Onity Group Inc (ONIT) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Ocwen Financial first quarter 2014 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). I would now like to turn the call over to John Britti, Executive Vice President and Chief Financial Officer. Please go ahead sir.

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 Corporation. Before we begin, I want like to remind you a slide presentation is available to accompany our remarks. To access the slides, log onto our web site at www.ocwen.com. Select Shareholder Relations, then under Events and Presentation, you will see the date and time for Ocwen Financial's first quarter 2014 earnings. Click on this link. When done, click on Access Event.

As indicated on slide two, our presentation contains forward-looking statements made pursuant to the Safe Harbor Provisions of the Federal Securities laws. These forward-looking statements may be identified by reference to a future period, or by using forward-looking terminology. Forward-looking statements by their nature address matters that are to different degrees uncertain. 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 GAAP financial measures, such as normalized results and adjusted cash flow from operations. We believe these non-GAAP financial measures may provide additional meaningful comparisons between current results and results from prior periods. Non-GAAP financial 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 today's earnings release, as well as the Company's filings with the Security and Exchange Commission, including Ocwen's 2013 Form 10-K, and quarterly 10-Qs. Note that we expect to file our first quarter 2014 10-Q by tomorrow. If you would like to receive our news releases, SEC filings, or 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 Faris, President and Chief Executive Officer.

Now I will turn it over to Bill Erbey. Bill.

Thank you John, good morning and thank you for joining today's call. Today I would like to cover two topics in my prepared remarks. First, why we believe that trends in the marketplace are beneficial to Ocwen's competitive position, and second, why we believe demand for our services is as powerful as ever, and more importantly, should remain robust well into the future. After my comments Ron will discuss the consequences of the emerging regulatory environment in more detail, and provide an update on our results and operations. Finally, John will provide additional information on our first quarter financial results and future funding strategies.

Let me begin with an overview of the three trends that we believe reinforce Ocwen's competitive position in the marketplace. First, regulators legislators sellers and other stakeholders insist upon near perfection in servicing transfers, and as we will discuss, Ocwen has both unique capabilities, and a long history of success in this regard. Second, it's important to be in sync with the fullest regulatory mandates, and Ocwen is the only non-bank fully subject to the National Servicing Settlement requirements. More over Ocwen's records of helping homeowners provides an exemplary record of complying with the spirit of emerging consumer protection. And third, capital and counterparty strength are increasingly important to regulators, legislators and sellers. Ocwen has the strongest balance sheet of any large non-bank servicer.

Starting with the expectation of near perfect transfers let me make several observations. Most importantly, Ocwen is unique in the length and consistency of its track record of successful servicing transfers. In an environment where MSR transfers are expected to be flawless, and companies selling MSRs are on notice from regulators that they will be held accountable for a transfer's success, our track record is among our biggest competitive advantages. Our success is demonstrated by the facts.

On slide four of our presentation you will see how we have been effective at reducing the 90-day delinquency rate for large acquired portfolios over the first 12 months following boarding. No other firm can point to such a long and consistent record of taking on large numbers of delinquent loans, and rapidly bringing down delinquencies benefiting borrowers and investors. The ability to rapidly improve portfolios is only possible with tried and tested transfer processes. Ocwen simply has more experience, and that makes it difficult for others to be as effective. Moreover Ocwen's success is a direct function of how we operate, and in sharp contrast to how other services operate.

Ocwen's platform has been built from the ground up, and utilized greater automation that provides consistency and eliminates the errors inherent in human processes through greater automation. Unlike other servicers Ocwen's platform does not rely on loss mitigation experts, with years of experience to make it work. By use in-depth dialog engines and automating decision making, we accomplish two things other services have difficulty replicating.

First we can expand capacity more rapidly without compromising quality. We can take someone with strong empathy and intelligence, and turn them into world class loss mitigation specialists in three months. Our competitors take years to train someone to be an effective resolution specialist. Second our system is built upon detailed dialogs, which reduce variability in process and results. As a result we provide the greatest consistency and accuracy and offering solutions to borrowers that stakeholders demand.

The second trend supporting our position in the market is that we are the only non-bank servicer subject to the most comprehensive servicing standards and monitoring required of the largest banks across our entire servicing platform. Ocwen is deeply committed to adhering to the highest standards of compliance and regulatory oversight, which is why we were the first non-bank servicer to come under National Servicing Standards and monitoring. As such we're subject to virtually identical servicing standards and oversight as the large banks.

Perhaps as importantly, Ocwen can point to facts that demonstrate that's we are very much in sync with the spirit of the regulations that aim as we do, to ensure that servicers are helping homeowners. As we have noted in the past, and as Ron will discuss further, we are proud of our ability to lead the industry in pre-foreclosure resolution that are better for investors, communities, and families facing financial hardship. In particular Ocwen is very effective in modifying loans, and perhaps more importantly, finding solutions that work, such as modifying loans are less likely to redefault.

On slide five you can see that Ocwen has a track record of modifying a higher percentage of loans in subprime securities than our peers. The true measure of success however is that Ocwen's modified borrowers are more likely to stay current. On slide six, you can see how we stack up against our peers. Some are better than average, but none is better than Ocwen. This data is supported by multiple independent analyses that shows that Ocwen consistently provides more modifications with lower redefaults than other servicers.

For example, a Moody's analysis published in October 2013 cited Ocwen as the Best-in-Class servicer over the course of the housing crisis as compared to other large servicers, specifically with regard to HAMP, Ocwen has more HAMP modifications than any other servicer, according to data from the United States Treasury. The bottom line is we get results, and taken together you can see why I am enormously proud of our success in helping families to find workable solutions to stabilize their lives.

The last trend I want to discuss is the increasing focus by regulators on capital adequacy, and prudential oversight for mortgage servicers. This is a clear area of advantage for Ocwen given our superior balance sheet and capital position. Ocwen remains the best capitalized large non-bank servicer by a substantial margin as you can see on slide seven, we have far more equity and net worth relative to debt compared to our pierce. Because of our superior cash flow we're even stronger on other metrics of balance sheet strength, such as debt service coverage ratio.

Balance sheet strength is becoming more important competitively, as regulators and sellers have begun to scrutinize servicing transfers in the context of counterparty risk. As we look at potential regulation we are comforted by the fact Ocwen holds more capital against its MSR book value than its peers, and versus the typical bank. We are nearly one to one on capital to MSR book value. We also believe our funding strategies are generally more conservative, that is more prudent and safer than others. For example, the major benefit of our OASIS notes is that it's shifts pre-payment risk off our balance sheet allowing us to match fund prime MSRs.

The reason Ocwen has survived several market cycles and capital market meltdowns, is that we have always funded ourselves assuming that credit markets will face disruptions from time to time. As I have told my colleagues, I'm not looking to start a new career at my age, and I have seen too many cycles to think it can't happen again. We're not looking to eek out modestly higher returns to investors at the expense of adding substantial risk to our balance sheet. While this philosophy of conservatism has driven our funding strategies, we're fortunate that it positions us very well as regulators contemplate the future of the mortgage market, and potential capital requirements for servicers. With our established competitive advantages as the backdrop, I'll turn to why we continue to believe that the underlying demand drivers for growth in our core business remain robust, and will persist well into the future.

With respect to our core servicing business, there is no doubt that near-term pent-up demand for our services is a continuing effect of the mortgage crisis. As slide eight shows we're still a long way from normal delinquency rates. Rates have come down slowly, but they are still well above historical norms. The real question in the minds of our investors is what happens as the crisis given demand abates, even if that takes another two to three years as we would expect. In our view, the persistent legacy of the mortgage crisis is a strategic shift in demand factors that should support our business well into the future. As Jamie Diamond noted as a recent investor conference, he would prefers never to have to service another seriously delinquent mortgage loan. This comment is indicative of a new paradigm for mortgage servicing at many large and small banks. It's important to go over the reasons for this secular shift in strategy by banks, because many observers incorrectly assume it is largely driven by the new BASEL capital regulations. Based on our discussion with banks, this is not appear to be the case.

The major motivations for banks selling nonperforming servicing are two-fold. First is the desire to focus on their core banking franchise. Banks prefer avoiding the headlines and natural ill-will associated with handling loans in distress. Banks have a wide variety of consumer products that they want to sell and performing borrowers represent greater cross-sell opportunities. Second is cost. Banks find it very difficult to profitably service nonperforming loans. When Bank of America sold off much of its nonperforming servicing, they primarily noted to their shareholders the massive associated cost savings.

These factors are not just driving banks near term interest in selling servicing, we believe they have changed bank mortgage strategies, and will sustain demand for our services into the future, even after the industry returns to more normal levels of default. As a result, we believe there has been a long-term shift in how mortgage servicing will work. At a minimum we would expect two things. First, higher risk mortgage products will more likely be serviced by specialists, and second, lower risk loans that do default will more than likely also be serviced by specialists. We believe this emerging servicing market will be one where Ocwen will compete very effectively. Many industry observers note the default rates on recently originated products are very low, questioning the need for specialty servicing in the future. As we have noted in the past however this assumes that as a nation and an industry, we're comfortable allowing substantially lower homeownership rates.

I would contend that the decline in home ownership rates is politically, socially, and economically unacceptable. Recent press accounts support the notion that both regulators and originators are looking for ways to expand mortgage lending markets. Most observers acknowledge that near zero risk lending is bad for families seeking the dream of home ownership and for our country's long-term growth. We hope never to see the kind of irresponsible lending that has led to the financial and housing crisis. On the other hand, we expect more balanced lending standards and supporting regulations to develop over the next two to three years.

Finally, outside of persistent demands for our core servicing business, we continue to see opportunities for growth in related and adjacent businesses. We're investing and building our mortgage origination business, as we have noted in the past, we bring sizeable advantages to the business. Simply recapturing refinances on our $3 million loan servicing portfolio will yield solid returns, while also providing some hedge against future run-off. Ocwen's preferred vendor relationship with lenders one, is an advantage, and accessing a set of lenders that represent more than one in eight new loans originated. Earning a even modest portion of that business would create significant profitable growth in our corresponding channels. Moreover we believe our operational skills along with some product innovations in the works will build the business across all of our lending channels. Beyond originations we believe the skills that make us successful in servicing are applicable to new business lines. For the most part we believe we can grow these businesses organically, though they may include acquisitions. We expect to provide further updates on these opportunities on our next earnings call.

I'll now turn call over to Ron to talk about regulatory effects on our business results, and cover operational and segment level performance. Ron.

Thank you Bill. This morning I will cover two main topics in my prepared remarks. First, I will provide some thoughts regarding the near-term and longer term effects the regulatory environment is having on Ocwen and the industry, and second, I will cover some of our operational results for the quarter in more detail, and discuss some of our ongoing borrower outreach efforts through community organizations.

Before I get into the effects of the evolving regulatory environment, let me remind you how Ocwen is regulated. Historically Ocwen has been primarily regulated by each of the 50 states as a licensed mortgage servicer and originator. As a result of Dodd-Frank we are now also supervised at the Federal level by the Consumer Financial Protection Bureau, or CFPB. In addition we're subject to oversight from a host of others, including Freddie Mac, Fannie Mae, their conservator, the FHFA, Ginnie Mae, FHA, VA, private trustees, and a broad range of clients for whom we service or subservice loans, including some large national banks. Overall, we welcome additional consistency, scrutiny and clarity by regulators, as we believe that over the longer term it is very good for the industry, because it instills confidence in all stakeholders and allows the market to move forward. Moreover, we believe that stricter regulation is ultimately a competitive advantage for Ocwen.

As Bill mentioned, we are the only large non-bank fully subject to national mortgage settlement standards and monitoring. We also have the strongest capital position among large non-banks. We also believe that our competitive strength in process management and automation are particularly valuable in the context of the evolving regulatory environment. Before I describe why this will play to our strengths, let me first go over the key impacts of the evolving environment. Two major operational impacts of regulation are that it has increased costs, and raised the bar on quality. Costs go up because processes now require more time, additional activities, and more documentation.

For example, the new rules that went into effect in January extends foreclosure processes by generally not allowing foreclosures to be filed until a loan is 120 days delinquent, versus the prior industry standard of 90 days. Another example is that most loss mitigation procedures now require additional documentation to show that specific process steps were actually completed. Ocwen has been focused on process quality as an operating principal for a long time. The emerging compliance structures are driving towards zero tolerance for errors, which is something we embrace wholeheartedly.

Nevertheless, the bar has been raised substantially because of the additional activities and documentation now required under the regulations. There is no doubt that meeting the new regulatory standards has at least in the shorter term raised everyone's costs, including Ocwen's. Based on data from our MSR valuation firm, MIAC, we estimate that industry average variable costs for servicing nonperforming loans have risen by approximately $50 to $60 per year. We would estimate our own variable costs have gone up by about $30 to $40 per year per nonperforming loan.

In addition all servicers are adding substantially to their overhead costs, particularly for oversight and reporting. There is no doubt that the impact of all of this has been to erode margins in the short run. Longer term we believe this strengthens Ocwen's competitive advantage because the changes increase the importance of scale and efficiency, and we believe it places a greater premium on operational skills where Ocwen can excel relative to our competitors.

As we have said in the past we believe that increased regulatory requirements will be especially difficult for servicers that are subscale, and who have already high cost structures. We do not believe that these marginal servicers will be able to compete effectively without substantial investments. In many cases, their platforms are not capable of automating the new requirements efficiently or effectively. Ocwen's platform on the other hand is designed in such a way that we can more easily automate requirements than others. Even if initially almost everyone's processes, including ours, are more manual than we might like. As a result, we expect that over time our margins and competitive advantage should improve.

Before I move on to operations, let me address the questions we are often asked regarding the New York Department of Financial Services. Our Wells Fargo transaction remains on indefinite hold. Beyond that is it not appropriate for us to comment further at this time. I can say however that we continue to invest in our compliance and operational risk management systems.

Moving onto operational results, let me start with revenue in the quarter. As expected, OneWest and Greenpoint contributed additional revenue adding servicing fees of about $15.6 million in Q1. Unfortunately, poor weather contributed to weaker REO sales across our PLS portfolio than we would typically experience in the first quarter. Modification volume was also down a bit over last quarter. The slower rate of resolutions dampened revenues because we collected less deferred servicing fees. This largely offset the benefit from OneWest and Greenpoint. Note that REO associated deferred servicing fees are very high on average, because the long total time line to complete foreclosures and REO generates sizable uncollected servicing fees. Fortunately we are seeing REOs rebound strongly in April up over 60% through mid-month compared to the first half of February.

Slide nine updates our historical modification numbers. Since 2008, we have helped about 490,000 families keep their homes with sensible modifications, including government sponsored HAMP modifications. In the first quarter of 2014, Ocwen completed 28,456 loan modifications. HAMP modifications accounted for 39% of the total. In the quarter 49% of modifications included some forgiveness of principal. Our share depreciation modification accounted for 4,153 of the modifications in the first quarter.

Environmental factors have slowed our historical ramp-up in modifications on recently boarded portfolios. Typically we have been able to ramp-up modifications within three to four months of a new acquisition. We now expect this ramp-up to occur in the second half of this year on the OneWest portfolio. As a result, we expect a small decline in modifications again in the current quarter before ticking up again later this year. As we discussed in greater detail on our last earnings call, we are proud of our modification performance, and we believe that sensible modifications can provide the best outcomes for investors, communities, and most importantly families facing difficult circumstances. Ocwen has been a leader in HAMP modification as shown by Treasury data. We are a leader as well in private label securities modifications, and redefaults as Bill covered in his comments. We have also led the industry with innovative programs, such as the share depreciation modification.

Third-party studies by a variety of analysts point to Ocwen as a Best-in-Class loss mitigation servicer. In short we help more homeowners become current on their mortgages, and by doing so, provide better results for mortgage investors. Modifications are not the only way to provide borrowers with alternatives to foreclosure. Payment plans, forbearance plans, short sales, and deeds in lieu of foreclosure also provide ways to avoid the cost of foreclosure for both investors and communities. Working with borrowers can also offer results in full debt pay-offs and reinstatements.

For the first quarter of 2014 over 78% of all of our delinquency resolutions were resolved without resort to foreclosure. We are proud of our ability to resolve loans without foreclosure, as it is the best for struggling families, for blighted communities, and for investors. In addition to modifications, Ocwen had 23,477 other preforeclosure resolutions of delinquent loans in the first quarter.

Moving onto our delinquency performance for the first quarter 2014 we continue to see improvement. Ocwen's overall 90-plus delinquency rate fell from 14.5% on December 31, 2013, to 13.8%on March 31, 2014. On the newly-boarded OneWest private label portfolio delinquencies fell 1.2 percentage points from the end of December to the end of March. Pre-payment trends continue to be very positive for our overall portfolio, with declines in both prime and nonprime rates.

Constant pre-payment rate or CPR dropped almost 2 percentage points across all loan types, averaging 11.2% in the first quarter of this year as compared to 13.1% in the fourth quarter of last year. Overall CPRs on our portfolio are down over 9 percentage points since the middle of last year, when CPR rates started falling. The CPR on nonprime loans averaged 9.2% for the first quarter, which is down from 11% in the prior quarter. Slide ten shows nonprime CPR trends, including a CPR breakdown between voluntary, non-voluntary, and regular amortization. Prime loan CPR declined from 14.5% in the fourth quarter of last year to 12.6% in the first quarter of this year.

Slide 11 shows prime CPR broken down into its components. John will go over valuation in more detail later, but the declining pre-payment rate continues to be the most important story regarding the value of our existing servicing book. On the other hand, the decline in refinances is having the opposite affect on lending operations, which went from a $14.8 million pre-tax gain in Q4 2013, to a gain of just $0.6 million this quarter. Forward lending posted a pre-tax gain of $6.9 million, while our reverse lending business lost $6.3 million in the quarter. Homeward lending's funded volume was off by $200 million from the fourth quarter 2013 to $1.1 billion in Q1.

Retail volume was roughly flat, while wholesale and correspondent volume fell by more than 25% to $462 million, loss volume for our own direct lending channels remains strong at almost $300 million. Which is up 50% quarter-over-quarter. This was offset by lower retail volume through partnerships where volume fell by $135 million, to $381 million. We earned substantially higher margins on our own direct business, and we expect the partnership share of retail to continue falling as we provide most remaining HARP leads to our own direct channel. HARP refinances continue to be the major driver of earnings in our forward lending business. However, we expect this volume will begin to decline over the next few months as the number of marketable HARP eligible loans decreases.

Our Liberty Reverse mortgage subsidiary lost $6.3 million on a pre-tax GAAP basis in the first quarter. As we have discussed in prior quarters the shift in business to a variable rate product with lower upfront funding and larger future draws creates current period losses, but will generate future period gain. These tail earnings arise as existing loans request additional draws, which generate gains on sale with very little expense. We estimate that the present value of future draws against Q1 originations to be $8.1 million. Liberty's market share slipped a bit to 15.1% in Q1, as a product was introduced by competitors that we would not originate. The product essentially exposed a lender to being forced to make substantial future draws based on a fixed current interest rate. Not surprisingly the product was recently disallowed by Ginnie Mae.

Moving onto our integration of recent acquisitions, the final transfers of loans from OneWest and Greenpoint were completed during the first quarter. We also acquired some trailing MSRs from the ResCap Estate. We have been subservicing the loans, and we were awaiting the conclusion of negotiations between the Estate and the investors to complete the sale. This shifted $2.9 billion from our subservice portfolio to owned MSRs, and added about $120 million in purchased advances.

We are also nearing the end of our integration of the legacy ResCap loans onto Ocwen's servicing platform. We expect to be able to finish our consolidation by the end of the summer. Consolidation will allow us to substantially lower expenses and reduce the operating complexities of running multiple platforms. As we have noted in the past, there are contract termination expenses associated with shutting down the existing platform of about $20 million, that we now expect to incur in the third quarter of this year.

Let me move on to talk about some of Ocwen's longstanding work with community housing organizations. We strive to be the best in the business at helping homeowners in distress, and thereby serving the interest of investors and communities. One way we do that is by improving the effectiveness of our communications with struggling homeowners. This is absolutely essential to preventing foreclosures. Among the most powerful means we have for doing this is through our support and collaboration with non-profit consumer advocacy and housing counseling partners all around the country. The efforts of these groups are especially helpful in hard-hit areas and underserved communities. To name just a few, we are grateful for the Homeowner Outreach Assistance from Home Free USA, National Association of Neighborhoods, National Community Reinvestment Coalition, National Council of La Raza, Neighborhood Assistance Corporation of America, and Empowering and Strengthening Ohio's People.

We continue to expand our partnerships with non-profit community groups across the country. Through these partnerships we are able to enhance our outreach to our customers, who are struggling with their mortgage payments. The housing counseling firms we work closest with are highly experienced and effective at helping families through the delinquency resolution process. They are also skilled at educating families on financial literacy and household budgeting, which has resulted in reduced redefault rates.

This month we are establishing an advisory board with representatives from community groups around the country. We intend to use this board as a means to further strengthen our links to these groups that have done so much to help us be effective. We hope that their role can also ensure Ocwen's mortgage lending and servicing policies and practices will have a positive impact on local communities, particularly those hardest hit by the economic downturn.

Before I turn the call over to John, I want to discuss some organizational changes we are making to build our management team, and focus greater energy on initiatives to diversify and grow our business over the long-term. Over the next 60 days, we anticipate that John Britti will be transitioning his CFO responsibilities to a newly-hired Executive Vice President of Finance, Michael Bourque. In addition to his CFO role, John has been leading many of our corporate and business development efforts. He has also been engaged in building out our capital markets capabilities. We believe that these efforts are too important to get only a part of his attention. John will become Chief Investment Officer of Ocwen Financial Corporation upon the transition, and Michael's appointment as CFO. Michael Bourque comes to us from GE where he was CFO of their Distributed Power business. We believe Michael adds substantial additional depth to Ocwen's executive management team. We are thrilled to have him join us in our St. Croix office, and we look forward to him taking on his new role. We also look forward to having John focus greater attention on future business activities for Ocwen.

Now I would like to turn the call over to our current CFO, but future Chief Investment Officer, John Britti.

Thank you Ron. Today on the call I will cover four areas. First I will review our normalized and quarter-to-quarter results in more detail. Second I will go over the impact of HLSS rights to collect servicing fees on our financials, and provide some guidance on those related expenses in Q2. Third, and in response to investor requests, we pulled together additional thoughts on valuation. Lastly, I will talk about our funding and stock repurchase strategy over the next couple of quarters.

First, let's start with the review of our normalized results on slide 12. Normalized pre-tax earnings for the first quarter 2014 were $114 million. Approximately 80% of normalization expenses relate to the ResCap platform transition. A lower normalized income quarter-over-quarter was due to a variety of items, including substantially higher overhead and variable costs associated with regulatory mandates, as Ron discussed earlier.

There were also several items to note when comparing quarter-to-quarter normalized income. The first is the swing in MSR value. While we carry 95% of our MSR book value at lower of cost to market, we carry about $7.6 billion of UPB, or $110 million of current MSR book value as fair value. This small portfolio generated a fourth quarter 2013 gain of $19.1 million compared to a first quarter 2014 loss of $5.1 million. These third-party broker marks to value our portfolio, and the broker model is very sensitive to interest rate movement. So the drop in value is a direct function of the 23 basis point drop in 10-year treasury swaps from tend of December to the end of March.

On top of that, we had a $2.4 million reversal of MSR impairment in Q4 2013 with no such changes in Q1 of this year. The net MSR changes for these items totaled $26.6 million. Next we had a large change in the reserves for uncollectible servicing receivables. This expense was $24.3 million, versus $5.7 million in the fourth quarter of 2013. The increase was a result of a change in estimate of the collectability of certain receivables from the GSEs. We would not expect to incur such high expenses in the future.

Moreover we believe we're adequately reserved to cover non-reimbursable amounts as of March 31st. Over the past eight quarters this expense has averaged only about $1.6 million per quarter. The future run rate may be modestly higher as a result of the growth in our GSE portfolio. Nevertheless such expenses are an ongoing cost of doing business, so we did not normalize any of it. We also had a large swing in lending results, as Ron noted earlier the lending segment generated a change of over $14 million quarter-to-quarter. These three items represented a $59.4 million swing from the fourth quarter of 2013 to the first quarter of 2014.

On slide 13, we show adjusted cash flow from operations relative to earnings. As expected adjusted cash flow from operations turned positive. We would expect even higher advance reductions and positive cash flow as REO sales and modifications rebound. As with deferred servicing fees our largest loan level advance balances are typically associated with REO, because they have been accumulating for a long time.

Ocwen's total effective tax rate for the quarter was 14.8%. This rate was affected by some one-time true-ups. Our estimated first quarter run rate for taxes was 12.5%. As we have said in the past, our tax rate varies depending upon our earnings mix and relative mix of operations in the mainland US. Based on our current plans we would expect our 12.5% run rate is a reasonable estimate going forward in the next few quarters.

I will next go over the impact of HLSS rights to collect servicing fees, and how that works through our financials. We had no additional sales of advances or rights to MSRs to HLSS in the first quarter. To date we have sold rights to receive servicing fees on $170.8 billion of UPB as of March 31, 2014 to HLSS. We have also sold the related advances totaling about $7.1 billion to HLSS. These sales freed up capital, that funded growth without issuing new common equity. This has proven to be efficient funding for Ocwen in first quarter of 2014 interest expense pertaining to HLSS rights to collect servicing fees was $81.9 million. After considering the advance financing costs that Ocwen would have borne absent the asset sale to HLSS the net increase to Ocwen's interest expense is about $36 million, which represents cost of capital of approximately 6.9%, taking into account accelerated deferred tax benefits.

In the second quarter of 2014, we expect interest expense pertaining to HLSS rights to collect servicing fees of between $76 million and $82 million. When CPR is falling we've reexamined the assumptions on which we have based our amortization. As we have discussed in the past, nonprime MSRs have been amortized based on assumed CPR of 18%. The actual effective amortization rate was actually closer to 22%, given that the methodology also front loads amortization. It's worth noting that Ocwen's interest expense related to HLSS rights to collect servicing fees goes up when CPR falls, because as the financing takes less amortization of the HLSS liability, which pushes up interest expense. There's a mismatch that has further highlighted our need to consider am amortization method to better reflect the actual CPR rate, rather than one that's arbitrarily higher. Starting in the quarter we attuned our assumptions to better fit actual prepayments for all nonprime MSRs. Note that we are still the only servicer that has 95% of its servicing MSRs booked at lower of cost or market, so we will still be booking expense every quarter against these assets, rather than writing them up on occasion.

Moving on, I will provide some additional perspectives on the value of Ocwen's existing business. Many investors have asked questions regarding our previous disclosures in an effort to value the Company in run off. The reasons discussed by Bill earlier we think this is an inappropriate way to value the Company. Nevertheless we also understand why investors would like such a view. Building on our previous disclosure, I present some analytics on the next few slides for your consideration. The valuation methodology assumes no new bulk MSR purchases, we do assume that our lending business generates value, especially from recapture of loans that run off from our portfolio. Lastly we add some value for our subservicing business. We certainly seen renewables of existing subservicing contracts, but no new large deals.

On slide 14, we start with the biggest component of the overall run off analysis by valuing our current MSRs. This chart should look familiar to those who follow the Company, as the first three bars are similar to what we have disclosed in prior quarters. The first bar on the left depicts the book value of our MSRs at lower of cost or market as they are on the books. The next bar adds a fair value adjustment based on third-party valuations. After that, we add back the impact of Ocwen's lower costs to service. This analysis also adds back some delinquent servicing fees not included in broker analysis, as there's a very low probability that deferred servicing fees will be uncollectible.

The final addition takes into account two further value changes. First we adjusted the discount rate, the estimate of value for the third-party broker model uses an average discount rate of about 10%, MSR buyers appear to use cap rates closer to 8%, so we use that for this analysis. Secondly we have lowered CPRs. The broker mark assumes CPRs of 17% on nonprime MSRs, with current pre-payments running at only 9.2%, and most of that pre-payment being involuntary, it seems very unlikely that long-term pre-payments will be 17%. As more loans cure, and foreclosures eventually ebb, involuntary prepayments should decline substantially. Note that we've also reduced the value impact of lower CPR to reflect that a portion of the lower payment accrued to HLSS on those MSRs where they hold rights to collect servicing fees. The total value of our MSRs based on these assumptions is about $4 billion.

The next slide summarizes how we valued the origination business by breaking it into three components. The largest piece of value is derived from the recapture opportunity from our existing portfolio. To be conservative we assume no recapture from nonprime MSRs. We assume the 25% recapture rate on prime loan pre-payments and a 2% pre-tax margin. Both of these assumptions are below what we're experiencing today on [par], but reasonable assumptions on a go-forward basis. For the correspondent channel we assume that our current market share in the correspondent rose over three years from approximately three-tenths of 1% to 1.2%, assuming we earned about 8% to 9% of Lenders One business. Though that is not the only source of new potential business, and correspondence yet.

Finally, we added value for the reverse mortgage business based on our internal forecast that includes a modest growth in market share. We end up with a total value for this business of about $1.2 billion. Note again that this value attributes nothing for the expansion of our broker channel, or for the business we might acquire outside Lenders One and our nonprime portfolio.

Lastly we estimate the value of our subservicing contracts as noted we assume we don't add new bulk business, but we also assume we maintain the volume of our existing business which is very conservative. This contributes just over $200 million in value. To estimate the value of a Company in run-off on slide 16, we start with the book value of equity so we effectively assume repayment of all debt. We add only the estimated incremental value of our MSRs above book value, the value of the origination business, and the value of subservicing. The total comes to about $5.3 billion, on a per share basis this would be very close to our current stock price, so we recognize that this approach is far from perfect or definitive. And illustrative purposes only, and it incorporates numerous assumptions. Just the same we think it gives at least some sense of what the Company is worth, adding nothing to the franchise value in our core servicing business, and nothing in opportunities for adjacent businesses beyond mortgage lending.

Turning to my last topic of funding strategy and buyback, let me talk a little bit about funding activities in the first quarter. Two things to note. First, we ended up funding out of current cash flow several final closings related to ResCap OneWest and Greenpoint. In total we funded about $134 million of MSRs in advances that closed in the quarter. Second, we did not close on enough sized term loans, when we put the Wells transaction on indefinite hold, as we had planned, to use that to increase our liquidity position over and above the requirements to close Wells. With the additional closings and without the new funding we were somewhat more limited in cash availability than originally planned.

As a result we trimmed back our stock repurchase plan which is consistent with our guidance that our first priority is funding new investments. Year-to-date, we have repurchased about $25 million of common stock, at an average price of approximately $37 per share. Our funding strategy going forward has evolved with the success of OASIS, and our longer term desire to diversify our funding sources. Because we are substantially underlevered compared to our peers, we expect that even without a large through deal we will likely increase debt including the OASIS notes to improve liquidity and for other corporate purposes. Going forward, we anticipate additional stock repurchases at a higher level to catch-up with earnings posted in Q4 of last year and Q1 of this year, with the caveat that we reserve the right to purchase more or less shares at any given period.

In conclusion, I will summarize some key points we made. We believe Ocwen's long-term competitive position in the market is improving, based on our strong track record and capital position, and our prospect for sustained business is strong. While the regulatory environment has raised costs for Ocwen and the industry, we believe that we are better positioned than competitors to respond to these higher costs that improve margins over time because of our scale and demonstrated process management and automation capability. Ocwen continues to outperform the industry in loss mitigation, especially rates of modification, pre-foreclosure resolution and redefault. We believe there is solid value in our existing book of business that continues to improve as pre-payment rates slow. We expect to add modest additional leverage and continue buying back stock, though we will continue to seek new investments of primary use for capital, which we expect to cover in more detail in our second, at our next quarter conference call.

Thank you, and I will now open it up for questions. Operator.

Thank you. (Operator Instructions). The first question comes from Bose George from KBW.

Good morning. The $30 to $40 increase in servicing costs that you mentioned, is that increase similar on the GSE and the private label side?

Well, it's related to nonperforming loans, and it would be similar regardless of what type of loan it is. It's related to nonperforming loans.

Okay. Great. And then the reserve for uncollectible receivables, was that related to the slow down in property liquidations, the compensatory fees that GSEs are charging, just curious what that was?

It was not related to that. We're not going to get into the details of it, but there are, as you're servicing GSB loans, there are certain expenses that you incur, some of which are recoverable from the GSEs, others depending on the ultimate outcome of the loan, et cetera, are not. And so in this quarter we just had a larger amount that we deemed we would not be able to recover. But we're not going to get into any other details on that.

And just one last one on capital, Bill sort of referred to potential capital rules for the industry and I'm curious about what your thoughts are about what that could look like, and who would be imposing those capital rules?

We're not going to really comment on that, although we think that we are the best-positioned firm whatever the capital rules might be. Some states already have capital requirements for servicers, some are even fairly substantial, none of them are a problem for us. We're not going to speculate on where the industry is going to go with that, but we actually see it more of an advantage than a disadvantage if that actually occurs.

Okay. Great. Thanks.

The next question comes from Mike Grondahl from Piper Jaffray.

Yes, guys, in a general sense, how much of that $59 million kind of negative swing would you consider sort of one-time in nature?

Well, I mean, on one hand, you can say all of it, but it is very difficult, for example with the origination business to project out in the future, where that's going to be. Most originators have been experiencing declines. I don't think we would expect the kinds of declines quarter-over-quarter that we had in the near-term, but it is a little bit difficult to project out that in particular.

Okay. And if we look at your normalized operating expenses of about $325 million in the quarter, how should we think about that number normalized post the ResCap synergy and what not? And others?

Well, Mike, I think the normalization is aimed at doing exactly that. I think what we put up for normalized expenses is about 80% of that is aimed at reducing the expenses down to where we think they should be on a run rate basis, once we consolidate it onto a single platform.

Okay. Are there any other synergies, do you expect to affect those normalized expenses?

I think it's difficult to quantify. There are complications that I'm sure result in expenses throughout the organization, simply because we have two servicing platforms. We have to maintain compliance in other things for multiple platforms, so we do expect that as we move entirely off of the old ResCap platform, we have made our best estimate of where we think the expenses will kind of come out, but it also eliminates a variety of complications within the organization, which we think will probably provide other benefit down the road.

Okay. And maybe just the OASIS deal, those proceeds are not included in the $204 million of adjusted cash flow from operating activities, is that correct?

That would show up in investing activity.

Okay. I just wanted to make sure.

The next question comes from Brad Ball from Evercore.

Thanks. Can you size the impact of the lower deferred servicing fees in the quarter? Can you give us a sense as to how much of a rebound we should expect from increased REO sales that you're talking about in the first half of April?

I think what we said in our prepared comments was that we felt the benefit that we got from the OneWest and Greenpoint transactions is a little over $50 million in the quarter, were largely offset by that slow down, so I would think that would be the best and only guidance we're going to give there.

And can you give us any indication the rebound you talked about in the first half of April we completed the month now, is that rebound continuing? And is it entirely weather-related, or were there other factors that slowed ROE sales in the first quarter?

We don't think there's any other real environmental factors. Obviously, the interest rate environment is a little bit higher than it was earlier part of last year, and that's always going to impact home sales. But we think most of that slow down based on what we were expecting in the first quarter was related to the weather, and I think that we haven't seen anything different in the second half of April than what we saw in the first half, so I think our statements are consistent.

And do you disclose the amount of REO, the ROE units that you have available for sale at quarter end?

I believe our Q has information on it.

That would be in the Q tomorrow?

Yes.

Okay . And then on HARP, so you been consistent with your comment about HARP likely slowing in the coming quarters, can you tell us how much of your existing book is HARP-eligible?

I don't think we have that data available. It's gone down in part because rates go up. When you think about HARP eligibility, they may be eligible for the program, but the expense to refinance does shrink as rates rise. But I don't have the number available.

Okay. And just getting back to Bill's initial commentary in terms of the broader market opportunity, is there any reason to think that the pipeline that you discussed before the New York DFS halted the Wells Fargo transaction, is there any reason to think that pipeline has changed in any way?

Yes, I think we're not going to really comment on pipeline. A lot of that is going to be driven by what the larger banks decide to do. As Bill's comments indicated, we think there are still strong incentives for them to relook at their mortgage servicing books, and we think that's an opportunity for us, but we're not going to provide any other kind of color on the pipeline.

Okay. Understood. Thank you.

You're welcome.

The final question comes from Kevin Barker from Compass Point.

In regards to the uncollectible the servicing receivables, how much of that would be apples-to-apples to the $182 million of Accounts Receivable that you have on the balance sheet right now?

Can you just repeat that?

If you looked at the reserved, the impairment on the reserves and the uncollectible servicing receivables, those uncollectable servicing receivables, do you have similar assets that are currently on the balance sheet?Would you consider the $182 million Accounts Receivable to be similar in structure?

The $182 million is going to include a whole host of different things, so it would not be appropriate to sort of say that the $182 million is the same kind of receivable, all of it is the same kind of receivable as what we increased the reserve on. So that $182 million has a lot of different things in there, and I would not characterize them as all the same. That was taken on a smaller piece of that.

If we were to quantify the percentage of Accounts Receivable that is related to those types of servicing receivables, how big is that? Can you help quantify that or give some context?

I don't have those numbers kind of right now, so I don't think, unless John, no. I don't think we can comment on that right now.

Okay. And then looking at the transitional transaction expenses, they have continued for several quarters now. They've come down quite a bit this quarter over last quarter. At what point do you see those finally abating or running off, given that there's no near-term acquisitions, given the Wells Fargo portfolio is on hold?

I think as we indicated we do expect some contract rate expense in the third quarter, but beyond that we shouldn't be incurring very much in the way of expenses beyond the second quarter, there may be a little bit in third quarter but it largely should be done, once we get off the ResCap platform.

And then if we look at once you remove the ResCap platform, how much expense data do you expect from that, and if you were to put some qualification around how much your pre-tax margins per EPB would go up from the decline in expenses related to that transfer?

Well, as I mentioned earlier I think that is the point of the normalization, and most of the normalization, most of the normalized expenses relate to that, as we said, about 85% of the normalized expenses relate to the ResCap platform, and so I think that's our best indicator now. As Ron also mentioned, it is part art/part science. There are complexities that are driven throughout the organization as a result of having two platforms. It is difficult to assess I think with perfection what our run rate would be.

Great. And then in regards to the acquisitions that you spoke about earlier, are title insurers or possibly originators still some of the top things on your list of potential acquisitions, or can you just give some context on what would be your main target for something you're looking at to bring into the Ocwen business?

We can say definitely we're not looking at originators in terms of acquiring one. We intend to build that organically with our processes and controls in place that more mirror our servicing business. Obviously we're looking at a number of different opportunities right now. Your difficulty in the title space even though we very much like that, is just there are not a lot of meaningful acquisition targets that are available within that space. So you probably would not see something in terms of title insurance.

And then finally looking at the OASIS deals, do you expect to continue to come to the market with similar type deals, given you have a significant amount of performing HC servicing still in your servicing portfolio?

Yes.

Definitely.

Okay. Could you give a quantification of size of that type of transaction you're looking at?

Well, I don't know that I want to talk about any specific transaction, but I would say we estimate we could probably issue as much as another $600 million worth of notes, OASIS type notes, and maybe more.

Our ultimate objective is to eliminate as much as possible the pre-payment risk associated with our prime portfolio, and keeping in mind that some of that embedded gain is not yet reflected in our, since we book things at lower cost to market. So some of what we're protecting is stuff that's not on the balance sheet today. But our objective is to reduce significantly our pre-payment risk.

Okay. Thank you.

Ladies and gentlemen, that does conclude the conference for today. Again thank you for your participation. You may all disconnect. Have a good day.