Onity Group Inc (ONIT) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Ocwen Financial second quarter 2015 earnings conference call. (Operator Instructions). As a reminder, this call is being recorded. I would now like to introduce your host for today's conference Steve Swett. You may begin.

Good afternoon, and thank you for joining us today for Ocwen's second quarter 2015 earnings conference call. Before we begin, please note that a slide presentation is available to accompany today's call. To access the presentation, please go to the Shareholder Relations section on our Website at www.ocwen.com and click on the Events and Presentations tab.

As a reminder, the presentation and our comments today may contain forward-looking statements made pursuant to the safe harbor provision of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology.

Forward-looking statements, by their nature, address matters that are to a different degree uncertain. Forward-looking statements involve risks and uncertainties that could cause the Company's actual results to differ materially from the results discussed in these forward-looking statements.

In addition, the presentation and our comments contain references to non-GAAP financial measures, such as adjusted book value of equity per diluted share and normalized adjusted cash flow from operations.

We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition. We also believe these non-GAAP financial measures provide an alternate way to view certain aspects of our business that is instructive. 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 SEC, including Ocwen's 2014 Form 10-K and our first quarter Form 10-Q and our second quarter Form 10-Q once filed.

Joining me on the call today is Ron Faris, President and Chief Executive Officer, and Michael Bourque, our Chief Financial Officer. And now, I will turn the call over to Ron.

Good afternoon, and thank you for joining us on the call today. I would like to provide a general update regarding the state of the Company. Although it now seems like a long time ago, at the time of our last update on April 30th, we had not yet filed our 2014 10-K or first quarter 10-Q.

I want to thank our investors for their patience, our counterparties for their support, and the Ocwen team of professionals and advisors for their tremendous effort and sacrifices, which ultimately culminated in successful filings.

I am pleased to announce that we expect to file our second quarter 10-Q later tonight.

As you are aware, in the first half of the year, Ocwen was profitable, generating $55 million of pretax income and generating cash flow from operations of $535 million. We have been executing on our agency MSR sales strategy, having closed sales on the MSRs underlying $63 billion of performing unpaid principle balance, or UPB. We also executed our first nonperforming MSR transaction on $3 billion of UPB. These deals have collectively brought in $358 million in transaction proceeds and $57 million of net gains.

As previously announced, we have used the bulk of the asset sale proceeds to reduce our corporate debt by paying down the senior secured term loan by $341 million, reducing our corporate debt-to-equity ratio from 1.7 times at the beginning of the year to 1.2 times at the end of the second quarter.

As we close the remaining announced transactions, we anticipate further reducing our corporate debt-to-equity ratio to 0.8 times, in line with our previous communications.

As for the upcoming transactions, I would note that there have been some updates to what we've previously announced. In late March, Ocwen announced a $25 billion UPB MSR sale to Nationstar. We closed $3 billion of that announced sale at the end of April and transferred the servicing in May.

We are working through the process on the remaining $22 billion. But, at this point, we cannot say exactly when and how much of the remaining portion will close, as there are still approvals and details to work through.

In any case, we still believe that we will meet our asset disposition objectives for the full year with proceeds and pricing execution in line with what we previously communicated. Of course, there are no guarantees. And all of our announced sales may not close as we current envisage.

From a regulatory standpoint, we continue to work closely with our regulators and the monitors. We are not aware of nor anticipating any fines, penalties, or settlements from any state agencies that would have a material financial impact on us. We continue to devote substantial resources to our regulatory compliance and risk management efforts, while engaging in frequent and transparent communications with our regulators and monitors.

(inaudible) expressed our expectation that the next report from the National Mortgage Settlement Monitor would demonstrate that we have made progress in improving our internal testing and compliance monitoring. We are pleased to note that the second interim report issued by the NMS Monitor on May 7th, covering the first two quarters of 2014, indicates that the monitor now has increased confidence in the independent capacity and competency of our internal review group, or IRG, based on the steps we took as a Company.

As are similarly pleased that the retesting of nine of the metrics for Q1 2014 deemed to be at risk by the monitor resulted in substantially similar results to the work of our own IRG. We have continued to cooperate with the monitor in the retesting of metrics and assessment of our IRG. And we are optimistic that the next monitor's report will demonstrate continued progress in resolving the monitor's concerns. We do not anticipate any fines or penalties resulting from the national monitor's review and retesting efforts.

During the quarter, the New York Department of Financial Services Operations Monitor Golden Associates began its engagement. We believe our relationship is off to a positive and productive start. Golden brings with them a seasoned team of professionals, who are adding helpful perspective and experience.

They are focused on helping me, along with Ocwen's leadership team and Board, manage through this transition period while making the necessary improvements that will ultimately help us succeed long term. We are especially focused on improving the customer experience.

In line with the settlement consent order, we are also working with the New York Operations Monitor on criteria for Ocwen to be able to purchase mortgage servicing rights again. But, it is too early to say when that process will be completed.

Also, during the quarter, the California DBO announced that it had selected Fidelity Information Services as its auditor. While the engagement is just beginning, we understand the scope will be focused on reviewing servicing files and assessing Ocwen's compliance with applicable California and federal laws.

We are committed to working closely with the California auditor and the California regulator. In order to receive approval from the California regulator to resume mortgage servicing right purchases in California, we must demonstrate our ability to provide them information in a timely manner and in a form requested. We are committed to meeting these requirements as soon as we can. But, it is, again, too early to predict when that might be.

We continue to work closely with other state regulators and have provided an update to recent exam activity in our investor presentation. We are not aware of any licensing issues that would have a material financial impact on us. And we are not aware of nor anticipating any material fines or penalties from our state regulators.

Moving onto other items of interest, as mentioned in our last update, we believe we have strong defenses against the notices of nonperformance claims made by the Gibbs & Bruns investors. Other RMBS investors have been vocal in speaking out in support of Ocwen.

We note that the standstill period announced previously has expired. The master servicers and trustees are continuing their analysis of these erroneous claims. And the Gibbs & Bruns investors have taken no additional actions.

We continue to believe, especially after all of the scrutiny, that the claims have no basis. To the extent that there are any future or additional claims by these investors, we intend to continue to defend ourselves vigorously.

We are pleased -- we were pleased in the quarter to see positive movements from two of the rating agencies. On June 15th, Moody's confirmed our servicer ratings are removed the ratings from review for possible downgrade. They also upgraded our corporate rating to B2 with a stable outlook.

On June 24th, Fitch affirmed our servicer rating and revised our servicer rating outlook to positive. Both agencies noted the capability of our servicing teams and also the progress and stabilization of our corporate governance, risk and compliance infrastructure, and internal controls.

Unfortunately, on June 19th, S&P, noting a similar set of facts as well as the impact of regulator and investor scrutiny, elected to reduce a number of our servicer ratings to below average with stable outlook.

The S&P servicer rating action potentially triggered the ability of New Residential Inc., or NRZ, to claim up to $3 million a month, capped to $36 million in total, if the downgrade of Ocwen servicer rating triggers an increase in NRZ's cost of funding or a reduction in NRZ's overall rate of return with respect to two of NRZ's servicing advance facilities.

We know the S&P downgrade lowered the advance rate in certain of NRZ's servicing advance facilities. NRZ has told us that its cost of funding and the rate of return have been adversely affected as a result of the downgrade.

The overall impact on Ocwen has not yet been determined, but is capped under our agreement at the $3 million per month and $36 million in total. We accrued $300,000 at June 30th in connection with this agreement.

In line with the language within our agreement, we are collectively seeking alternative ways to remedy any impact the advance rate change may have had on NRZ. Finally, if the S&P rating is restored to average and NRZ's advance rates revert to prior levels, its ability to claim up to $3 million per month will cease.

As we continue to execute our plan, further demonstrate our compliance system is effective, and continue to provide strong servicing results, as we always have, we believe that our servicer ratings should improve to levels similar to other large servicers.

Our relationship with NRZ continues to strengthen. And they have been a great partner so far. Improving our servicer ratings is important to us and to NRZ. We believe that it is in the best interest of all parties for the NRZ-related servicing contracts to remain with Ocwen long term. Improving our servicer ratings should also help both Ocwen and NRZ reduce advance financing costs.

A final point related to servicer ratings is that, to date, we are not aware of any additional servicing contracts being terminated by RMBS investors beyond the four previously disclosed in the first quarter of the year.

As indicated in our press release today, we have also launched a cost-improvement initiative. There are two slides in our investor presentation that provide more detail on this. And you can see by the results in the quarter, we are starting to see the decline in our revenues from the asset sale execution.

Unfortunately, it is not possible to right-size the cost structure while you are still servicing the loans. So, there will be a lag between when the revenue is divested and when we can actually adjust our cost case.

Michael Bourque is leading our efforts to improve our cost structure, targeting a reduction of at least $150 million over the next year. Before providing more specifics, I want to make clear that we plan to deliver on this initiative while still executing our plans for our risk and compliance infrastructure.

We also remain focused and committed to making ongoing enhancements to our servicing operations and technology platforms, which we believe will ensure we continue to enhance the borrower experience while continuing to deliver best-in-class loss mitigation results.

We get asked the question a lot from investors about our ability to get back to our historical margin levels. Given some of the changes in the industry, we don't believe those margins are achievable given today's landscape. However, we do believe we can move in that direction.

On page 14 in our investor presentation, we lay this out, looking at the Company, excluding our lending business. As we look at margins, we set 2012 as our benchmark, with an operating margin of 57%. If we try to assess how close we could come to achieving those levels today, we need to adjust for structural changes in the business since then.

There are four adjustments noted. First, we need to adjust our revenue down for two factors, first, to adjust for the lower revenue associated with agency servicing, as that is a higher percentage of our business today than it was previously. The second factor impacting revenue is the level of deferred servicing fees that existed in 2012. They were much higher than one could expect today, given how delinquent our servicing portfolios were then. So, we adjust to something more appropriate for today's book.

The next two adjustments are made to reflect the higher spending on our risk and compliance infrastructure as well as to reflect the cost of our regulatory monitors. Finally, we make a fourth adjustment to reflect the mix of onshore-offshore labor associated with servicing agency MSRs.

Making these adjustments brings the 57% margin down to about 43%. You'll note that we are focused somewhere between -- we are forecasting somewhere between 20% to 30% operating margin for 2015, well below what one would consider a reasonable target, given the benchmarking I just described. This represents an opportunity for the Company. And we expect to close a portion of that gap in the coming year by executing on our improvement plan.

As we think about the savings opportunity, we are focusing on five areas to achieve our goals, our servicing operations, our technology spend, our other operating costs, our capital structure, and our growing originations business. Michael will go into more details on this shortly as well as provide an overview on how we expect our cost structure to change over the coming year.

In addition, we have always believed that investments in quality, service, and compliance ultimately result in reduced operating cost over the long term. We believe that the investments we have and will make in those areas will ultimately further improve operating cost.

Before turning the call over to Michael, I want to make two additional points. First, the second half of 2015 will be challenging from an income perspective. We have additional sales of nonperforming GSE MSRs that will result in large gap losses, although they will have positive cash flow to the Company.

HARP business is starting to decline. We will potentially have some amount of higher expense related to NRZ and the S&P downgrade. And as I already mentioned, the timing of cost reductions we are working on lagged the reduction in revenue associated with asset sales.

We also anticipate higher interest expense on advances following the refinance of the Freddie Mac advance facility and the anticipated refinance of the OMART facility. Overall, assuming we are able to execute on our remaining anticipated performing GSE MSR sales, we should remain profitable for the full year.

Finally, we continue to make progress on improving our origination capabilities. We are excited about the future of both our forward and reverse mortgage origination businesses. Our reverse mortgage portfolio, for example, has built up an estimated $58 million in anticipated future gains as future draws occur on existing loans over the next five years.

Now, let me turn the call over to Michael.

Thanks, Ron. I will begin with a review of our financial results for the second quarter, discuss the progress on our MSR sales, address our liquidity and recent refinancing activity, quickly review MSRs and our book value of equity analysis, and close with a discussion on cost improvements.

Before I begin on the financials, I would note that pages 17 to 20 of the investor presentation on our Website cover our traditional financial earnings slides.

In the second quarter of 2015, Ocwen was profitable. And we continued to generate positive cash flow from operating activities. Ocwen generated total revenue of $463 million, which was down 9% from the first quarter due to a 10% reduction in servicing revenue to $423 million, as we executed on our initiatives to sell some of our agency MSRs. Lending revenue was $39 million, up 4% compared to the first quarter of 2015.

Total operating expenses for the Company were $352 million. Included in the operating expenses was a $16 million Ginnie Mae MSR impairment reversal benefit resulting from the increase in interest rates in the quarter. This means we have almost completely recovered the $18 million charge from the first quarter of the year.

We also saw amortization at our MSR fair value mark-to-market impacts come down in the quarter. Amortization was $32 million, down $7 million from the first quarter of 2015. And our MSR fair value mark was $15 million, down $18 million against the prior period.

These benefits were partially offset by a $7 million increase in strategic advisor costs, which were $15 million in the quarter, and higher legal and consulting spending, which was up $7 million against the first quarter. Within the second quarter, we incurred a total of $6 million of monitoring expenses.

I would note that we expect this number to rise in the third quarter as the new California auditor ramps up its engagement.

Total other expense in the second quarter was $98 million, which was up 10% from the first quarter, primarily due to amortization related to the commitment fees on the backup Freddie Mac servicing advance and OMART facilities we secured as part of our efforts to secure our unqualified audit opinion. In total, net income was $10 million, or $0.08 per diluted share.

Cash flow from operating activities, or CFOA, was $210 million, bringing the year-to-date total to $535 million.

Looking into our business segments in more detail, I will start with the servicing business. We generated total servicing revenue of $423 million, including direct servicing revenue of $286 million and subservicing revenue of $28 million. Fees, including HAMP fees, late fees, and other fees, totaled $98 million in the quarter, which was up slightly from the first quarter. Gains and other revenue decreased 56% to $11 million.

The reduction in our servicing revenue was driven by three factors: asset sales, which was about $20 million of the decline; prepayments and runoffs, which accounted for another $17 million; and the elimination of the Alpha Source data fee, which accounted for another $10 million reduction.

Operating expenses were lower, due to reversals of certain interest rate-related Ginnie Mae impairments and lower amortization and fair value changes, as previously mentioned.

In the quarter, we generated $75 million of gains relating to our performing MSR sales, which was offset by a $45 million loss incurred on our nonperforming loan transaction. We ended the quarter with total residential UPB of $322 billion, of which 87% was performing and 13% was nonperforming.

Pro forma, adjusting for announced MSR sales, our UPB would be about $276 billion. The average CPR for the portfolio was 16%, with 19% in the prime segment and 12% in the nonprime segment. The increase in CPR over the last quarter, particularly in the prime space, was a result of the 16 basis point lower average mortgage rates in the first quarter versus the fourth quarter of last year.

Finally, during the quarter, we completed about 23,200 modifications, about half of which were HAMP mods.

Moving onto the lending business, we generated $39 million in total revenue and pretax income of $14 million. Compared to the first quarter of 2015, our revenue was up 4%, and pretax income was down 10%, due to higher origination costs.

We saw continued momentum in originations in the quarter, with total funding volumes of $1.3 billion. Within our platform, we saw significant gains in funding within the correspondent segment up 37%, the reverse segment up 28%, and the wholesale segment up 13%. HARP accounted for 23% of our fundings in the quarter, which was down from the prior quarter.

We continue to build out our origination platform to drive higher volumes of new loans, which over time should provide some offset to the reduction in our UPB that comes naturally from prepayments and runoff.

Let me now provide an update on our MSR sales, which are detailed on page 12 of our presentation. To date, we have sold MSRs related to $66 billion of UPB, generating $358 million of proceeds and net gains of $57 million.

We are in the process of executing additional transactions on MSRs with UPB of $25 billion, which we expect to generate $245 million of net proceeds and another $20 million of net gains.

Aggregating completed and pending transactions together, we expect to generate $746 million in aggregate proceeds from our performing MSR sales, generating gains of $157 million. On our nonperforming MSR transactions, we expect to receive cash of $233 million, which reflects a payment from Ocwen of $142 million, offset by the recovery of advances funded with corporate cash of $375 million. We expect to generate a net GAAP loss of $80 million in connection with our nonperforming MSR sales.

As we note on page 23 of the investor presentation, consistent with our most recent communication, we still anticipate using the majority of the cash generated from these transactions to reduce our corporate leverage by paying down the senior secured term loan.

Reducing our corporate debt-to-equity ratio down to approximately 0.8 times will further strengthen our position as the loose-levered major nonbank servicer. This provides us flexibility and will further reduce interest expenses, helping go-forward cash flows and earnings.

We expect this combination with continued strong performance will also eventually help improve our corporate and servicer ratings, which will further stabilize the Company.

Next, I will discuss our liquidity. Cash generation has been a consistent strength for Ocwen over the long term. In the second quarter, the Company generated $210 million of CFOA, bringing the year-to-date total to $535 million.

We ended the quarter with $320 million in cash, up almost $200 million compared to where we started the year. Additionally, in the quarter, we began using excess cash on hand to reduce our borrowings on our servicer advanced facilities and our origination warehouse lines. At the end of the quarter, we had reduced our borrowings on those lines by $170 million, saving $3 million in annualized interest expense.

Putting that available liquidity together with our $320 million in cash, we ended the quarter with $490 million in total available cash and liquidity.

As we move forward into the balance of 2015, we anticipate continuing to generate liquidity from our operations as well as from our MSR sales strategy. Additionally, the cost-reduction initiatives that Ron referenced earlier are intended to improve our margins and our ability to drive positive cash flow from a smaller MSR portfolio.

At this time, we still anticipate using excess liquidity to reduce our corporate debt. Once we achieve our goal of getting to approximately 0.8 times corporate debt to equity, we will consider other uses, such as potentially repurchasing stock.

On pages 24 and 25 of our investor presentation, we include information about our servicing advance and origination warehouse facilities. We continue to make progress on refinancing all of our 2015 maturities.

The Freddie Mac servicing advance facility was refinanced into a facility called OFAF and was upsized from $400 million to $450 million. We issued $225 million of investment-grade-rated term notes out of the facility, Ocwen's first transaction utilizing this structure, and received an 8-point improvement in our advance rate.

The all-in interest rate on the full $450 million facility is around 2.3% based on last week's interest rates. Although this is higher than where the prior facility was, we are pleased with the execution. And the outcome, frankly, is better than both we and the markets were forecasting for us earlier this year.

Our largest servicing advance facility, OMART, was the focus of much attention during the process of issuing our 10-K earlier this year. You may recall this is our $1.8 billion private label secure servicing advance facility with an October amortization date.

We are pleased to say that we are in the advanced stages of the refinancing process. We are targeting a smaller facility size, $1.65 billion, and expect the refinancing to close in August.

Executing on refinancing these two facilities will continue our progress to materially improve and extend the available liquidity sources that support our business. We are also working through the process of extending our origination warehouse facilities. Multiple facilities have pending maturities. And all are on track to be extended and/or replaced by an alternate facility.

Regarding our MSR economics and the adjusted book value of our equity, we have updated the slides we presented in our first quarter investor presentation after positive feedback about their inclusion last time.

I will not walk through them in detail, but note that the methodology, analysis, and conclusions are all consistent with what we have previously discussed, namely that we believe there is considerable additional value in our MSRs and other assets that did not appear on our balance sheet, given our accounting elections and how these assets are valued.

We present these pages as a tool to assist the investment community in making an apples-to-apples comparison with some of our peers as well as to give people a sense for what the book value of our equity would be using an alternate view, which management has deemed to be useful for its own purposes.

I would note that this is not intended to be a substitute for GAAP-based analysis or a valuation estimate for the Company. To convert this into a valuation, one would need to make numerous other adjustments, two of the largest of which would be an amount representing the present value of our fixed costs, not included in the MSR valuation, as well as an amount for the value of our lending business.

Moving onto our cost-improvement initiative, as Ron mentioned, we are focusing on five areas to achieve our margin improvement goals: servicing operations, technology spend, other operating costs, the capital structure, and our growing originations business.

Regarding the servicing operations, some of the cost improvements will come from volume-related changes in our operational staff as well as from continued productivity and operational improvement initiatives.

As we look at our technology costs, we have been working through insourcing and/or direct sourcing, so noncore and nonreal servicing-related technology spending. We are also looking at ways to simplify our infrastructure and renegotiate existing contracts.

The third area of opportunity is around our other costs, led by our professional services spending. Across the Company, we've seen increases in these areas, whether it was the strategic advisors we engaged in the first part of the year or the consultants that are helping us execute our MSR sales. We're in the process of reviewing every engagement, identifying those that are mission critical and seeking alternatives in price reductions for everything else. We are also reviewing the other areas one might expect, facilities, travel, etc.

The last two areas of improvement opportunity are a bit different, but are potential areas where adjustments could enhance our profitability in different ways. As our liquidity continues to improve and our deleveraging continues, we may have the opportunity to enhance our capital structure in ways that may reduce interest costs and/or enhance our shareholder returns.

We also don't anticipate having to execute any of the commitment letters and/or backup lines for our financing facilities, like we had to do in the first part of this year working through our 10-K filing. I recognize this won't help improve operating margins, but it is still a meaningful opportunity at the pretax income level.

Finally, we have carved out spending increases in our lending business, as that business continues to grow. For the time being, we anticipate being able to fund those increases out of the profits of the business. But, we will be diligent in ensuring we aren't [seeding] cost increases too far in advance of expected revenue increases.

We expect to update you on our progress in all these areas next time we speak. I would note, just as Ron did, that notwithstanding these cost-improvement programs, we are strongly committed to executing our plans for maintaining and improving our risk and compliance infrastructure.

We remain focused on and committed to making ongoing enhancements to our servicing operations and technology platforms, which we believe will ensure we continue to enhance the borrower experience while delivering best-in-class loss mitigation results. If we need to sacrifice the speed or the magnitude of our cost-improvement objectives to ensure we protect the gains we have made in those areas, we will do so.

With that, I will now open it up for questions. Operator?

(Operator Instructions). Ken Bruce, BofA Merrill Lynch.

Thank you. Good afternoon, good evening, gentlemen. Thank you for all these details. I think it's going to take a little while to digest them. But, maybe we can kind of get to the heart of a lot of the questions that I get or I think we get specifically around the profitability of the servicing entity.

When you look at the cost structure today, OpEx is running call it $350 million. And if you annualize that, that's $1.5 billion. And you're talking about taking $150 million from that. And I guess the question that falls out is, even when you do that, is -- or do you have a chance of being profitable in the servicing entity, given the direction of revenues?

So, first off, our ultimate objective will be to hopefully even exceed that amount that we've laid out there for all of you. We do at this point believe that we'll be profitable next year. The servicing business has other advantage to it. It does feed some of the profits in the origination business. So, it's an important business and one that we're going to continue to focus on to get it back to somewhere near where it was before.

From an operating margin perspective, I take it that that's what you're referring to?

Yes.

Okay. And in the context of potential for growing the portfolio, you mentioned you're looking to see if you can get some approval for acquiring assets. What would you expect the likely timing around any decision on that to be? Is that something that it could be in 2015, or is that really just something that you've asked, and now, you just have to wait?

So, it's -- yes, I don't think it's so much that we have to ask as much as there are certain things that we need to work through, both with New York and with California. And we're committed to working through those as quickly as possible. But, as I said in the prepared remarks, at this point, we can't really estimate for you when that might be.

Okay. And maybe just lastly, and I'll let some others ask questions. I'm sure there's many. In terms of the cash flows from operations in the second quarter, a lot of that looks like it was reductions in advances. And I assume that those related to at least partly on sales. Can you give us an update in terms of how the collections on advances are proceeding? If you can give us some information around that, that would be very helpful.

Yes, so, on the cash flows, Ken, the reductions in advances that hit the operating cash flow line are not related to the asset sale transactions. So, those you'll see in other sections of the statement relating to investment activities.

The reductions in advances that you see are largely just from activities related to I guess two things. Number one, we know that the increase in the advance rate on the OFAF facility that we executed, those are -- that was basically moving from corporate funded advances to -- or corporate cash funded advances to match funded advances. And so, there's movement there.

But, then we also executed a transaction and moved some other advances in the quarter, bringing those down further. So, it's rarely ever covered. I think you'll see it when you go to the Q. We -- at the end of last quarter, we were north of $900 million in corporate advances funded with corporate cash. And I think we ended just below $600 million in the second quarter. So, that's the biggest driver of the operating cash flow. So -- .

-- Okay. Great. Well, thank you for that and, again, all the information you provided in the deck. And I'll let the next person ask. Thanks.

Thank you.

Kevin Barker, Compass Point Research & Trading.

Thank you. Could you help us understand what base expense you're using in order to measure the $150 million cost-saving initiative? Should we use the operating expenses from this quarter and then assume that that will flow through over time?

So, Kevin, the way that -- the way you can think about it is, if you annualize the first half run rate of 2015 and go from there. That's kind of the most current information and reflects the structure that we're really starting from. I think that's probably most appropriate.

But, as we roll forward, I would say we were careful to say we're targeting at least $150 million, kind of echoing some of the -- what Ken was poking at previously. And this is going to have to be a sustained effort here over time to deliver profitability and margins, as we mentioned.

Okay. And when we think about the $150 million, is that separate from the client and expenses that you would expect from lower delinquency rates or even a smaller servicing portfolio, or is this just absolutely how -- the expenses you expect to come down?

Yes, so, we're thinking about it as we have a cost number today, and we know -- we're thinking in absolute dollars is what I would tell you. So, frankly, it all matters. And so, we're looking at all of the things you would expect, the volume-related changes, things like amortization and staffing levels and some of the other resource changes as you adjust your delinquent agency book, but then also more of the kind of structural-based cost like changes as well. And so, everything is in play.

Okay. And then your interest expense ticked up this quarter. And I know you've had quite a bit of refinances, various debt facilities. And also, you're paying down some of your facilities. Could you help us get an idea of, like, what the run rate interest expense will be like over the next few quarters, given the payoffs that are expected from the MSR sales and the renegotiation of the debt?

Yes, so, I'll -- maybe I'll start with the quarter-to-quarter variance. And you'll see some of this in the Q. We did have to execute the kind of backup -- backstop facilities, if you will, in the quarter, first for the facility that we just replaced, the Freddie Mac OFAF facility. There was a 1 point commitment fee on that that we had in place and took in the quarter.

We also had a small backup fee we had to pay for our OMART facility that drives most of the variance. You had a reduction in your term loan interest. That balance came down. But, given some of the delays and the timing of the execution of OFAF, we actually paid a higher interest rate out of the gates until we could get the -- some term notes issues, got hung up in the timing around the S&P downgrade.

So, going forward, you're right. The S& -- the term loan delevering will help reduce interest expense. The OFAF interest expense is at the rate we indicated in the prepared remarks, around 2.3%. And we would anticipate that we're optimistic that we'll have good execution on our OMART facility. And refinancing I think is -- we hope to be inside of what we talked about with OFAF. But, until that's done, we can't talk too much more about it.

What would the -- would your interest expense savings be separate from your cost-saving initiative?

Yes, the cost-savings initiatives we talked about is everything through your operating cost. And we're looking at the interest -- potential interest savings as additional enhancements to profitability and returns.

Okay. And then you mentioned the $80 million loss on nonperforming MSR sales. How much of that has already been reflected in your income statement this quarter? And how much will be reflected going forward?

Yes, so, you can see the breakdown on page 12. We took $45 million in the second quarter. And there's another $35 million to go in the second half of the year.

Okay. All right. I'll get back in line. Thank you.

Sure.

Mike Grondahl, Piper Jaffray & Co.

Yes, thanks, guys. The $150 million in cost save, how did you come up with that number? Is that sort of the stuff you can get your arms around in six to nine months, or I know it's a starting point, but can you kind of just help us? How'd you end up with that number?

Look, it's a little bit of a -- Ron walked through the benchmarking, which was something important for us to understand in terms of what might entitlement be if you ever could get back to what was a very high-performing, high-returning business relative to where we ended last year.

It's -- I don't think this is a quick six to nine months, and you're done type effort, Mike. I think it's going to be something more sustained over time. And so, we're looking at it as something -- it's at least $150 million that we're forecasting here over the near term to put this Company on the right path to long-term success.

And that balance is making the necessary tough decisions today with some of the investments and other gains that we need to add in other parts of the business to protect our risk and compliance infrastructure, but also to see growth. And so, I think it's more of a multiyear evolution here. But, we're starting now in earnest. And the at least $150 million as we're talking about it is between now and the end of next year.

Okay. And with the NRZ potential $3 million a month, when will you come to resolution on that? Any thoughts?

Well, I would -- it's difficult to say. I would suspect that, during this quarter, we will come to some resolution with that -- on that, which could include us coming up with some ways to -- with them to mitigate the impact that they've had because of the downgrade. So, I would think that it would be something that, when we talk next, we'll be able to provide full clarity on.

Okay. And then just lastly, any more thoughts on any other asset sales, or is this $90 billion agency and some of the nonperforming stuff, are you kind of stopping it there?

So, Mike, as we talked in our last call, what we really focused on in the second quarter was on execution of the sales that we had announced. And we have still a ways to go in the third quarter to continue with that and make sure that we effectively execute on the sales and the transfers.

And so, I would say at this point same -- pretty much the same thing we said last quarter. We're not targeting any additional sales at this point in time. However, we're going to continue to evaluate our portfolio and evaluate our view on the margin of the portfolio. And we may decide to do more sales at a later date. But, right now, that is not our focus. And you can see we did not execute really anything new in the second quarter.

Got it. Okay. Thank you.

Henry Coffey, Sterne, Agee & Leach, Inc.

Yes, good afternoon, everyone, and thanks for taking my call. I was looking at the servicing and origination segment. Frankly, the numbers were very much in line with what we were expecting. And then I looked over at corporate. And there's some fairly large variance items there. I think I've identified them from your expense roll forward.

But, your corporate expense was about $16.7 million in the first quarter. And it jumped to about $41 million. Maybe you can tell me where the $24 million came from. Is that on slide 20? Do I just look at the $24 million or so positive expense trends, and that's where I'm going to find it, or -- ?

Yes, it's going to be a mix of a lot of the things on the bottom part of the page, all flow through there, Henry. So, maybe start there, and then if you want, I'm happy to follow up with you next week.

Right. So, in simple terms, that's where -- most of those expenses landed in corporate.

That's right.

And then just in your book value analysis, you include the expected loss from the sale of nonperforming servicing, but not the like -- the potential gain if you close the deal with [NSM]. Is that correct?

I'm sorry. Can you say that again?

Just in your book value analysis, I noticed that you are including the expected loss from the sale of nonperforming servicing of $0.43.

Yes.

But, you're not including the -- like, the potential gain if you close the remainder of the deal with Nationstar. Is that accurate?

Well, we've reflected -- the way we've done it, and you can see this in the table in the back. We -- for the fair value increase you see, which is the first bar on the left -- .

-- Yes -- .

-- Of $2.39, we put the agency MSRs basically at the purchase price. And so -- .

-- Okay -- .

-- The kind of [netted] gain there is already reflected in the fair value column.

Yes, I think -- Mike, correct me, but I think the $0.43 adjustment is additional sort of compensatory fee and other things that we have to adjust for when we -- .

-- Yes, it's basically the difference between what's not already reflected in the MSR value and the overall final negotiated price. So, that's right, Ron.

And then just in terms of understanding the $150 million expense reduction, how much of that are you going to attribute to change in volume because there should be some shrinking volumes? And how much of that do you think's going to be attributable to improved efficiencies on a variety of fronts?

I don't think it's probably the right time to go into that level of detail, Henry. I think, as we execute on the plans and get further along, we'll help illustrate some of the splits here for everybody.

I think the reality is it's going to have -- it's going to be -- there are going to be volume-related savings. There are going to be productivity-type things that we're targeting. And there's just going to be kind of structural base and fixed-type cost savings that we're going to go after. So, but, putting a number on it or a percentage on it right now I think is premature.

Great. Well, listen, thank you very much. And we'll talk once your Q comes up.

Great.

Bose George, Keefe, Bruyette & Woods, Inc.

Hi, guys. Good afternoon. Actually, the first thing, I just wanted to clarify the benefit from the MSR impairment and the fair value mark on the MSR. The -- again, I'm looking at page 20. Is it basically that $18 million and the $34 million? I just wanted to make sure what the contribution was from the write-up of the MSR.

Sure. So, the -- let me just get to page 20, sorry. So, the $34 million related to Ginnie Mae, you'll recall last quarter we booked an $18 million impairment charge. So, that was a negative 8 -- that was a bad guy, if you will, in the first quarter that -- because rates reversed, we released essentially -- you could think about it as releasing $16 million of impairment reserve.

So, your quarter-to-quarter swing was $34 million there. And then on the fair value change, you had -- your first quarter fair value impact was I think $33 million across both your agency and nonagency book. And then the second quarter, it was only $15 million. So, that's the $18 million difference.

Okay. So, the positive mark collectively was $31 million, the $16 million and $15 million.

Yes, now, keep in mind $15 million -- or I'm sorry, about roughly $13 million of that nonagency mark is going to be offset in your interest expense, given how we have the dynamic with HLSS or now NRZ. So, that all doesn't show up in the bottom line, Bose.

Bose, let me try this just to make sure we're not confusing anyone. The favorable interest rate environment that occurred during the second quarter for us did not have a very big impact. It did allow us to recover most of the impairment on the Ginnie Mae book. We don't actually book the Ginnie Mae book to fair -- well, to mark to market. But, because last quarter, it actually went -- the fair value was below book value, we had to take the impairment. But, we were able to recapture most of that.

Other than that, the rise in interest rates only impacted our P&L by maybe another $1 million or so because we have virtually nothing that's mark to market that's interest rate sensitive.

Okay. Great. That's helpful. Thanks. And then just in terms of your comment about being profitable for the year, so that includes all the sort of the gains and losses on the sales for the back half of the year as well, right?

Yes.

Great. Okay. That's all I had. Thanks very much.

Thanks, Bose.

Kevin Barker, Compass Point Research & Trading.

Thank you. Could you discuss some of the things that you talk about on vendor and third-party cuts? Could you just detail some of those cuts? And does any of that include trimming some of your relationships with Alpha Source?

So, maybe I'll take the first part of your question first. The -- as we think about different cuts, examples, as we mentioned in the script, we've had strategic advisors helping us through the first part of the year that we would expect now that the Company has significantly stabilized. That would go away. And that would -- they are a vendor. And that would be a vendor cut.

As I mentioned, we have different consultants helping us around some of the execution of the MSR sales. That will change. We've had different groups helping us accelerate some of the changes around our risk and compliance infrastructure. And those will mature and eventually move on -- and will move on.

And so, I think those are some examples, Kevin, where you'll see an impact. I think you'll also see an impact, we would hope, certainly from moving some of the delinquent servicing, but also around areas of legal spending, both off the portfolio, but then also just around the Company as things have stabilized and we can move past some of the challenges from last year. We would expect those to run down. And so, that element of professional services we're going to try to work down.

As it relates to our technology platform, we mentioned we are looking at potentially insourcing kind of what I would say nonreal servicing, nonstrategic elements of the technology footprint that we use, and trying to get cost savings that way.

As it specifically relates to Alpha Source, they're obviously a critically important partner, strategic partner for us. But, that said, we are looking at everything. And we'll have to continue to evaluate the relationship here. But, we're very much committed to the partnership and continuing to move forward together.

Yeah, Alpha Source has obviously been a very big portion of your overall business and important partner. Is there something where you can maybe trim some of the technology that is being outsourced to Alpha Source, or is there something where you would look at the whole platform?

So, I think the way to think about it is there's two aspects to kind of our technology spend with Alpha Source. One is largely around the -- just the infrastructure, the hardware, maintaining PCs, all of that kind of thing. And then you have the actual real servicing system and its related systems that there's fees that are more on a kind of a per loan fee.

And as the portfolio comes down, that per loan fee that we pay on the -- say, the real servicing technology will come down for us. What we're also focused on is looking at that infrastructure piece and seeing if there's ways for us to take some of that work in house and allow us to do it more cost effectively than having a third-party vendor do it for us.

Would that be around the servicing, or would that be around the origination platform?

Well, it would really be around all of it. But, again, it's things like hardware, PCs. It's infrastructure type of things that we're talking about. And that -- and we would really be looking to take some of what they do for us in house, and really, it's corporate. It's servicing. It's originations. It's the whole thing because it's the infrastructure. It's not specific to the software for the servicing business. That will stay in place.

Okay. Okay. And then you're shutting down the Rescap system in the third quarter. Is that right?

We haven't put a timeline on it, Kevin. But, we do anticipate exiting that system.

Yes, we moved all of the loans off of it last October. But, there are certain sort of -- in this regulatory environment, it's important that we have continued access to certain pieces of the information for some period of time. So, until we're comfortable that we can basically flip the switch off and have all the information available to us elsewhere to make sure we can meet all of our regulatory requirements, we need to keep it going.

But, we do think that there -- a point will come hopefully this year where we can flip that switch and turn that off. And that will result in sort of an upfront payment, but a long-term savings over what we would pay if we just let the contract run out.

Okay. All right. Thank you for taking my questions.

You're welcome.

Michael Kaye, Citigroup.

Hi, just looking ahead, it sounds like you're at least starting the process with New York and California, potentially do some MSR acquisitions. Just when that happens eventually, do you anticipate copartnering with NRZ on a financing for those deals?

I don't think we've gotten that far. But, we definitely do consider NRZ as a partner that, if we were acquiring MSRs, that -- they would be definitely one of the first financiers that we would go to, to possibly partner with them in some way, either on the related advances or even on the MSRs, similar to how we historically did it with HLSS.

Okay. And then just related to the S&P downgrade, is that going to have any impact with your relationship for the -- with the GSEs, specifically your ability to be a Fannie and Freddie licensed seller-servicer?

At this point in time, we don't believe so. And we continue to operate as usual with the GSEs.

Okay. All right. Thank you.

You're welcome.

Matt Liebowitz, Nomura Securities International.

Hey, guys. I think most of my questions have been answered. But, I was just hoping -- I know you briefly mentioned you'd book share repurchases at some point in the future. Can you just maybe expand a little bit about that our how you're thinking more generally about the potential to return some cash to shareholders?

So, Matt, we are generating a lot of cash. We expect to continue to generate a lot of cash, both from the remaining sales that we've announced, plus from normal operations. As Michael said in his prepared remarks, once we get down to the target we've set for ourselves of 0.8 times, we're going to definitely step back and reevaluate the capital structure and what we then do with cash that we continue to generate.

And as Michael said, one potential use that we've highlighted would be the potential to start repurchasing shares again. But, we're not committing to anything at this point in time.

Okay. Yes, understood. And then I guess, on the interest expense line, have you guys contemplated potentially doing anything on the unsecured paper that you have outstanding? I guess it makes up a decent chunk of your interest expense. Do you think there's any opportunity to reduce some cost savings via that route?

So, there are some complications there. And it may be too difficult to go into all that here. I would say that it is easier for us to pay down the term loan because there's sort of a more of a natural ability to pay that down, some requirements with the asset sales. And then sort of it's easier to prepay that.

But, we'll evaluate everything once we have the bucket of cash that's sort of left over after what's required to be paid down from the asset sales to the term loan. We'll make decisions as to how we allocate the rest of it. So, we're not ruling that out. But, we're not at that point yet where we're ready to make that decision.

Okay. Great. That's it for me. Thanks for your answers.

You're welcome.

Bose George, Keefe, Bruyette & Woods, Inc.

Thanks. Yes, just had a follow up on the MSR fair value marks. On page 41, that $47 million that you guys show for the market rate increase, that's not shown in the book value, right? That's a gain that you'll recognize as those MSRs are sold. Is that right?

Yes, because the agency MSRs are carried at lower cost to market. They're not at fair value.

Okay. Great. Thanks.

Henry Coffey, Sterne, Agee & Leach, Inc.

Yes, same kind of detail question as Bose's. If I understand it correctly, the fair value write-up on your MSRs was about $33 million, $34 million and then, of course -- down, negative. I'm sorry. It was a negative charge. And then the Ginnie Mae was a fair value write-up of about $33 million or $34 million.

No.

So, they're offsetting.

The Ginnie Mae in the quarter was a discrete $16 million, Henry. The $34 million is the impact walking from the first quarter to the second quarter.

Okay.

Yes, like I said before, I think the way to look at the rising interest rates and the impact it had on our income statement from a fair value standpoint was really the $16 million that we picked back up on the Ginnie Mae impairment and I think maybe just another few million dollars related to the agency MSRs that we do carry at fair value. But, we don't carry all -- we carry a small amount of fair value. So, most of the benefit, to the extent there is any, was not reflected in our income statement, as it might be in some of our competitors.

And then I know, with the nonagency book, which you are now holding at fair value, you also have that sort of offsetting liability. Can you tell us how that played out?

Yes, so, the asset, Henry, changed by $18 million in the quarter. And the liability offset that change by $13 million. So -- .

-- Okay. So -- .

-- Remember, we still have some of the OneWest nonagency book hasn't been sold to HLSS. So, it's -- or NRZ. So, it's not subject to the offsetting liability. So, you'll have -- you generally will have a higher change in your asset than you will your liability.

So, you had a positive gain of $18 million and a negative charge of $13 million?

No, the other way around.

You had a negative charge of $18 million and then positive write-up of -- .

-- Yes -- .

-- Write-up of $13 million. So, then -- .

-- Yes, a positive offset -- .

-- Besides these two items, the only real extraordinary item or unusual item was the gain on the sale of servicing.

That's correct.

Great. Thank you very much.

You're welcome.

Thank you. That does conclude today's Q&A portion of the call. I would like to thank everyone for attending Ocwen's second quarter 2015 earnings call. This concludes today's program. You may all disconnect. Everyone, have a great day.