Onity Group Inc (ONIT) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ocwen Financial third quarter 2015 earnings conference call.

(Operator Instructions)

I would now like to introduce your host for today's conference, Mr. Stephen Swett. You may begin.

Good afternoon, and thank you for joining us today for Ocwen's third 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 provisions of the Federal Securities Laws. These forward-looking statements may be identified by reference to a future period, or by use of forward-looking terminology. Forward-looking statements, by their nature, address matters that are to a different degree uncertain. Our business has been undergoing substantial change, which has magnified such uncertainties. You should bear these factors in mind when considering such statements, and should not place undue reliance on such statements.

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. Our forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update or revise any forward looking statement.

In addition, the presentation and our comments contain references to non-GAAP financial measures. Such as adjusted operating expense, normalized adjusted cash flow from operations, adjusted book value, available liquidity, and the economic value to Ocwen of our MSRs. We believe that these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition. We also believe that these non-GAAP financial measures provide an alternative 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, our second quarter Form 10-Q, and our third-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. Now, I will turn the call over to Ron.

Good morning, everyone, and thank you for joining us today. I will begin by reviewing Ocwen's strategy, before updating you on some significant items since the second quarter earnings call. I will then turn the call over to Michael to provide additional details.

There are three key elements to our current strategy. One, create growth, two, improve the cost structure, and three, continue to stabilize the Company. The first element of our strategy is to create growth for the Company. We are focusing on a few critical areas to make this happen. First, we have been investing our technology, processes, and retail infrastructure to build out the capability required to significantly ramp up our residential mortgage origination volume and profitability. It is our aspiration to grow into a top 10 originator by leveraging technology, process excellence, and innovative new products. We are actively looking at the feasibility of offering additional products that meet the needs of homeowners that do not qualify for conventional conforming products that could be securitized. While there is no guarantee that we will be successful, we are excited about the possibilities, and are dedicating significant resources to the effort.

On the conventional front, we believe that we have made great strides over the last year and are working towards continued expansion next year. As we have mentioned before, we are also in a pilot phase on two small commercial lending products. Namely providing secured floorplan lending to used-car dealerships, and providing financing to investors to buy and rent out single-family homes and apartments. We are actively signing up new customers in select markets, building up pipeline, and finding new loans. So far, we are encouraged by the response. We expect to communicate more about these products pending the completion of the pilot, and the formal launches of the businesses in the coming months. We believe that we can create value as a creator and generator of new assets with strong margins, versus our historical transaction-based growth strategy.

Second, we are actively focused on improving our cost structure to support our smaller servicing business. Since July, the team has been incredibly focused on improving the size of our cost base, and we have made good progress. In our September investor presentation, we noted that examples of potential savings, opportunities ranged from $238 million to $368 million, and those only included the cost categories explicitly mentioned. As you can tell from our workforce reduction announcements and the 9% improvement in our adjusted operating expenses in the third quarter, we are making progress in line with our previously stated goals. Adjusted operating expense is a new metric that we are introducing, and Michael will cover this in more detail a bit later.

Third, since the beginning of the year, we have made great progress executing on our asset sales strategy, and we are largely complete with our previously announced transactions. As a result of these sales and our continued cash generation capabilities, we've been able to significantly reduce leverage, paying down the senior secured term loan from almost $1.3 billion at the beginning of the year, to roughly $475 million today. This puts us on track to achieve our target of 0.8 times corporate debt-to-equity ratio by year-end. Additionally, we recently amended the term loan to give us greater flexibility moving forward.

Through it all, we remain focused on enhancing the customer experience, and on the maturation of a comprehensive risk and compliance infrastructure. We continue to expand our leadership in providing sustainable home retention alternatives to struggling families as evidenced by our HAMP volumes and reductions in customer complaint volumes. Additionally, despite the 2014 testing results recently announced by the National Monitor which reflect legacy issues, we feel good about the progress we have made with our national mortgage settlement compliance, and expect to continue to demonstrate progress.

We also continue our unending efforts to help families and strengthen communities, because everyone at Ocwen cares. Working closely with our Community Advisory Council, a diverse group of national, regional, and local nonprofit housing counseling, community development and civil rights organizations, we are focused on a wide range of emerging issues and relevant policy matters impacting families and communities. At our last meeting in September, we discussed the challenges facing the industry and borrowers, including a continued need for loss mitigation counseling. As importantly, the Council expressed a need for sustainable origination products to help moderate income borrowers who continued to have difficulty accessing the mortgage credit market achieve the dream of homeownership.

We continue our grassroots efforts to work with national, regional, and local nonprofits in an effort to help borrowers in need of assistance. We continue to sponsor and participate in numerous events across the country, where we work directly with homeowners struggling to find solutions to stay in their homes. One of our recent national efforts involves an initiative with the NAACP called Help and Hope for Homeowners. This initiative is designed to encourage struggling homeowners to seek loan modification assistance at strategically located borrower outreach events which are jointly hosted by Ocwen and the NAACP. We will hold four of these events in 2015. The third event was recently held in Long Island, New York. More than 220 borrowers attended this event, looking for solutions to make their mortgage payments more manageable so they could avoid foreclosure. We have another event scheduled in the Maryland and Washington DC metropolitan area in November.

We were also recently recognized by HomeFree USA at their leadership and training conference in Portland, Oregon. Where I accepted their Community Champion award. I also encouraged everyone to go to our new website ocwencares.com to find out more about the amazing difference our team is making.

Finally, we continue to manage the key issues that have faced the Company this year, including regulatory compliance, and the Gibbs and Bruns investor claims. No additional RMBF deals have been terminated as a result of rating agency downgrades, and the earlier uncertainties surrounding HSART, the NRZ advance financing facility, has been resolved. In our presentation, we have provided an update on the status of state regulatory exams.

I commend our senior managers and the entire Ocwen team for their commitment to successfully working through the challenges facing the Company and the industry this year. We are all committed to remaining the leader in helping homeowners, while we expand our origination businesses and return Ocwen to profitability.

Now I'll turn the call over to Michael.

Thanks, Ron. I'll begin my remarks on slide 5 with an update on a few key items.

In the third quarter, the Company reported a pre-tax loss of $56 million and reported and earnings-per-share loss of $0.53. As we previously indicated, we are in a period in which the revenue loss from the asset sales tips more quickly than our expense reductions. This is the biggest driver to our financial results in the quarter.

Additionally, we were impacted by significant charges. We recorded a $23 million impairment in our Ginnie Mae MSRs, driven by the decline in interest rates in the quarter. We also recorded this quarter $17 million in restructuring like charges, which covered expenses related to the Fiserv platform contract termination, severance, lease breakage costs and other items, which will reduce expense levels in the future. We incurred $11 million in charges to book reserves to cover legacy servicing claims. Another $11 million for a mortgage-backed securities trustee operations review, as well as legal and other settlements. And finally, $8 million of expense incurred pursuant to our agreement with NRZ in connection with downgrades to our S&P servicer rankings. We also recognized $41 million in net asset sale gains in the quarter.

Our cash generation was strong in the corner, consistent with the trend all year. Excess cash during the third quarter and subsequent to quarter end, was primarily used to reduce borrowings on servicing advance facilities and warehouse lines. Despite the operating and net income loss, we generated almost $240 million of cash from operations in the quarter, and ended September with $731 million of available liquidity. $229 million of that liquidity was used in October to pay down the term loan. Since July 1, we have brought the balance of the term loan down from $936 million to $477 million to date, and we are on track to reduce leverage further in the fourth quarter. As we have said in the past, we continue to target a goal of approximately 0.8 times corporate debt-to-equity. And once we achieve this level, we believe we'll be in a position to consider alternate uses for excess cash flow.

With regard to our balance sheet and liquidity, I would like to update you on several items. First, during the third quarter, we completed the refinancing of our $1.8 billion private label OMART facility into a $1.65 billion S&P rated servicing advance facility, comprised of $1.35 billion of variable-rate funding notes held by three large money center banks, and $300 million of one-year term notes. The current all-in interest rate on our new facility is about 3%, and we were pleased with the execution.

More recently in October, we executed an amendment to our senior secured term loan to, among other things, temporarily remove certain financial covenants through June of 2017 and enhance our operating flexibly. With the refinancing of the OMART facility and the amendment to the senior secured term now in place, we have significantly increased our financial flexibility as we execute our delevering, and enter 2016 with significant liquidity and investment potential.

We've also reached agreement with NRZ on the terms for the monthly payments the Company will make related to the S&P downgrade of Ocwen servicer ratings. You might recall the payments were capped at $3 million per month, up to $36 million overall. Our agreement with NRZ was to pay them roughly $8.5 million in total payments for the first 3.5 month period from the downgrade until October 2. We estimate future monthly payments will range from $1 million to $2 million per month between now and June 2016. The amount will vary based on the balance of advances being financed, and changes in one month LIBOR.

Moving on, I would like to provide an update on our MSR sales which are detailed on page 6 of our presentation. To date, we have sold MSRs related to $88 billion of UPB, generating $555 million of net proceeds and net gains of $98 million. There are about $113 million in proceeds related to performing MSR sales that we have closed, but have yet to collect all of the proceeds. And we're in the process of executing additional non-performing loan transactions with UPB of $1 billion. We expect these transactions to generate about $18 million in losses in the fourth quarter. However, they will help further simplify our operations and reduce our advanced funding requirements.

I will now cover our traditional earnings slides on pages 10 to 12 in this slide presentation. In the third quarter of 2015, Ocwen generated total revenue of $405 million, which was down 13% from the second quarter. Servicing and sub-servicing revenue was down 11% to $375 million, as we continued to execute on our strategy to sell agency MSRs as well as normal prepayment activity and runoff. Lending revenue was also down compared to the second quarter, declining 25% to $30 million, primarily due to lower margins, as channel mix shifted to include a higher percentage of correspondent loans. And less direct lending, as the result of lower HARP and FHA refinance opportunities from our existing portfolio.

In the third quarter, total operating expenses were $388 million, an increase of about 10% compared to the second quarter. The change in total operating expenses was primarily driven by the following. A $40 million swing in the Ginnie Mae MSR valuation, which moved from a $16 million positive benefit recorded in the second quarter to a $23 million impairment in the third quarter. $22 million of expenses related to legacy servicing claim reserves, trustee review costs, and legal and other settlement expenses already mentioned. $17 million in restructuring-related charges, including $12 million related to that Fiserv termination. And approximately $6 million for severance and other lease and contract cancellation costs. These items were partially offset by $16 million in lower operating expenses which we will walk through in more detail shortly, $15 million lower strategic advisor costs, and $16 million lower amortization and runoff related expenses.

Total other expense in the third quarter was $73 million, which was down 26% from the second quarter, primarily due to the benefit of higher gains on MSR sales, which totaled $41 million in the quarter, up $11 million over the second quarter. And lower interest expenses on our senior secured term loan, partially offset by $8 million in payments to NRZ.

In total, Ocwen recorded a net loss of $67 million or $0.53 per diluted share. I would note that we incurred tax expenses, despite the loss partially based on our geographical mix of income, but primarily because of additional income tax expense recorded in connection with uncertain tax positions. As mentioned previously, cash flow from operating activities was $239 million, bringing the year-to-date total to $774 million. The strong performance in the quarter was driven primarily by the recovery of advances and other working capital items.

Moving on, I'd like to spend a minute drilling deeper into the financial results for our servicing and lending businesses. In the servicing business, we generated total revenues of $375 million. As noted earlier, the decline in servicing revenue is primarily driven by three factors, MSR sales, pre-payments, and runoff. Fees, including HAMP fees, late fees and other fees, totaled $72 million in the quarter, which was down 15%. Gains and other revenue decreased 42% to $15 million, primarily due to the fact that we did not have a whole loan sale in the quarter which generated $7 million of revenue in the second quarter.

Operating expenses in the servicing segment were 12% higher in the third quarter compared to the second quarter. Which is primarily due to the swing in the Ginnie Mae MSR valuation, and many of the other items I've already mentioned. We ended the quarter with total residential UPB of $288 billion, of which 87% was performing and 13% was non-performing. The average CPR for the portfolio was 15%, with 18% in the prime segment and 12% in the non-prime segment.

Finally during the quarter, we completed about 19,500 modifications, about half of which were HAMP mods. The number of HAMP modifications has trended down with the maturity of the program, and we would expect this trend to continue going forward, albeit with some natural quarterly variation.

Regarding our MSR economics and the adjusted book value of our equity, we have updated the slides for the third quarter, which are presented in the appendix of our slide deck. I will not walk through these pages in detail, but note that the methodology, analysis, rationale, risks, and conclusions are all consistent with what we've previously discussed. Additionally, I would note that there is also a side in the appendix that illustrates the various fair-value impacts in the quarter, as well as informs how these values changed between the second and third quarters of the year.

Moving onto the lending segment, the business continues to perform well. In the third quarter, funding volumes were $1.3 billion, roughly in line with the second quarter although comprised of a different mix. Correspondent volumes were up 22% quarter over quarter, driven by more aggressive pricing than in the first half of the year. Direct volume was down 33%, as agency portfolio sales reduced our refinance opportunity. The lending business generated $9 million of income in the third quarter, with strong cost controls offsetting tighter gain on sale margins. This brings the year-to-date pre-tax income of the lending business to $39 million.

You may recall that excluding the goodwill impairment of the fourth quarter of 2014, the lending business earned $22 million in all of last year. So we're pleased with the progress we've made this year, not only growing the business, but doing so profitably. We also continued to invest capital in technology, and the build out of our retail channel. As we look to grow our origination platform further to provide sustained growth in MSRs, and higher and more stable profitability.

Now I would like to move to discuss costs and turn your attention to slide 13. As Ron mentioned earlier, we are introducing a concept called adjusted operating expense, which we believe is instructive in evaluating our progress to improve our cost structure. Adjusted operating expense is a non-GAAP measure used by management to evaluate our underlying operating expense performance by adjusting our GAAP operating expenses for certain items like changes in MSR fair value due to changes in valuation inputs and other assumptions, as well as for things like restructuring expenses, among other items. For a complete description and reconciliation, please see slide 17 in the appendix.

Our third-quarter adjusted operating expenses were $326 million, down 9% from the second quarter, despite the fact that we saw monitoring expenses more than double. Within the third quarter, we incurred a total of $12.5 million of monitoring expenses, compared to $6 million in the second quarter. The increase in monitoring expenses is primarily due to the increased engagement with the California auditor which we spoke about on our last call, and higher spending from New York.

You'll note the impact of lower amortization and runoff related fair value charges, given the changes in the servicing portfolio since last quarter, as well as a host of lower operating expenses across employee costs, professional fees, servicing expenses, and technology. These are all areas of focus as we've been working to improve our cost position entering 2016, consistent with the efforts we outlined in our September 15 investor presentation and with Ron's remarks earlier.

To wrap up, we continue to make progress as a Company and we are excited about our future. We are building for the future by focusing on creating growth engines around residential mortgage originations, as well as expanding to other product offerings. We are improving our cost structure to better align to a smaller servicing business, but also one that better leverages technology and improved processes.

Finally, we continue our efforts to stabilize the Company. Executing on our asset sales and reducing leverage as expected, while enabling the maturation of our risk and compliance functions, improving the customer experience and driving internal programs around employee engagement, diversity, and inclusion, all which will make Ocwen a better company and a better place to work.

With that, we'll now open the call up for questions. Operator?

(Operator Instructions)

Bose George with KBW.

Actually Chaz Tyson on for Bose. I just was wondering about the non-conventional conforming product that you are piloting and testing at.

Could you give some more color on what the product looks like, and how you see that opportunity over the next couple years? Whether it be on the purchase or refi side? Thanks.

So on the non-conventional product, just to be clear, that is not one that we are yet piloting. It is one that we are spending significant resources on determining what consumers are looking for.

Obviously, we have a big book of non-agency type borrowers, so we have some insight into what kind of products work and what won't work for them. So it's too early for us to give any more details. But we are excited about the possibility there, and to the extent that we feel that we can originate the product and securitize it, we'll move into the pilot phase.

Okay. Is it hard to get comfortable with the regulatory risk on that side of the lending equation? Or do you find that you are able to structure a product that you think would be pretty compelling from a regulatory standpoint?

I'm not going to get into any real details there. Clearly, the lenders have struggled with some of the regulations out there that increase the risks for originating loans that are not sold to Fannie, Freddie, and FHA.

But again, as I said, we are excited about what we've seen so far and what we think we can do and are hopeful that we can work around those issues. As I mentioned in my remarks, our Community Advisory Council has also expressed a great interest in working with us to find products that will work for homeowners out there who were unable to get conventional credit today.

Okay. And then on the expenses, 9% down quarter over quarter for the adjusted operating expenses that you noted, is that a good run rate for us to think about going forward or should it be more than that, or how do you think about it?

We're not going to comment on our run rate. I think our remarks were clear back in September when we published some examples of the cost categories that we were targeting as well as some expected ranges of expected savings in those key three or four different areas.

The adjusted operating expenses is a view that we use internally to assess our progress there. And as you see more and more of the cost improvement actions come to fruition, we would anticipate seeing that show up obviously in those results over time. So it's not meant to be a run rate that people should extrapolate, but rather an indicator that we are making progress on the efforts we launched in the summer.

Okay, makes sense. And then just last one, you had ending UPB of $288 billion. If you look at slide 11 and add up the numbers on the right side, it's $266 billion. Is that the number that we should be using after all the sales are completed, ex obviously natural runoff of the portfolio?

So that is meant to indicate when all the final sales -- some of the sales may have closed but are still being serviced by Ocwen today. So that is meant to reflect the UPB once those final transfers have taken place with the previously announced asset sales.

Should that be happening over the course of 4Q or 1Q or pretty near-term?

So we anticipate closing all the financial transactions before the end of the year. There's a chance some of the transfers may fall into the first quarter, but we're not going to be more specific than that.

That's helpful, thank you.

You're welcome.

Michael Grondahl with Piper Jaffray.

Thanks, guys. After you got this recent amendment on the SSTL, are there any other hurdles you have to move forward and make some of the investments that you've been talking about? And then maybe secondly, could you rank those investments in terms of importance and maybe dollars that you might allocate to them?

Mike, first of all, keep in mind, the term loan still does have some covenants in it, so we are always going to be mindful of making sure we operate within covenants. And we are still working towards getting down to that 0.8 times debt-to-equity ratio that we've been targeting.

But I think that the amendment did give us a lot more flexibility and room to start executing on our strategy to complete the cost-reduction initiative and to start to carry out some of these new business lines or products that we've talked about on the origination side.

At this point, since we haven't formally launched some of the businesses, but are just in pilot phase, I think it's premature for us to say how much capital or investment we are going to be making in those. But we are not looking to bulk up the balance sheet with assets. We are looking for assets that we can generate profitably, securitize, potentially retain some of the risk, but then continue to recycle the capital. So we are not looking to consume a great deal of our capital with these new businesses. Although it will take some capital to move them from pilot phase into the next phase when that occurs.

Okay. And then on slide 4, you talked about obtaining servicing acquisition consents. Approximately when would you expect those? What quarter do you think those might fall in or what half year?

Unfortunately, I think we don't have enough information to be able to pinpoint it to a quarter. Know that we are working hard and working productively with the various parties that we need to ultimately gain that approval.

As I've said before though, I don't want to overstate that opportunity even when we have those restrictions lifted. Right now, I don't see in the marketplace a lot of opportunities for the kind of servicing transfers that would interest Ocwen. And that's why we're focusing more of our efforts on generating new assets on our own through our various origination channels.

Okay. And then maybe lastly, Ron, if you could comment on your confidence in profitability in 2016? And then any guess at even a rough range, just some of the free cash flow you can generate?

Mike, I don't think, as you know, historically, we've been pretty limited in any of our forward-looking statements, and I think we're going to return to that. So I'm not going to make any statements about expectations for next year, either on profitability or cash flow.

Okay, I thought I'd try, just to get a little help. But thanks.

You're welcome. Good try.

Henry Coffey with Sterne, Agee.

Hello, and thank you for taking my questions. In going through some of these expense items, some of them are clearly not ongoing or not core or whatever you want to call them, the fair value marks in the Ginnie Mae, the restructuring costs, the gain. The legal settlement for $11 million, could you give us a sense of is that an ongoing expense or was that a one-time settlement?

Henry, one clarification. I think as you get through, you'll see on page 17 there -- in the prepared remarks, we talked about $11 million of MBS trustee operating expenses as well as legal and other settlements. So it's broken down into a couple different buckets there.

I think the legal settlement in the quarter was across a couple different things for $6 million, and we had an MBS operating expense review or an MBS operations review where we had to spend $5 million, and that was something that we would view as an unusual item that's certainly something we hadn't seen before. So that's what makes up the $11 million.

What I mean is, that $5 million isn't going to show up again, is it? Or is this an ongoing expense?

So it's definitely, in and of itself, not an ongoing expense. Although it was focused primarily related to one trustee, and there are other trustees that could possibly request similar types of reviews. So it is a one-time nonrecurring, in and of itself, but there is a possibility that we could have other similar expenses in a future quarter.

The RentRange acquisition by Altisource and your interest in doing financing into the single-family rental market. Will you be able to work with RentRange and other affiliated Altisource companies to put that together?

So nothing that we've announced or are doing is really related to that or in conjunction with Altisource. So there's really nothing further to comment there, because the two are not linked together.

How are you going to be sourcing those loans?

Well, Ocwen as a servicer, we have a large REO portfolio, so we have contacts with investors and others in the rental space. And I think that's one of our biggest advantages that we have over others. Otherwise, we'll be utilizing some of the proprietary marketing and technology that we have in our other lending channels to also reach out in that channel.

And then, were you talking about floorplan financing?

Yes. On the auto side, that's correct. And that's also in the (multiple speakers) space.

That's a whole new technology buildout, isn't it?

So, yes. So, first of all, it's not a consumer business, it is a commercial business. Without getting into great detail, we have been working on this for quite a while.

We've hired a very experienced Management team to lead that effort, and, again, I will stop there. But you are correct, it is a new type of initiative but fits with our desire to generate assets and ultimately be able to securitize and recycle the capital, service the assets. So I think it fits in with our business model.

Can you put numbers on either of these opportunities?

Not at this point. But we're hoping that once we are through the pilot phase and if we decide to, which we hope we will, to move on with these businesses. Hopefully then we can give more thoughts on the size of the market, and where we think we can take our business.

I know it would be out of character for you to put too much on this. But the gap between what we will call your ongoing operating expenses and your total expenses, even when we exclude the fair value adjustments, seems to be closing. Is that a fair assessment that that gap is narrowing and will continue to narrow?

It's definitely our objective to narrow that gap, and that's what the cost improvement initiative is all about. As we pointed out in the September presentation that we did, we highlighted some areas where we thought it would come from.

Some of that comes more automatically as the portfolio rolls off, others we have to take action items. And you can see that we have been taking action items, like the staff reductions that we've announced. So our objective is definitely to narrow that gap.

All right, thank you.

Thank you, Henry.

Fred Small with Compass Point.

Hey, thanks for taking my question. A couple questions actually. First of all, on the NPL actions, in the fourth quarter I think you said it was about $1 billion and that there would be an $18 million hit. Is that right?

That's correct.

Got it. And then how much will this reduce the advanced funding requirements?

So we're not providing that explicitly. Some of the reductions will have offsetting impacts, and some of the financing arrangements that we have, but the total transaction will be positive from a freeing up additional cash flow though.

Okay, got it. So the assumption is there are higher advances for those loans?

Yes, there are advances. They are agency loans, but they are non-performing. There are advances against them. I think as we've highlighted earlier in the year as we've moved out Fannie Mae and non-performing loans, we had no real advance financing against those.

On our Freddie Mac advances, non-performing loans, we did have and do have financing against those. So the mix of Fannie and Freddie drive how much free cash flow becomes available. But as Michael said, without providing any more details, we do expect there to be some free cash flow, that the transactions themselves are cash flow positive.

Okay, got it. So if I look back to, call it, pre-res cap, when the portfolio was mostly non-agency there was a low-to-mid-20%s pre-tax margin on the servicing business. Obviously, things have changed and the mix is different, and there are higher regulatory costs. But can you guys get back to when we think about profitability, a double-digit pre-tax margin?

Unfortunately, Fred, I think we're not going to -- keeping in line with what I said to Mike, we're not going to speculate or provide forecasts on future margins. We've tried to highlight the -- give a sense as to the cost savings initiatives next year compared to this year. And would just guide you to utilize that information as best you can, but we're not going to provide forecast on margins at this point.

Okay, got it.

Fred, I think the other thing that you can look at, we tried to give people a sense historically how 2012 might look before some of the acquisitions. You mentioned adjusting for some of the elements like monitors, risk and compliance, and other costs elements that we take as almost permanent changes in the business.

So I think that would be another data point you could try to use to triangulate what you're thinking about the Company and margins going forward. But as Ron said, we're not going to be more specific than that.

Okay, got it. Just on the revenue -- the follow-up on that just on the revenue side. I guess the revenue yield on UPB is going up. Is that primarily or trending up just on average UPB, is that primarily just mix shift as some of the agency runs off, or as you sell some of the agency?

Yes. And I think that's what people would expect just given the basis point to revenue you get on non-agency is generally higher than you get on agency.

Got it. And then if you had to think about the duration of the HAMP fee stream overall, how long does that last and what is the decline rate?

We're not going to forecast it. I think what we'd tell you, obviously with the HAMP program, you have initial fees that the Company earns and then you also have success fees that are paid out periodically to the extent the modified borrower remains current, so it won't be a cliff, so to speak, but it will run down over time.

So I think you've seen HAMP mods were significant in the quarter still, relative to the rest of the industry. But a decline from where we've been in the past. So I think as you just look at that trend, you can make your own assumptions on how that plays out. And understand, we will have HAMP fees beyond the expiration of the program just because of the nature of some of those success fees.

Thanks a lot. And then last one, if I look at slide 20 for the MSR valuation assumptions, the cost to service line on the PLS loans. These are the third-party assumptions, the third-party broker assumptions that you're using there.

I was just wondering if you could put or give a relative sense when you're looking at the fair value assumptions there for the PLS. So the $341 annually blended, where is that in your internal assumptions and the updated assumptions for the cost to service?

That's not anything we've updated recently, Fred. I think historically, I think the last time we probably published anything on that was probably the second quarter of last year. I would say the number is a bit higher just given some of the changes to risk and compliance over that period of time, but we haven't given any specific estimates on our own internal assumption numbers since then.

So the number is higher than what you published in 2Q 2014, but still lower is the assumption than what the third-party broker is using?

Yes. Just given the fact that you see such implied excess value from rolling in updated assumptions, that would have to be true.

Okay, got it. That would be really helpful if you could, in the future, provide some sort of detail on the assumptions you're using for cost to service.

Okay, we'll take that under advisement. So thanks for that suggestion.

Awesome. Thanks a lot. Thank you.

(Operator Instructions)

Michael Kaye with Citigroup.

In the September presentation, you presented a pretty wide range of potential cuts, I think it was $238 million to $368 million. Can you talk a little bit about some of the key variables that could get you from the lower to the higher end, and what could really hinder you from hitting these high-end operating expense cuts? And finally, do you need any reg approvals for these cuts?

First off, we have plans in place and continue to seek out opportunities for cost reductions. We are striving for the high end, and, in fact, don't even want to limit it to the high end. As far as -- I don't think that I can say that there are any approvals, external approvals, required to execute on our strategy.

That being said, we are ensuring that our risk management people and our compliance team are side-by-side with us to make sure that we are evaluating the risk to the Company, the risk to the consumer associated with any initiatives that we take to reduce costs. And I think as long as we continue to do that and are thoughtful about that, there shouldn't be any limitations on our ability to execute on the plan that we have.

Great. Just one last clarification, could you just could go over one more time that NRZ agreement? Went over some numbers pretty quick, I think you said at the end, $1 million to $2 million per month until June 2016. Was that right?

Yes, that's right, Michael. And it's going to depend on the actual advance balances funded under their lines, as well as the base rate LIBOR and their facility changes over time. But that's generally how we forecast it.

And I think the point is, the maximum indemnification is $3 million a month. In the first 3.5 months, we did not reach the maximum amount. But we expect that actually the future payments will be lower than what we've had to pay in the first 3.5 months, so we're trying to give you at least some sense as to what that might look like.

Okay, thank you.

Ken Bruce with Bank of America Merrill Lynch.

Thank you, good evening. I guess I have a number of questions. Maybe you can give us an update as to some of the issues that have been essentially keeping the overall level of advances as high as they are.

I think last year and maybe in the beginning of this year, we talked about the delay in follow-up docs and that had been inhibiting a lot of the modifications and the like from taking place in foreclosures. Can you give us an update just in terms of how that situation is today, and how you're thinking about that?

I don't exactly recall the comments that you just made there. But we -- from all the data that I've seen, our foreclosure timelines are within the industry norms, and generally a little bit better. So I wouldn't say there's anything specific beyond just the changes that have incurred across the industry over the last number of years that have generally slowed down moving loans through the foreclosure process. But other than that, I don't think there's anything to highlight.

I guess just to maybe be a little bit more precise in the question. I guess in the change that required you to have all the trailing documents before you could pursue foreclosure, that added some considerable delays to the entire timeline for the industry.

And I guess I'm just trying to understand, has that largely moved through and so everything is -- in a sense, is operating in a timely fashion? There obviously are jurisdictional issues that may impact specific timing for certain states and the like. But is there any further delays in terms of overall processing of foreclosures?

You're right that those companies like Ocwen that are subject to the national settlement, as well as with some of the CFPB rules, the process for what you have to produce on the front end to initiate a foreclosure is more cumbersome. And they're actually, I think back a ways, there was maybe some catch-up involved in changing around processes and doing things to make sure everything was in place.

Now, you still need to get all the documents to the extent that there is added time on the front end to do that. It's still extended out from where it was originally. The rules now really don't allow you to start foreclosure action until you've reached 120 days of delinquency, where prior to the CFPB rules, that was more like 90 days.

So there are some embedded things that have occurred. But I don't think that we have any operational constraints or inherent missing document constraints beyond just normal course activity that hinder our ability to move through the process the same way that anybody else has.

Ocwen always has the challenge that since we didn't originate a lot of the loans, we may have to go out and track documents down from custodians and other places. And it may take us -- it may be a little more difficult than an originator who originated everything on their own. But that's always been part of our business, and really no different than what it was years ago.

Ken, the other thing I'd tell you is, I think you'll see some of this when you go through the queue. But if you look at our advances, just where we were a year ago, it's come down by about 25%. Some of that has been accelerated on some of the non-performing asset sales, but more than half of that improvement going from, call it, $3 billion, $4 billion, something like that, to almost $1 billion less now, is really just improvement in advances over time.

If you look at the cash generation this year, on a year-to-date basis, we've generated just under $800 million of CFOA. The biggest driver of that has been advanced recoveries. So we are collecting these advances, and making improvements here, as one might expect.

Right. And I guess I'm not asking the question to necessarily compare you against any other firm. Really what I'm looking at is the interest expense associated with those advances, and trying to make sure that we understand what the progress needs to look like in terms of advanced reductions in order to get the interest expense down over time.

And obviously, I understand you don't want to give estimates or forecast profitability, but it's not beyond you to understand that the interest expense line is a big driver of that. So I'm trying to appreciate how long those advances are going to be out there, and that's why I asked the question. I don't know if there's any additional color.

I think the best color would be to just take what Michael said. I don't think advances are ever going to just fall off a cliff and go to zero, it's going to continue to be a steady decline. So maybe the one challenge in looking back this year is to try to tease out the asset sales that impacted that number.

But it will be a gradual decline over an ongoing basis. So I think that's the best we can do for you right now.

Right, okay. And then I guess maybe to address the operating expense side of the equation. And I recognize you are giving us a lot of help here with the adjusted number, and some of the discussion points around trying to get those costs down.

But could you review maybe just from a high-level perspective where the big chunks of those expense savings are going to be coming from? And specifically, I know you've made some announcements around headcount cuts, but I think that traditionally most of the expense has been essentially, it's been people. So maybe you can give us just a sense as to what the cadence of additional reductions may be?

I think, Ken -- I think we've laid that out for folks back in September, how we were thinking about the breakdown of the cost savings, both between the things that, as Ron mentioned, are likely to just occur because the business is different in 2016 than it was in 2015. And then beyond that, you have the items that require a little bit more Management discretion and action.

We've talked about the employment reductions, the announcement earlier in September around 10% of the US workforce. Obviously, a difficult decision, but one that was important to address. There's also continued improvements in things like servicing performance, where whether it is uncollectible advances or claim losses and other types of things, ongoing improvement that can be generated in that area.

The other thing you get is you get potential savings and productivity from different technology investments that we've been working through over the last year or two, that we would expect to pay dividends next year. Beyond that, is the blocking and tackling type things. It is consultants, it's outside counsel spend, third-party vendors, and the like.

And then you will note as you go through some of the restructuring charges, we've terminated leases, we've changed some of the terms of leases, we've looked at other assets that are being utilized as well and have made some decisions there. So we are executing on the things that you might expect, Ken.

Yes, I know that this is obviously a delicate conversation when it comes to people. If you looked at Ocwen pre-2013, you had a little under 1,000 people in the US, and today you have something closer to 2,000.

Should we be expecting anywhere close to the, if you will, reversal of the business to look like it used to? Or is this fundamentally going to be a different business, both from the standpoint of what the cost structure is because of compliance? But also the, if you will, composition of the workforce has changed permanently?

I think you need to look at it apples-to-apples. So in 2012, we didn't have a lending business. Now the lending business, whether it's the origination folks or the additional resources we have there, there's roughly -- for simplicity terms, call it, 500 people or so in the US driving that business.

And like we said on the prepared remarks have generated $37 million of pre-tax earnings so far this year, inclusive of their headcount cost in the US. So we're not worried about those individuals. There have been increases in risk and compliance over the last two years, that's correct. Some of those, as we've commented in previous quarters, those functions have had a higher percentage of folks in the US, just given the regulatory focus and the challenges of building up the capability required today. And so we've resourced that primarily here.

So, we will continue to look at it, Ken. I don't know that the business ever gets back to where it was, but we are always going to make sure we are balanced between meeting our obligations to our customers, meeting the various regulatory compliance requirements, and delivering for shareholders. So just thought that would be helpful to clarify.

That's a great point. I guess, so you have 500 in the lending business, so that's going to be separate and distinct from anything you really had back in 2012. Great, I think I'll leave it there. Thank you for all your help this evening.

Thanks, Ken.

We now have come to the end of the question-and-answer session. That concludes today's conference call. You may all disconnect.

Thank you.