the different aspects of your strategy, which I guess we have to think about across a broader cross- section of companies just because there's a lot of capabilities that are outside of Ocwen central, but obviously, can factor into the longer term growth potential. So I'm just trying to organize these in my own mind. But thank you for your comments.

Thank you.

Our next question comes from the line of Mr. Mike Grondahl. Sir, your line is open.

Yes. Just two follow-up questions. The first one, if we think about the $530 million of revenues in 2Q, can you give us some sense for how ramped up Homeward, ResCap, and Ally were?

Those--ResCap would have been on the entire quarter. Homeward would be on the entire quarter. The only one that had some portion which--and it wasn't much. Most of Ally came on either on April 1 or April 15. So there was--and then we had about $2.4 billion I think that closed in the quarter in May and June, mostly in May. So--.

--But, John, doesn't it typically--.

--It's not quite--.

--Doesn't it typically take you a couple quarters to sort of board the loans and begin to earn your ancillary fees?

Oh, yes, I'm sorry. That is certainly true that you'll start to see on the ResCap--you won't see the ResCap portfolio get its full delinquent servicing fee boost until we get those loans onto our platform.

So Mike, I think what you're getting at--and I think the best thing for us to do is point to the past transactions. On the PLS component in particular, whether a deferred servicing fee--and we talked about the $500 million or whatever that's outstanding, as we are able to fully integrate into our platform and our programs kick in and we start to liquidate REO at a faster pace, do more short sales, and execute our modification strategy and drive delinquencies down, we do start to capture some of that deferred servicing fee, which drives then the revenue number higher during that period.

So I think on the GSE portfolios, like Ally that John just mentioned, you're going to see that--you really won't see much fluctuation in that. The first quarter you put it on, and whether it's on the prior ResCap platform or the Ocwen platform, you probably won't see a significant difference in the revenue on the GSE side. But on the PLS, just look to the past transactions from the charts that we've shown, and that should be a good way to think about Homeward and ResCap on a go-forward basis.

Homeward was boarded in February, March, and April. ResCap, as we just--as we've pointed out in these prepared remarks, the first PLS transfer took place in July. We hope to complete all of it by the end of the summer. And so, we would expect then to see some pickup in revenue like we've seen in other portfolios following that.

Okay. And then, I missed--what was the delinquency percent of the portfolio at June 30?

Nonperforming was 14.4%.

Okay. And what was the prime?

We don't--we haven't disclosed the prime versus non-prime component. We will probably put that out as a supplemental disclosure.

Okay. Thanks, guys.

Our last question comes from the line of Mr. Kevin Barker. Sir, your line is open.

Could you just speak about the breakout of different servicing fees this quarter as--in basis points, the difference between loan and subservicing fees, and then late charges and possibly the other fees associated with servicing?

Well, I'll just--I'll direct you to the 10-Q for that information. I'd--rather than trying to walk through that. I think that will be in detail in our 10-Q and there may some additional information that will be available by portfolio in our supplemental disclosures that I think will get at those questions.

Okay. If you were to say the fee revenue in basis points where it would peak absent any further acquisitions, would you expect that to be sometime in the middle of next year, or possibly into 2015, given all the acquisitions you've done?

Well, look, I mean, I have to go through and do a little bit of--I haven't done it the way you're exactly suggesting, which we may have a pro forma. But I think, as Ron described, if you look at our past performance by nonprime portfolio as it boards onto our system, in basis points it takes several months, say six months or so, to ramp up to the level that it then remains for a substantial period of time. And so, I think that if you were trying to do your forecast by portfolio, I think that's the way to think about it.

Yes. I mean, and you'll see Homeward will ramp up earlier than ResCap. ResCap will then ramp up some on the PLS component. And One West and the other transactions that we've talked about will follow as those portfolios are boarded. And so, it--I don't know that we can sit here and say when exactly it will peak. And there'll be different peaks depending on which portfolio kicks in at what point in time. Obviously, as we get bigger and bigger, no single portfolio is going to drive that number as much as it maybe did in the past. But again, I think that looking at the historical numbers that we've provided should be the best way to kind of gauge it.

Okay. Thank you for taking my questions.

Sure.

Thanks, Kevin.

We have one final question coming from the line of Mr. Brad Ball. Sir, your line is open.

Thanks. Yes. Ron, you mentioned in your prepared remarks that the profitability of the pipeline should not differ from past transactions. I just wonder if you could clarify that. Do you mean that the average servicing fee should be in line with past deals? Like are you pointing to the One West deal or to Saxon Litton, or are you talking more about I think what John was referring to in his comments about profitability, so not each dollar of UPB is alike so you'll be able to operate some servicing more efficiently? As you look at the $400 billion pipeline going forward, it may not have the same level of delinquency, but again, it can be serviced more efficiently. Just if you could help me clarify that thought.

Yes. What we are talking about is what we expect to--the return we expect to get on the capital that we deploy. Now, the good news is, as we pointed out, we still--we can deploy a lot of capital without having to raise new equity. So most of that capital would be in the form of debt. But we're talking about not revenue or basis points or anything like that. We're talking about similar types of return on the capital that we would deploy for future transactions should look similar to what a Litton or a Homeward or what we're expecting to get on ResCap as we move forward, similar to those transactions.

Okay, yes, that's very helpful. So we may have diminishing average fee margins on each incremental deal, but the underlying profitability based on the capital invested should remain stable.

Yes. I mean, the profitability on the capital that we deploy should remain stable. And since--but from an earnings per share standpoint, it's all incremental because we can do a lot more without having to add any additional equity.

Sure. And then, just real quick, two quick ones. You mentioned that the average fee on the private label was 35 basis points and on the agency, 28 basis points. Is that the base fee, or is that the all in, including ancillary?

That's the contract rate.

Okay, so you can earn above that based on performance?

Yes. You'll earn additional ancillary revenues plus we would earn collection, delinquent servicing.

Yes. On the prime portfolio, that base fee will probably be more indicative. There's--the ancillary fees are not going to drive it as much, and you generally don't get the deferred servicing fees on the prime portfolio. But on the private label portfolio, yes, that's the base fee. Because it's an old date, that's why it's 30-some basis points as opposed to 50, but the loan balances tend to be bigger. But, yes, you will see more of a--as delinquencies decline you'll pull in more of the deferred servicing fee. And there is reasonably substantial ancillary fees on any nonprime portfolio.

Great. And then, John, do you have the number--what is the average UPB serviced during the quarter?

I actually don't have that in front of me. But it will be easily calculable from our disclosures, I think.

Is it--if you do the straight average, it comes out higher than it actually would be, right, because the Ally transaction happened early in the quarter?

Yes. I'll tell you, I mean, I don't have that immediately available. But you'll be able to easily tease that out of our 10-Q.

Yes. In the 10-Q--.

--Sorry, I don't have that, Bill.

Okay.

Keep in mind that the Ally portfolio, if you're looking at just raw UPB service, the Ally portfolio was on there at the beginning of the quarter as well. It was just in the form of a subservicing contract and it converted to an MSR purchase in this quarter. So from a UPB standpoint, there wasn't a tremendous amount of new UPB boarded in the quarter. In fact, John even mentioned that there was some amount of de-boarding. So I think if you actually look at the beginning and ending balance, the average is probably not going to be that far off for what you're trying to do.

But you were--I'm sorry. You were subservicing $120 billion for Ally and you purchased around $90 billion in MSR--in UPB servicing. And so, that's $30 billion that you didn't--that you're not subservicing anymore?

Well, the $30 billion is (inaudible) that the other buyer is--.

--Oh, yes, but that hasn't--.

--Yes, that hasn't moved--.

--Only a small--.

--Yes, only a small portion of that has moved off.

And not all of it's going to move off either.

Yes.

Some of it's going to stay. So it's going to be--but the biggest portion that will move off is going to move off in August.

Yes, which John talked about earlier.

Got it. Okay. Thanks very much.

All right. Speakers, we have no further questions on queue.

Thank you very much, everyone. Have a great day.

Thank you. Bye.

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