Onity Group Inc (ONIT) 2013 Q3 法說會逐字稿

Good morning and welcome to the Ocwen third quarter earnings call. (Operator Instructions). I would now like to introduce Mr. John Britti, Chief Financial Officer. Mr. Britti, you may begin.

Thank you, operator. Good morning everyone, and thank you for joining us today. My name is John Britti, I am Executive Vice President and Chief Financial Officer of Ocwen Financial Corp 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 Financial third quarter 2013 earnings. Click on this link. When done click on access event. As indicated on slide two, our presentation may contain certain Forward-looking statements pursuant to the safe harbour 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 agreement. They may involve risks and uncertainties that could cause the Company's actual results to differ materially from the results discussed in the Forward-looking statements.

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 principals generally accepted in if United States.

For an elaboration of the factors I just discussed, please refer to the risks disclosure statement in today's earnings release as well as the Companies filings with the security and exchange commission including(inaudible) 2012 Form 10-K and first, second, and third quarter 2013, 10-Qs. If you would like to receive our news releases, SEC filings, and other materials please e-mail Linda Ludwig at linda.ludwig@ocwen.com. Joining me today for the presentation are Bill Erbey, our Chairman and Ron Farris, President and Chief Executive Officer. now I will turn it over to Bill Erbey. Bill.

Thank you, John. Good morning. Thank you for joining today's call. This morning, I would like to cover four areas in my prepared remarks. First, I will discuss our earnings. Second, I will review Ocwen's quality of earnings and sustainable cash generation capability. Third, I will share thoughts on future growth particularly in adjacent markets, and finally, I will describe our stock repurchase program. After my comments, Ron will provide update on our operations including acquisition integration and cost reduction plans, and finally John will provide detail on our liquidity position and third quarter normalized results. Slide four shows highlights of our third quarter earnings.

We had record revenues despite have little benefit from the One West transaction. This quarters earnings however, were not as strong as we would have liked primarily due to one, an unanticipated delay in closing of our One West transaction that created a shortfall verses our expectations. The good news is that our existing services portfolio is generating revenues in excess of our expectations. Two, costs well above our historical as well as our and long-term goals as we are taking a cautious approach to transitioning the RESCAP loans to the real servicing platform. Given the current environment, we retained redundant staffing on both servicing platforms in order that the transfer went smoothly.

Additionally, we were fully staffed for the One West transaction months before the transfers occurred or are occurring. Three, to a lesser extent under-performance in lending. With respect to the delays in revenues that is largely resolved now that most of the remaining One West loans will transfer tomorrow. To put the delay into perspective, note that One West when fully boarded would generate about $75 million in quarterly revenue. The portion that did not board would have contributed about two-thirds of that amount or $50 million. Regarding costs, we have lots of work to do. We have plans in place to get us where we need to be. Once RESCAP and One West are boarded on real servicing, we expect to return to our historical margins. As Ron will discuss later, we still believe that there is reasonable upside in our lending earnings in upcoming quarters.

Most importantly, we do not expect these short term issues to impact our stabilized returns or longer term cash generation capability. As noted on slide four, we saw a meaningful decline in pre-payment rates across our portfolio in third quarter compared to second quarter. These slower pre-payments bode well for long-term servicing earnings in cash flow. The left-hand bar on slide five shows the baseline forecast of free cash flow we expect to generate over the next 10 years with no additional growth in our portfolio. Our baseline assumptions for pre-payment rates assume the lower interest rates that existed at the time we priced the deals. Baseline average pre-payments at 16.7%. Delinquency reduction expectations are based on assumptions for low economic growth and a weak housing market comparable to what we experienced from 2010 through 2012.

Even under these assumptions, we believe our portfolio can produce approximately $8.4 billion in free cash flow over the next 10 years. Note that this 10 year cash flow forecast does not capture the long tail of cash flow generation as we still expect to be generating $300 million of cash flow in the tenth year. Again, this baseline forecast assumes zero new acquisitions and simply 5% return on reinvested cash. The middle bar on slide five shows cash flow in a scenario where economic recovery drives down delinquencies by 50% by the end of 2014.

In this scenario, we also assume both lower default driven pre-payments and higher market interest rates combined to reduce CPR by 50%. This is starting to look more like a potential baseline scenario for the future. The impact of these changes would increase 10 year cash flow largely from higher earnings by 27% to $10.7 billion. Finally, assuming we could reinvest cash at 15% return which is still below returns we have been able to generate in the last three years, cash flow generation jumps by another 25% to $13.4 billion with more than $900 million of cash flow generated in year 10 suggesting a far more significant tale. Gong back to current cash generation, slide six shows our adjusted cash flow from operations. Because we sold most of Ocwen's advances at the beginning of the quarter to HLSS, adjusted operating cash flow is down from the prior quarters.

On the other hand, we accelerated cash flow through the sale to enable us to close new business without adding equity. As you can see, Ocwen continues to generate cash flow substantially in excess of earnings which demonstrates the high quality of our earnings. Many of our peers in the mortgage industry generate cash flows often negative that trail rather than lead earnings. As we have said many times, we believe our conservative accounting policies account for much of this difference. Slide seven of our presentation details some of the specific accounting differences between Ocwen and its peers.

First with the exception of a small percentage, Ocwen carries its MSRs at lower cost or market or low COM rather than at fair market value. As a result, Ocwen will never show earnings write up on about 95% of the owned MSR portfolio instead we amortized these MSRs. Actually, we have been amortizing our non-prime MSRs at a rate of 18% which is well above actual CPRs of 12% to 15% creating excess value not shown in our earnings or on our balance sheet. Note that fair value accounting can also generate large changes in value simply by changing the model assumptions used for valuation. For example, if we had lowered the discount rate by 2.5% and loss assumptions by 7% on our credit cents of the portfolio, we would have generated over $100 million of additional earnings in the third quarter

had we been on fair market accounting and made such adjustments to evaluation model. 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 $500 million in delinquent services fees that unlike many other servicers have not recognized as revenue and therefore are not on our balance sheet. Third, with respect to acquired advances, we believe our accounting policies are conservative, and that they do not pull earnings forward. For example, when we purchased advances at discount, say at 95% of face value, we do not book the discount into earnings as those advances are collected and then put new advances on the books at 100% of face value.

Rather to the extent we acquire advances at a discount, we amortize the earnings over the life of the MSRs. For all of these reasons our actual cash flow has consistently exceeded earnings and over time deferred earnings should appear as net income. Moreover, Ocwen's debt to equity level is overstated relative to peers that mark MSRs to market, record the servicing fees, and recognize advance recoveries. I will discuss more on this later regarding our corporate leverage. Now let us turn to our current outlook on growth. We continue to see a sizable pipeline to potential opportunities.

With a near term pipe line of about $400 billion. We expect resolution on at least 25% of this pipeline by year end. Note the actual volume of deals we are pursuing is much larger. Also note that many deals we have won never made it into our quarterly pipeline estimates because they evolved very rapidly. Moreover, we continue to believe the overall size of the opportunity is at least $1 trillion over the next two to three years including both large and small transactions. We continue to see strong indications that large and regional banks are accelerating plans to reposition their mortgage servicing portfolios, shed legacy assets, and sell off or sub-service non-core servicing assets.

Also as we have seen in the past, smaller sub-scale specialty servicers may view sale and exit as the highest return alternative, especially given the implementation of new servicing rules by the CFPB starting in 2014 which will likely increase fixed costs for many smaller servicers. On previous calls, we have covered in more detail how an improving economy and the re-emergence of a private mortgage market would generate additional potential long-term growth. While this remains true in our view, on this call instead, I would like to discuss opportunities for Ocwen in adjacent lending markets. For obvious reasons, I cannot provide specifics about the handful of industries we are evaluating. I can say that we are focused on financial services where we believe we can create a competitive advantage through application of core strengths including innovative use of technology, low cost operations, and development of efficient funding vehicles that involve limited pre-payment and interest rate risks.

We have been actively evaluating investments over a year, and have elected not to pursue some interesting opportunities because we did not believe we could achieve our hurdle rate of return on investment due to price or other factors. We will continue to be measured in our approach, but we would expect to make an announcement in the next 12 to 14 months. Discussing returns on equity provides a good segway to my last topic on Ocwen's plans to more efficiently manage our balance sheet and generate higher returns on equity. As you can see on slide eight, we have been increasing our returns on equity since the end of 2011.

Our ability to continue to grow assets and earnings capacity without substantial dilution to shareholders is an important component of how we create shareholder value. We have closed three very large transactions in a period of less12 months, and yet we have only issued a small amount of new equity as part of the homeward purchase the seller wanted to invest with us not because we needed additional equity. Our balance sheet strength and relatively low leverage, combined with our substantial cash flow means that we can both fund substantial growth and repurchase stock to maximize returns on equity.

As we have mentioned previously, Ocwen is under-levered as shown on slide nine. As you can see on the chart, our debt to tangible net worth is far below our public peers. Note however, that for accounting reasons I previously discussed, our tangible net worth is understated. If we adjust our net worth to account for just two things, the fair value of our MSRs and for deferred servicing fees, the gap in leverage becomes even more substantial. In addition, our stronger cash flow provides greater interest coverage ratios as well. To provide a picture how our conservative accounting policies overstate our actual leverage, let me refer you to slide ten.

As of September 30 of 2013, the book value of our MSRs was $1.8 billion. If we were to mark our MSRs to market as our peers do, the carrying value of our MSRs based on third-party broker marks would increase by $685 million. This would all show up as earnings and increased equity on our balance sheet. By the way, this market valuation also understates the value to Ocwen. As the fair market value is estimated using average industry cost to service that are more than three times higher than Ocwen's cost on non-performing loans. If we were to use our actual servicing costs ignoring our resolution performance advantage, our MSR value would be another $863 million higher. Note that we did not use this last adjustments for analysis on the prior slide.

Nevertheless, there was $1.5 billion of value not currently be reflected in the book value of the MSRs. This excess value not only provides additional opportunity for leverage, but also provides potential access to additional cash to asset sales that increase overall returns to Ocwen shareholders. Ocwen has already generated almost $2 billion of investment capital from sales of advances and rights to non-prime MSRs to HLSS. We have also been making progress on our strategy to lay off the risks and reduce the costs associated with funding prime MSR where most of the excess value resides. We recently completed the sale of 2.5 billion in prime MSRs while taking back a sub servicing contract. This transaction generated total net proceeds of $35 million and a gain on sale profit of $5.2 million excluding the benefit of the sub-servicing agreement.

This gain on sale earnings will be deferred over the estimated life of the sub-servicing agreement or just under nine years. Ocwen continues to make progress on a structure that we believe will provide an even more efficient mechanism to distribute prime IO risk in selling the MSRs and keeping the sub-servicing. We hope to have more to announce before year end. In any case. When we fully monazite the prime MSR portfolio it will add significantly to our potential liquidity and substantially lower our pre-payment exposure. For all of these reasons, we believe Ocwen has substantial access to liquidity that we can use to fund growth and increase value to shareholders. We intend to deploy excess liquidity in the following order of priority. First, to support the growth of our core servicing business. Second, to expand into adjacent or complimentary businesses that meet our return on capital requirements and where we can develop a competitive advantage utilizing our core strengths, and third, repurchase shares.

With regard to share repurchases, we are pleased the Board of Directors has authorized a $500 million stock repurchase program. This program may be amended at any time and may utilize both market and privately negotiated transactions. The $500 million does not include repurchase of any stock issued as a result of conversion of our series A perpetual convertible preferred stock. As previously announced in late September, we have completed the purchase of over 3 million shares of converted preferred shares at a price of $50.19. We view this repurchase agreement as consistent with our overall approach to optimize capital management. It reduced future preferred stock dividend payments, and bought back stock at a level we deem advantageous to shareholders. I will now, I will turn the call over to Ron to talk more about our commitment to quality service, operational and segment-level performance, and cost management initiatives. Ron.

Thank you, Bill. This morning I will cover four topics in my prepared remarks. First, I will discuss our success in generating sensible home-retention and loss mitigation solutions. Second, I will give a quick regulatory update. Third, I will provide an update on our recent integration efforts and implications for our transition expenses and overall cost structure. Finally, I will cover our servicing and origination operations before turning the call over to John Britti.

Let me begin by restating that we take our business very seriously because we know that our success as a company is not just measured in dollars collected for mortgage investors, but also by the number of families we help stay in their homes through difficult times. We know that doing a better job can have a significant impact on the lives of the families we serve. In this regard, we are extremely proud of Ocwen's success in providing non-foreclosure options to distressed homeowners. Slide eleven shows the growth over time in our modifications especially over the past 15 months. So far in 2013 alone, Ocwen has helped 84,000 families receive sensible modifications providing an opportunity to stabilize their lives and keep their homes. Since 2009 the number is over 370,000 families.

Ocwen has also been successful in driving other non-foreclosure resolutions especially short sales. So far this year, Ocwen has facilitated almost 22,000 short sales. Short sales are generally a much better outcome than foreclosure for borrowers that cannot afford or do not want a modification, and Ocwen is working on programs that we believe will generate more even short sales in appropriate circumstances. In early October, Moody' s published a study where it track over 1 million loans that were delinquent in December 2008 through July 2013. Their analysis found Ocwen's performance to be the best in class. The results speak for themselves. Ocwen consistently achieved more modifications than its peers with lower rates of re-default.

Our success is rooted in several factors. We have a rich history of utilizing technology along with innovations in mortgage servicing. Ocwen was the first company to introduce statistical models to improve loss mitigation, and we have led the market in the adoption of psychological principals to facilitate our interactions with borrowers. We know that we cannot help every borrower in ever situation with a modification, but we want to try in every that it makes sense. Even in situations where a modification is not an option, Ocwen has enhanced its programs of assisted short sales and cash for relocation assistance to ease the transition for those families that simply cannot afford to stay in their existing home.

Such programs are also extremely cost-effective for mortgage investors as they ultimately lower losses. Moving on to the regulatory front. Earlier this month, the CFPB provided guidance to mortgage servicers for implementing new rules announced earlier this year and scheduled to take effect in 2014. As we stated before, we support efforts by the CFPB and other state and federal regulatory agencies to provide more clarity with regard to mortgage servicing and origination rules and requirements. Greater clarity reduces risk for the industry and allows us to plan appropriately for any necessary changes. Ocwen is well positioned to comply with all the new requirements.

In most cases, we have already been following similar rules under sub-servicing or purchase agreements related to settlements by the large banks. More broadly, these new procedures should level the playing field across the servicing industry as smaller servicers will now need to meet the same requirements as larger servicers such as Ocwen. With regard to the settlement we disclosed this year, in the second quarter of 2013, we established a reserve which we believe covers Ocwen's exposure for a probable settlement with state and federal agencies. At this time, we have no official information to provide. We remain in discussions and will provide more details at the appropriate time. Next, let me update you on our recent transaction activity. In the second quarter, we announced the One West servicing portfolio.

Approximately $30 billion of the agency loans closed and transferred in August and September. The non-agency portfolio was delayed as the consent process took longer than usual. About 80% of the approximately $42 billion of largely non-agency loans will transfer tomorrow as Bill mentioned. The remainder will likely transfer by year end. Also, as we announced in the second quarter, we signed an agreement with Greenpoint to acquire their $ 8.3 billion servicing portfolio. We currently expect to close this transaction in stages over the next few months. The majority of that portfolio is also private label or non-agency.

Throughout the quarter we boarded an additional $5 billion of sub-prime loans from a large bank under a sub-servicing agreement. We expect to continue to see a flow of high risk sub-servicing or non-performing loan special servicing from large banks, and w believe that the use of specialty servicers will become the norm for the mortgage market in the future as large banks have come to recognize that they can achieve lower costs and superior outcomes outsourcing non-performing loans to specialists with strong operations, efficient scale, and flexible capacity. Moving on to our integration of recent acquisitions. As we said last quarter, our homeword integration was complete in the second quarter, and we now focused on are improving delinquencies on that portfolio.

With regard to the RESCAP portfolio integration, the transition to the Ocwen platform began in the third quarter with the transfer of most of the private label securities loans. Through the end of the quarter, we transitioned 22% of the RESCAP portfolio. The Non-agency portfolio represents about one-third of the delinquent loans which will accelerate our ability to supply Ocwen's superior loss mitigation to the loans that most need it. We plan to transfer the remaining loans to our platform in stages stretching into the second quarter of next year. Integration costs have been somewhat higher than expected as we have been careful to assure excellent customer service and strong compliance throughout the transfer process. RESCAP integration costs are likely to continue at a high level through the end of the year and then taper in Q1 and Q2 of next year. We also anticipate incurring a contract breakage expense when we finally exit the RESCAP servicing platform of about $19 million.

Nevertheless, we expect the long-term returns on the acquisition to be better than originally modeled as revenues are trending ahead of expectations. To put the RESCAP transition costs in perspective with past platform acquisitions, note that our transition related costs for the much smaller Home Ec and Litton platforms were ultimately $45 million to $55 million each. The transition off the RESCAP platform is larger and longer than these other transactions, and we built these expectations into our pricing of the deal. The normalization of transition costs represents various transfer-related expenses including our best estimate of known redundancies and excess expenses we have specific plans to eliminate once we are servicing all the assets on a single platform.

Normalization does not account for broader programs or projects we have underway to improve productivity on our existing platform. Over the past two years, many of our productivity gains through improvements in processes and technology have been offset by increasing regulatory burdens. Moreover, our rapid growth has not given us time to consolidate some of our gains and scale. Once we have consolidated on to a single platform, we are confident that we can make further productivity gains and overhead cost reductions. We also believe that several technology projects that have been delayed in support of integration efforts should come online that will reduce further our already industry leading units costs.

With regard to our unit costs, let me remind listeners that Ocwen's platform has substantial cost advantages over the rest of the market. As we have shown in the past, our cost of servicing of a delinquent non-prime loan is 70% lower then the industry average for non-performing loans. This operating cost advantage is even greater when we take into account our superior performance. This is because the cost of a performing loan is substantially lower than a non-performing loan. Our higher cure rates lead to even lower costs. Speaking of higher cure rates, let us more on to discuss operating performance, starting with loss mitigation in the third quarter. Ocwen's overall 90 plus delinquency rate at September 30, 2013 was 14.6% representing a 0.02% point increase in delinquencies compared to June 30, 2013. As I will discuss in a moment, portfolios owned at the start of the quarter all improved during the quarter.

The increase in delinquency overall in the quarter was driven by mixed changes as loans boarded at higher delinquency rates and loans that de-boarded had lower delinquency rates. As shown on slide twelve, out trend for delinquencies on recently acquired portfolios continues to improve in line with prior experience. After a 3 percentage point improvement in non-performing loans for the Homework portfolio in the second quarter, we were able to achieve a further 1.3 percentage point improvement in delinquent loans in the third quarter. Indeed, all portfolios recorded improvements ranging from 0.02 percentage points for older portfolios to 1.4 percentage points for the Chase portfolio. Total modifications for the quarter were 32,051 cross all portfolios representing a 14% increase over last quarter. This is also a quarterly record for Ocwen.

Hamp modifications were nearly half of the total which bodes well for future revenue. In the quarter 48% of the modifications completed included some principal reduction with about one quarter of those modifications being our proprietary shared appreciation modification. Constant prepayment rate or CPR dropped 5 percentage points across all loans types averaging 15.8% in the third quarter as compared to 20.8% in the second quarter. The CPR on non-prime loans averaged 13.1% for the third quarter which is down from 13.4% in the second quarter. Slide thirteen shows non-prime CPR trends including a CPR breakdown between voluntary, non-voluntary, and regular amortization. Prime loan CPR fell most dramatically to 18% in the third quarter from 26.1% in the second quarter. Slide fourteen shows prime CPR broken into its components. Moving on to originations.

The highlights are on slide fifteen. Let us start with forward lending operations. Our homeward forward lending business funded $1.4 billion of loans in the third quarter of 2013 which is off from last quarters $1.5 billion as the rate environment slowed our corresponding lending production. Nevertheless, our originations overall outperformed in a market that was off almost 30% over the same period. Block volume for our own direct lending channel grew substantially quarter over quarter. This is a direct result of increased volume in HARP and FHA and VA streamlined refinances. Overall, pre-tax profitably or our forward-lending operations was $8.9 million in the third quarter which is up from last quarter's forward pre-tax profitability of $5.8 million.

This increase was a function of a larger mix of overall volume in higher margin HARP refinance volume. Our Liberty reverse mortgage subsidiary maintained its position as the top reverse mortgage lender year-to-date with a 17% market share through September. The reverse lending business has changed substantially in the past few months. I will spend a little of time describing the impact of recent changes. Effective April 1st, HUD placed a moratorium on their fixed-rate standard product That product had been 80% of the market. With moratorium and higher rates demand shifted to their variable rate LIBOR-based product. That product now represents about 90% of new production. The new product has a lower average loan to value ratio of about 43% compared to 49% on the fixed rate standard product. The lower LTV has lowered average loan balances and reduced gains on sale as fixed products tended to trade at a higher premium.

As a result, overall Liberty is generating a negative pre-tax income of about $1 million per month. This product, however, should generate higher future draws than the fixed rate product which means the product has embedded future income streams that more than make up for the loss on origination. For originations in the third quarter, we estimate the future cash flows net of expenses will be approximately $7.8 million. These cash flows should largely come in the first three to four years. Year-to-date, we estimate pre-tax income deferred to be about $13.7 million. As we have said in the past, we view this as a long term investment and the changes in the reverse program put it on a sounder footing.

We view the HUD changes as generally positive. Overall, we expect our lending segment to contribute about $18 million to $22 million to pre-tax income in the fourth quarter assuming no change in interest rates. The forward lending business and increased recapture volume drive this expected increase. I would like the turn the call over to John Britti. John.

Thank you, Ron. Today on the call I will cover two areas. First, I will review our normalized results and quarter to date changes in more detail. Second, I will discuss our funding and liquidity position st the end of the quarter First, let us start with a more detailed review of our normalized results on slide sixteen. Normalized pre-tax earnings for the third quarter of 2013 were $147 million an 82% increase over the third quarter of 2012. Ron discussed earlier the largest normalizing item that $48 million in transition related operating expenses. We have broken out separate from these transistion-related expenses the components related to the July 1st HLSS transaction.

This expense is comprised of three main parts, acceleration of expenses as a result of shutting down advanced facilities, recognition of losses associated with hedges against the advance facilities, and incremental interest expense incurred in advance of closing One West. This last component was about $ 7.9 million of the total $17.9 million. The next item is a $5.1 million legal reserve for settlement of a few outstanding issues. The final normalizing item is small adjustment for the loans that moved to quicken in August related to the previously announced Allied transaction. When comparing most resent normalized earnings with second quarter 2013 results, it is worth noting four components that we do not normalize for in may have differed versus expectations.

First is the impact of the relatively small fair value MSR we have on our books. This $7.9 billion portfolio generated a gain of $12.6 million in the second quarter versus a loss in the third quarter of about $200,000. The second components is to Ginnie Mae servicing. While there was no major change in the Ginnie Mae portfolio in the quarter,. timing differences and claim filings and gain on sale of modifications generated a $8.5 million quarter to quarter incremental loss. These two items together thus generated a negative swing in earnings of approximately $21 million.

As noted earlier, origination earnings were also down by over $4 million largely as a result of our reverse mortgage business. Lastly, as discussed earlier also, One West was delayed. Had that deal fully boarded in the middle of the quarter, and the above components remained flat, we estimate normalized earnings would be between $185 million and $190 million. On slide seventeen, we provide more detail related to Ginnie Mae servicing. The revenue difference was generated by a $10.8 million change in gain on sale related to Ginnie Mae modifications. Ginnie Mae loans that are modified must be purchased out of the Ginnie Mae the pool and then can be re-delivered once the loan is re-performing. The timing for these modifications and margins that re-deliver of Ginnie Mae fluctuate somewhat quarter to quarter.

Such loans are generally a net positive for income especially compared to loans that go to claim. On the other hand, loans that do go to claim generate substantial additional expense in the period when the claim is filed. Again these flows tend to fluctuate somewhat quarter to quarter. The change in Ginnie Mae expense increased earnings quarter over quarter by $2.3 million resulting in a net difference that I mentioned earlier of $8.5 million. Also note that we have reclassified these Ginnie Mae items from other income and other expense categories to gain on sale for revenue and servicing origination expenses for the extent. See our 10-Q which we expect to file on Monday for more details. With respect to our UPB for the quarter, let me help you reconcile the ending balance of $434.8 billion.

The big moving parts were the One West boarding of about $30 billion in new UPB, another $5 billion in sub-servicing from a large bank, lending all together for about $1.7 billion, Quicken completed boarding of their portion of the Allied portfolio leading to a loss of approximately $20 billion in servicing, but we will continue to sub-service some loans on their behalf. Run off accounted for most of the remainder though there were some other small transfers. With regard to specific financing transactions completed in the quarter, the largest is on July 1st, we sold $2.4 billion of servicing advances and the rights to receive the servicing fees on UPB of approximately $83 billion to HLSS.

Ocwen's net proceeds were $662 million. On October 25th, Ocwen sold rights to receive servicing on another $10 billion of UPB for proceeds of $309.4 million. The increase in proceeds relative to UPB sold is primarily because the advances sold in October had a much lower matched funding efficiency rate. Through the third quarter of 2013, we have sold over $192.5 billion of UPB for rights to mortgage servicing rights to HLSS and about $3.5 billion in advances freeing up capital to continue to grow without issuing new common equity. This is proven to be efficient funding for Ocwen. In the third quarter of 2013, interest expense pertaining to HLSS was $74.2 million.

After considering the advance financing costs that Ocwen would have born absent the asset sale to HLSS, the net increased Ocwen's interest expense is $30.1 million which represents a cost of capital of approximately 6.2% taking into account acceleration of deferred tax assets. We expect to continue to look for opportunities to self servicing rights in situations where it makes sense for Ocwen shareholders. Turning to liquidity, Ocwen ended the quarter with $357 million in cash on the balance sheet which is down from $440 million at the end of the second quarter. Ocwen ended the quarter fully borrowed against advanced lines in anticipation of further closings. As Bill discussed, our balance sheet is extremely strong with significant flexibility and ample access to multiple sources of capital. AS a result, we believe we have substantial funding for new business at Ocwen. We expect that through a combination of asset sales and debt financing, Ocwen could deploy up to $6 billion in new capital to fund acquisitions without diluting existing shareholders.

To summarize some key points we have made. First, delays in closing One West resulted in lower revenue than we expected, but we are largely back on track as of November 1st. Moreover, lower pre-payments should generally improve long-termed revenue relative to original expectations. Second, we have work to do on the cost side, but we have very specific action plans to return to levels that we have achieved historically, and we have a solid track record of delivering on costs. Third, we have a strong pipeline of opportunities including several near term opportunities and longer term growth potential in adjacent markets. Finally, our strong balance sheet positions us to fund this growth and return cash to shareholders through stock a repurchase program. Thank you. I will now open it up for questions. Operator

(Operator Instructions). Our first question from Ryan Zacharia of J.A. M.

Hello, guys. Thank you for taking the question. I want to understand a little bit more about the One West boarding timing difference, because the Alpha Source presentation from Q2 which came out before your Q2 call said that boarding would be in the back half of 2013, and then the first half of 2014. It did not feel - - like in my model I had expected the minimus amount of One West coming on this quarter. What am I missing?

Ryan, I ca not really comment totally on Alpha Source. We actually did not refer to One West boarding to the best of my knowledge. We made comments about the amount of product that would be boarded over the remaining part of this year and next year which included both One West as well as RESCAP.

I think one west was explicitly laid out as being boarded.

No Ryan, I think that is wrong. They did not.

I am talking the Q2 presentation not the Q3 presentation.

I do not recall, Ryan. I am sorry.

From my vantage point it seemed like this was expected. so it just - - in my model did not explain the revenue shortfall which was a revenue yield issue as opposed to average UPB issue. I guess from your vantage point you always expected boarding One West in kind of Q3 and to a lesser extent than Q4?

Yes. The GSE component of the portfolio which boarded in mid August and September boarded basically with our original expectations. The private label component which is a substantial portion which is where the bigger revenue numbers are, we did expect to board in the third quarter, and it has as we mentioned in the prepared remarks been delayed, but we are now back on track starting tomorrow.

Okay. Just finally on the pipeline. Are you guys at all surprised internally that more had not traded over the last kind of three months or so.

Not really because just the magnitude of the transfers that have occurred across the whole industry. The sellers are very cognizant of what impacts putting large amounts of additional product through the system would cause. I think they are very judicious as to how they basically deliver that product into the market.

Okay. Great Thank you a lot, guys.

Thank you.

Our next question comes from Steven Eisman of Emerest Partners.

Could we talk a little bit more about the environment? You have a nice pipeline, but not a lot of actual transactions are taking place for you or anybody other than stuff that took place in January and the One West. What is the delay in terms of banks actually pulling the trigger?

I think it is the season. This is Bill. It differs from bank to bank. The overall is the people in the industry understand the tremendous amount of movement and transition that has occurred, and I do believe they feel that they will get better execution as they parse this out. You have a number of publicly announced transactions in the market here in the fourth quarter. It is not that there is not a lot coming behind it. It is one of spacing in terms of recognizing the best value.

Okay. Thank you.

Our next question comes from Henry Coffey or Sterne Agee.

Good morning, everyone. The $100 billion that you are looking at as transactions that should close obviously not necessarily to Ocwen. Can you give us some sense on what those transactions are all about? Where you see yourself in terms of winning potential business.

Henry, I appreciate the question. Although I think I have already have to give you the same answer. We have given a vast quarter to similar questions. We are not at liberty to discuss in detail the deals in the pipeline because we are under NDAs but for competitive reasons. I wish I could give you more information.

two other questions. Obviously, you have got the $500 million buyback number out there now. There are different philosophies on that. Some people look at it from a value point of view which is will buyback stock when it is cheap. Other people treat that as a dividend and just buyback stock with a reasonable amount prudence, but do really look at it as a return of capital measure. Can you give us some sense of your own philosophy and likely timing of additional share acquisition?

Certainly, Henry. It looks a lot like how Alpha Source behaves in the markets. We tend to buy more shares back on a daily basis where the stock is lower and fewer when the stock is higher. We will try to maintain some sort of balance with our earnings as John Britti said we have about $6 billion of capacity to make investments. To the extent that we diminish our tangible net worth, it will cutaway additional dollars of leverage that we may not otherwise have. We will try to basically balance it in terms of earnings. The biggest problem we have is because of accounting is so conservative. We actually generate more cash flow than we generate in earnings. We have to be careful that we do not be conservative in accounting and then deteriorate our net worth so we would lose dry powder to grow the business.

Are we going to see buybacks next year, or do you think this is something you hold out to the long-term future?

Buybacks next year? We have a program starting this year.

Do you think you will start it this year? Is the way I would ask the question then.

Yes.

Thank you.

Next question from Mike Grondahl of Piper.

Thank you for taking my questions. The first two are on margins. Once you get everything boarded and begin to ring out a little bit of the costs, what do you think those medium to longer term operating margins look like? Secondly, when this One West revenue gets layered in from the $42 billion, it looks like the incremental margin on that revenue is going to be 80% to 90%. Directionally right there, how do I think about that incremental margin when that revenue hits?

Mike, I think your calculation on the incremental margin is off. You probably would end up with a range closer to 60% if you compare it to the numbers we came up with. The other thing we would say is, we do not give guidance on future margins. Historical margins are a good guide. The biggest thing that is difficult for us sometimes certainly to forecast out further is our mix of business which does substantially effect our overall margin. Our historical margins are based on our historical mix of business. To the extent the mix shifted the margins would change. The returns on equity still remain high or maybe even higher except for example sub-servicing tends to have somewhat lower margins but much higher returns on equity. So if our mix of business shifted in that direction that would be the impact.

Okay. Then kind of a follow-up question on the environment out there. You guys clearly have the lowest cost platform which really means you can probably bid the highest. What do you think sellers are looking for besides price? If you lost this $100 billion, why do you think you would lose it?

Mike, we have a substantial competitive advantage on non-agency product and also particularly those which are non-performing. The closer you get to agency products given our current less then - - we do not like to take as much pre-payment risk as others might be willing to take. We would tend to be less competitive on performing products then other might be. Obviously, that is one reasons we are trying to get the HLSS prime into the market. It would more than level the playing field against other players in the prime and performing space. We should not lose highly delinquent non-agency products simply because if our margins are 58% like historically and our costs are one-third of everyone else, that math does not work too well, if you outbid us on that product.

Okay, and then on the $100 billion, I know you guys will not give details. Can you comment just - - I assume it is highly delinquent GSE or non-GSE papers. Is it in your sweet spot of what you want?

Mike, we want to retrain from giving any details around our pipelines for the reasons I cited earlier. I understand the desire for us to give more detail. One thing I would say is it is a mix of business, and it does include a substantial portion of non-agency.

Okay. Last question, guys, the cash flow of $143 million. Do I need to add back the $70 million of one-time expenses to that number?

If you are trying to get a run rate, yes I think that would be appropriate.

Okay. I just wanted to make sure. Thank you, guys.

Our next question from Kevin Barker of Compass Point.

Good morning. Thank you for taking my questions. Quick question about the $2.5 billion of servicing that you sold for $35 million proceeds and you retained the sub-servicing related to those servicing assets. Could you help us explain the counter party? Was it someone looking to hedge a portfolio or investor in those MSRs?

I would call them largely an investor in MSRs, but an investor that also had some servicing capabilities. In this case we are retaining the actual servicing as a sub-servicer. I would categorize it as an investment for the buyer.

Considering that you were looking to create HLSS prime to do a similar type transaction, is that off the table now? How are you thinking about that.

Of our overall agency this was a relatively small sale. We thought that it was - - there was an opportunity in the market to test the market on a small scale to see what kind of execution was out there. The execution was as good as maybe better than we had expected as Bill mentioned. Our own sort of created vehicle is not yet fully there, and so the good news is that even though we are confident we are going to get that new vehicle off the ground, if it gets delayed further or whatever it looks like there is still the ability to do almost similar type transactions in the market with other investor.

What would be the biggest impediments to getting the vehicle off the ground as you see it?

We prefer not to comments on that. It will give a view as to what we are doing. We would like to, you know, have first-mover advantage with regard to that. I would also say the product that we sold was not the most profitable product we could have sold. It did not have the highest potential gain for us given our basis. It had higher basis than most of our product.

Is that safe to say that was a legacy MSR not newly created?

Well, no. It is the other way around. If you look at the RESCAP acquisition those were extremely attractive multiples of MSRs. Ron, correct me. I think the it was like two.

Yes, in that range on the Allied trend.

Back to the comment you made where you have $6 billion of capacity to make acquisitions. Could you walk through some of the components of that $6 billion outside of purely leverage? You have servicing advances currently on your balance sheet that are not being financed or there are some other aspects or different components of that $6 billion you could walk us through? Thank you.

Maybe I misunderstand the question. Please ask again if I did. The $6 billion represents as we mentioned an analysis of what we think we could deploy in incremental capital based on utilizing our current debt capacity as well as potentially selling additional assets. It is a combination of the two that gets to the $6 billion. I am not sure if that is responsive.

In addition to the cash we have on the balance of over $2 billion of assets we could sell? And, then if we were just to lever at the same leverage ratio as the other players in the industry, we could generate another $3.8 billion of debt capacity.

It would actually at the leverage ratio it would be below our peers.

You are right, John I am sorry. Would you ever be interested in reaching a leverage ratio close to your peers?

There is a little bit lower debt to equity ratio. It is one to one here. One to one debt equity ration. Our peers are much higher than that.

Would you ever consider getting to that level or no?

Not at this time. It is $6 billion we have to invest. It will take us awhile. We are not -- we have been through cycles for 25 years, 30 years. We are not looking at extending the balance sheet to that extent.

Thank you for taking my questions.

Our next question from Bose George of KBW.

Good morning. What is the average servicing fee on the $42 billion of non-agency from One West that you are putting on the Greenpoint?

I think the contractual fee we talked about is in the low 30s.

That is for both those portfolios.

No, you said the $42 million which is the non-agency piece. It is in the low 30s. The actual revenues as you have probably seen in prior PLS transactions will be higher.

And is it similar for that Greenpoint portfolio as well?

I do not know offhand that number.

Okay. Switching to the prime MSR, what is the size of your prime MSR that could be monetized or funded through HLSS prime?

I think maybe a better way to think about it would be in terms of the excess. I actually do not have the number immediately of the proportion of our MSRs in dollar value of the MSR.

Most of it now is prime MSR with our sales HLSS, right?

Okay. So the bulk of that is monetizable?

Right.

If you look at our UPB rate- -

If you think about using that potential for share repurchases is that an accretive transaction?

Say that again, Bose. I apologize.

If some of that cash goes towards share repurchase, would you see that as a good transaction to monetize that and use some of that for share repurchase? .

Well, we have more than enough. You mean to borrow to use to buy repurchase share? We have - -

No to monetize the MSR and some of that cash goes to share repurchase.

Yes.

And Bose, I do not have the MSR value differential. It does represent more than half of our UPB.

Great. Switching to pre-payments. On the prime side just the market as a whole clearly has slowed. Then 18% CPR you guys had on prime in the quarter. Shall we look for that to come down a few point this is the fourth quarter?

You know where interest rates are going in the fourth quarter, Bose?

Assume just based on what has happened in the last month.

If interest rates stayed flat given it declined in each month during the quarter. Yes, if it stayed flat it would on average decline further in the fourth quarter. Given all of that. In other words, if it did not move from the level it was in September you would find fourth quarter levels falling still further.

Thanks, guys. That makes sense. Thank you.

Excuse me, Bose. There is one environmental thing to consider, too. With the QM kicking in January 1 that is going to having a downward effect on originations on prime originations.

That makes sense.

Our next question comes from Brad Ball of Evercore.

Thank you. Regarding the non-agency delay, the One West delay. You mentioned due to the consent process taking longer than usual. Could you talk a little bit more about what happened there, and do you have confidence that kind of problem won't arise again with future boardings?

I do not know that we will get into much the details of what occurred. The process that the various consenting parties in Ocwen and the seller went through bodes well for future transactions. Every transaction is different. There is different players that may have to consent. It is difficult to predict what a future transaction will look like. The process that we went through here although it took time was productive and will actually be helpful in the future.

It is typical that non-agency would take longer than agency where you are dealing with GSE only?

Historically it actually was the other way around. On this One West transaction we saw it where the GSE approval process worked much faster. It depending on the transaction. Depends on who the seller is, depends on who the consenting parties are. I do not know there is a good way to predict it. Things like the Moody's report that we mentioned where it comes out saying Ocwen outperformed the rest of the industry is helpful in paving the way for an easier consent process because obviously performance is one of the factors that goes into that.

Great. Then, Bill, could you clarify when you talk about returning to historic margins, are you talking about the operating margins which are around 60% versus this quarter which was in the high 30% or 40% range?

Yes, you should look at it between prime and non-prime servicing and sub-servicing. We are saying that we will return to those historic margins. As Ron pointed out, it is important to understand we have been able to maintain our margins aside from the transition costs in the face of rather large increases in regulatory costs through improvements in technology, and we have a lot of projects in place to try to continue to improve both our efficiency and effectiveness. We feel very comfortable we will be able to - - One thing we know how to do to manage costs.

With respect to the buyback. I think you said previously that you would have the ability to do $900 million of buybacks without any adverse tax consequences. Is there a reason why you went with $500 million this time rather than $900 million? Is it something that could be upsized if you end up being more aggressive over the next year?

Two things. We think we are in the place to also substantially almost substantially eliminate the $900 million cap. That is one answer. The other one is what we are trying to do is come up with a number that was reasonable over the period here that we could actually use to where we would not deteriorate earnings. Net worth, rather. In other words, we do not want to do a huge buyback and drive our tangible net worth down which would in fact reduce the amount of leverage that we could have. We have $500 million for this period of time is a reasonable. We have a board that will meet at any time of the date 24 by 7. If we were in a position where we felt we should increase or could increase, that is something that would not be - - assuming they would agree. It is their decision. We could easily adjust that.

Plus we also did some of the preferreds in the quarter. We also you took one step since the last time we talked as well.

Yes. And just to clarify you eliminating the $900 million cap. That is negotiating with the tax authority? Is that what is driving that?

No, it is just structuring. We believe there is still that cap is not there yet, but we think we will be able to get there.

Yes, and actually, just highlight that. The cap we were talking about was an actual transfer of cash. There are a variety of mechanisms such as borrowing money that would enable us to exceed that amount if we desire to do it.

Excellent. My last question, John. The break out of the $435 billion in UPB between servicing and sub-servicing.

Sub-servcing was 16%. Hang on a second. I think it is about 16%. It will be in our cue. I believe it is about 16.6% is the number that I had.

Great. thanks for your answers. Thanks.

Next question from Craig Perry of Panning Capital.

Thanks for taking my question. Congratulations on the quarter in progress. I just had two quick questions. First, Bill, in your opening remarks with respect to the cumulative cash flow from operations slide, you made a comment which I want to make sure I understand correctly. You felt like scenario three is starting looking more like the baseline forecast, is that correct?

Scenario two if you - - the difference between scenario two and three is really the re-investments rate. My comment though was positioned around scenario two.

Got it. Just in terms of improving underlying CPRs and delinquency rates. More likely middle of the road forecast as opposed to mid-case or something. The second question is just with respect to what is the target ROE now for redeploying capital? How are you thinking about that? Numbers you think through. The various options for all the cash flow to come back. You were sort of helpful in walking through what the priority is for the company. Just want to make sure I understand as you think about adjacent businesses as you put out capital what is the IRR internally that you are thinking about?

I will give you a wide range. Somewhere between 15% and 25%. It depends obviously on the business, and it depends on - -that may not be the initial return. But returns we think we can achieve through restructuring of any new business over time. We certainly wants it to be in line with what we have been able to achieve in the servicing business.

Right. It looks - - it is seemingly based on even looking at the capital you put out in the business versus what you have been able to or expect to return. the returns have been well in excesses of 15% to 20%.

Yes, and they will continue - -as we find other businesses where we can deploy. We have purposely remained substantially under-levered and maintained assets on our balance sheets that if we had other even greater growth opportunities, we could - - obviously the return on servicing then would rise significantly.

Right. Great. Thank you, guys so much, appreciate it.

Our next question from Daniel Furtado of Jeffreys.

Hello. Thank you for the opportunity. I want to be ultra-clear here. When you are talking about the $100 billion by year end, you are talking about your own pipeline. So one quarter of your $400 pipeline, or are you talking about the industry in general?

It is our pipeline.

Okay. Thank you. Second is to the extent you feel comfortable, would you comment on gain on sale margins for Harp product in the quarter, and what you are seeing in the fourth?

The short version the gain on sale margins has declined. It is mostly a function of the increase in profitability that we have generated. It is mostly because of increased volume from newly acquired portfolios. Beyond that I do not have any specifics to disclose.

Great. Thank you for the time.

You are Welcome.

Our next question comes from Jordan Hymowitz of Philadelphia Financial.

Thank you, guys. All my questions have been answered.

Our next question comes from Ken Bruce of Bank of America.

Thanks. Good afternoon. Quick clarification if you could. Just in terms of the revenue recognition on the sales. I had thought that those would occur at the point of sale versus boarding. Is there any differences in terms of the One West transaction, or how should we think about when the revenue recognition will start on any given deal versus the actual boarding?

If I understand your question correctly so when we announced the One West deal earlier in the year, we just announced it at the time we signed the contract. We had not yet acquired the MSRs or transferred them. On One West it is a deal where we - - as we - - we are acquiring the MSRs in phases simultaneous with the transfer.

That helps.

There have been cases in the past where we have actually taken ownership of the MSR and sub-service back to the selling entity. That is not the case in this.

Structurally this is different. You take ownership when you are actually boarding the loans in this case.

Right.

As you look at the opportunities in terms of whether or not you want to dimentionalize it across the $400 billion or the $1 trillion opportunity, is that what you see as the opportunity for the sale of MSRs or is that some combination of sales and sub-servicing or is there anyway to think about what in addition to the $400 million or $1 trillion that may come up from sub-servicing standpoint?

It is a mix of both, Ken. I think as we discussed in the past it is sometimes hard to tell when a portfolio is being discussed whether it will end up as an MSR or sub-servicing. In many cases, the discussions look at both. Literally you could end up bidding on the same portfolio both with a sub-servicing bid and an MSR bid. So we cannot even be sure. I would say based on resent information it does appear that mixes continue to trend in favor of MSR trade. As Ron mentioned in his remarks, we are also- - we believe long-term sub-servicing will become a bigger component of the business.

Lastly, just in terms of the forward lending opportunity. Is there any way that you can discuss what your aspirations are there in terms of either volume or share in the market, or how to think about what the growth potential is for Ocwen in that part of the market?

That might be something we want to do a little bit more detail maybe in future calls. We do have a lot of room to grow from a direct lending standpoint to handle the refinance opportunities that exist within the portfolios that we have acquired. Most of which have been acquired fairly recently in the last year. Some just acquired on One West very recently. We have a lot of room to continue to ramp up that direct lending side of things. Obviously it will somewhat be dependent on interest rates and refinance activity and it will be somewhat dependent upon the mix of future acquisitions. Maybe in the future calls, we can maybe give a little more detail about the longer term thought on originations overall. We do expect to see over time a lot larger share than we have today. We of course, have a very small share today. We do expect to see that grow.

Okay. Thank. I look forward to that at that point in time.

Bill go ahead.

I would add the comment, too. Lending is a relatively new business for us as opposed to servicing which is well established operation. In addition to Ron's comments, I think we will improve or operational capability as we are in the business longer, and we have more experience at it.

Understood. Thank you.

Our next question comes from Mike Grondahl of Piper.

Yes, guys. the $900 million cap on the buyback from June, is there a specific number today? How do we think about any tangible net worth covenants around this buyback? What is the minimum you have to have?

Mike, as far as the $900 million. We mentioned earlier. First of all, the cap we have right now is based on what is approved by the board. We would certainly need to go back to our board if we wanted to purchase more.

Has the $900 million increased since June?

The answer to that is yes. As I just discussed earlier, that is just regarding if we wanted to use cash. We could today if we had approval from our board, theoretically purchase more than $900 million simply by borrowing it, the money. There is no meaningful restriction. Does that make sense.

Yes, that does. Any covenants that guys you have to think about or that minimum amount of equity that you want, how should we think about that?

Mike, first of all. If we were to borrow it would most likely be unsecured. It would be bonds as opposed to term loans at that particular point in time. We believe with the leverage we propose there one-to-one that we are well inside the covenant package that we would have to promise to the bond holders. We do not see that. The question is if you start buying back stock well in excess of your reported earnings you are going to reduce your tangible net worth, and you will in fact at some point, it will look like you have a higher leverage ratio. Then at some point beyond that, you would get to the point where you would bump into potential covenants that you might have on a new bond offering. There is a lot of gap. We do not want to deteriorate tangible worth with dividend, through a stock buy back program. We want to maintain our capital strength. That still gives us an enormous amount of stock that we can repurchase.

Great. That is helpful. Thank you.

It will not be covenant limitations. We do not think it will be the ability to utilize cash through our global network that will be a limitation. It will be our self-imposed limitation on how we want to manage our capital structure. That will be more stringent than any of the other items that we just discussed.

Okay. Thank you.

At this time, I show no further questions.

Thank you everyone. We appreciate your support.

Thank you.

This concludes today's presentation. Thank you for your participation. You may now disconnect.