Onity Group Inc (ONIT) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Ocwen Financial First Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. (Operator Instructions)

I would now like to turn the call over to your host, Mr. Stephen Swett. Mr. Swett, you may begin.

Good afternoon and thank you for joining us today for Ocwen's First Quarter 2016 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 Presentation 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 a number of assumptions, risks and uncertainties that could cause actual results to differ materially. In the past, actual results have differed from those suggested by forward-looking statements and this may happen again. 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 whether as a result of new information, future events or otherwise.

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, available liquidity and the economic value to Ocwen of our MSRs. 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 our presentation, and today's earnings release as well as the Company's filings with the SEC, including Ocwen's 2015 Form 10-K. 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.

Thank you. Good evening and thank you for joining us today. I'm going to spend a few minutes covering some of the key themes from the quarter and then we'll turn the call over to Michael to discuss our first quarter results and the progress we've made on improving our cost structure. We know our expense outlook is one of the key areas of focus for investors and we believe the additional detail here will be helpful.

As noted in our earnings release, Q1 results were unfortunately negatively impacted by two large uncontrollable items. First, $33 million of interest rate driven fair value adjustments in our Ginnie Mae and GSE MSRs; and second, $30 million of third-party monitor costs. Despite those large expenses, reported operating expenses were still down 9%, and our adjusted operating expenses, a non-GAAP measure we typically provide, was down 17% from last quarter.

Excluding the MSR, monitoring impacts, and our new initiative spending, expenses in our servicing and corporate segments were down $80 million, a 25% reduction from the prior quarter. After discussing planned cost reductions for the last few quarters, we are pleased to see that our actions are starting to take hold and we are seeing some of the benefits starting to be realized. I would also note that we are actively working on additional plans to further reduce our expenses and improve our financial results.

Despite the reported GAAP loss for the quarter, the Company returned to generating positive cash from operations on both the GAAP and normalized basis, a non-GAAP measure we provide. As mentioned in our last earnings call, we also have significant future value not reflected on our balance sheet. These include the value of call rates, future reverse mortgage draws, unrecorded fair value adjustments in our agency MSRs, and unrecording deferred servicing fees. We believe these items totaling approximately $345 million of incremental value should be considered in addition to the Company's reported assets.

As we discussed back in February, our goal and strategy going forward is to transform Ocwen into a world-class asset origination and servicing company that delivers service excellence to our customers and strong returns to our shareholders. Historically, we were considered a transaction company. In other words, we purchased assets that others created. Going forward, we want to be the one that creates the assets. We believe that this strategy will provide us more control, greater stability and higher operating margins over the long term.

In line with our strategy, we have been focused on building out our lending capabilities. We saw mortgage originations volumes increase in the quarter and that segment returned to profitability. Additionally, we continued to invest in our Automotive Capital Services commercial lending business. We are pleased with the progress so far as we are now active in 12 markets in eight states. As of April 24, we had funded $21 million of loans in this business, we received $12 million in pay-offs and have $9 million in loans outstanding. We remain encouraged with our progress here as well as the underlying investment thesis and the prospects for this business in the future.

From a servicing performance perspective, for the ninth month in a row, we saw a significant reduction in CFPB consumer complaints. In the March report, Ocwen's consumer complaints were down 21% compared to the same three month period from 2015, the most of any of the large mortgage companies. We remain focused on delivering positive borrower experiences and creating a culture focused on continuous improvement and these results reflect that. I will note that the April report came out this afternoon and we were down 25%.

In [that spirit], we remain very active from a loan modification perspective, completing over 16,600 loan modifications in the quarter, of which 45% include some form of principal reduction. Additionally, we were very active in the new Streamline HAMP program in the quarter. As you may know, the Streamline HAMP program is a new US Treasury offering for 2016 focused on ensuring that every borrower who is eligible for HAMP modification receives the opportunity to obtain one.

As of April 21, we have mailed over 35,000 letters to potential eligible borrowers and are pleased to report, we have over 10,000 borrowers making trial payments under the program. After three successful trial payments, the modification becomes permanent to the homeowner. We will continue to update you on our progress in future calls.

Now I would like to take a moment to revisit some traditional analysis the Company used in the past to highlight it's capabilities as a servicer. Last year, these metrics weren't always in the top of people's minds. However, I think it's important to show that despite some of the challenges we have worked through, we remain focused on delivering positive outcomes, not only for borrowers, but also for owners of RMBS securities that rely on Ocwen as a servicer.

On page 5, we show some of our modification statistics. Since 2008, we've led the industry and completed over 600,000 modifications of which over 311,000 were HAMP modifications. That number is 47% more than the next highest servicer, a stunning percentage. Additionally, we have completed almost 97,000 principal reduction modifications over that time. That is three times more than the next highest servicer. All these add up to mean that homeowners in distress have a far greater chance to keeping their home if their loan is serviced by Ocwen.

We have always believed appropriate modifications and appropriate principal reduction modifications in particular offer mutually beneficial outcomes, meaning they provide benefits to not only the homeowner receiving the modification, but also the RMBS holders who receive more payments over time as a result of keeping the borrower in their home, making affordable payments. You can see evidence of this latter point on the next page.

Using third-party data, we see that 81% of our subprime private label security loans have made 10 or more payments in the last 12 months. For the rest of the servicing industry, that is only 73%. To put that 8 point difference in perspective, if the rest of the industry was as good as Ocwen at servicing these loans, that would represent in excess of $532 million of additional cash flows to subprime RMBS noteholders in the last 12 months alone. The bottom line is, despite some of the headlines and challenges this company faced over the last year plus, we are still delivering differentiated industry-leading outcomes for homeowners and for RMBS noteholders.

You will recall that we received an upgrade in our Fitch servicer rating earlier this year. We continue to provide all the rating agencies that rate or rank our servicing platform ongoing update on both our servicing performance results and on our ever improving control environment. Based on our performance results, robust control environment and financial condition, we continue to believe that some of our servicer ratings and rankings are too low relative to other bank and non-bank servicers.

We continue to work closely with and believe we have strong relationships with our various servicing and advance financing partners, including new residential. You will note that we have also worked closely with new residential on the execution of various call rights transactions and are pleased that we have remained the servicer of the resecuritized performing loan issued by new residential.

While we are not making any significant updates to our disclosures related to the allegations made by certain RMBS investors represented by Gibbs & Bruns or the February SEC letter we received, I remind you that our servicing practices have been and continue to be closely monitored by trustees, master servicers, GSEs and others. We continue to believe that our servicing practices have been and are consistent with industry standards, although as discussed earlier, we have demonstrated better overall performance for homeowners and subprime RMBS investors than most other servicers.

I would now like to pass the call over to Michael to discuss our financial results in more detail. Michael?

Thank you, Ron. First, I'll begin with a discussion of our operating results for the quarter and then provide some additional color on our cost improvement initiatives. We made real progress in the first quarter and I want to share more detail with you about that as well as discuss where we think some of these cost categories are headed as we work to restore the Company to profitability.

I'll begin with our first quarter results. We reported an $0.89 per share improvement versus the fourth quarter of 2015. Revenue was $331 million, down about 9% from the fourth quarter primarily due to normal portfolio run off. Total operating expenses were $329 million, down about 9% from the fourth quarter. Expenses were down due to several factors, including a $31 million reduction in uncollectable advances and Ginnie Mae losses from the fourth quarter, a $26 million reduction in legal settlement and restructuring charges, and a $5 million reduction in our employee costs.

Partially offsetting these improvements, we had two large items; a $30 million unfavorable Ginnie Mae MSR interest-rate driven valuation change, which given a positive $8 million change in the fourth quarter of 2015 led to a $38 million negative impact quarter-to-quarter. Additionally, we had $30 million of monitoring expenses, an $8 million increase from an already elevated fourth quarter level. I will discuss monitoring expenses further momentarily, as I'm sure there's much consternation over the magnitude of those expenses.

Total other expense in the first quarter was $104 million, which was down from $132 million in the fourth quarter primarily due to a non-repeat of a [$14 million] loss on our non-performing MSR transaction in the fourth quarter as well as a $10 million reduction in amortization related to the senior secured term loan. NRZ interest expense was also $3 million lower.

Despite our reported GAAP losses, Ocwen continues to generate positive operating cash flow. Cash from operating activities in the first quarter was $141 million. Looking at the normalized adjusted operating cash flow, a non-GAAP measure we use to highlight cash flow performance independent of advance funding and changes in the level of our mortgage originations, the Company generated $55 million of positive cash flow. As 2016 progresses, we anticipate the cash generation will remain a strength of the Company.

From a financing perspective, we achieved a positive outcome with our senior secured term loan amendment back in March. This amendment provides us additional flexibility through the February 2018 maturity and was a result we were very pleased with. We believe we are maintaining adequate levels of liquidity and continue to manage our leverage responsibly, having reduced the principal balance of our term loan down to $380 million in the quarter, and ending the quarter with a corporate debt to equity ratio of 1 to 1.

Moving on, I'd like to provide significant incremental detail on our cost reduction activities referring specifically to pages 9 through 19 in our first quarter earnings presentation. We've received many questions over the last few months about our cost structure and thought it would be helpful to take a step back and reset understanding in line with how we are thinking about it, so we have a common baseline to discuss costs.

There are many dynamics at work here; shrinking servicing, growing lending, uncontrollable valuation changes, monitor spending et cetera that complicate the story. We believe breaking down our costs into three groups provides a rational framework to understand just what's happening, where we're going and importantly, a way for investors to track our progress. That breakdown appears on slide 9.

The first grouping, our Servicing and Corporate costs is the segment reported costs, excluding the two items that make up our third segment called Uncontrollable costs namely the MSR valuation changes due to interest rates and monitor expenses as well as the costs we're incurring to build our Automotive Capital Services and Liberty Rental Finance businesses. We are actively working on reducing our Servicing and Corporate costs to not only catch up with the declining servicing portfolio and revenue, but eventually to return the Company to profitability.

The second category is around our lending and new initiative spending. Here we have the lending segment costs plus the expenses we're incurring to grow the new business just mentioned. We anticipate increasing expenditures here in 2016 to grow these different businesses. Finally, the third category is our Uncontrollable costs already mentioned.

We are likely to get lots of questions about the increase in monitor spend. Unfortunately, there is not much I can say about it. The nature of these engagements is that a third-party monitoring firm is appointed by a regulator or the court and we have no contractual control, nor oversight on what they can spend in pursuit of their mandate other than appealing to the ultimate authority.

Although data around this type of statistic is not widely available, based on what we've been able to discover, we believe the level of monitoring expenses being forced upon Ocwen is very high and perhaps unprecedented. At the current run rate, spent on the third-party monitoring firms could be $120 million this year, a level that represents approximately one-third of our current market capitalization.

We will not provide further specifics or comments other than to say that we continue to work closely with our monitors, but look forward to the day when we can graduate from their oversight in accordance with the terms of the orders and that we continue to discuss these costs with our regulators.

You will note that both the New York and California agreements call for the third-party monitors to be in place for two years. So assuming no extensions by the respective regulator, under these agreements, the New York monitor term would end in March 2017 and the California auditor term would end in July 2017.

Moving on, the next page includes a financial overview of the changes in these three cost categories between the fourth quarter of 2015 and the first quarter of 2016. These are reported numbers and note there is no normalization or any adjustments here. As I mentioned earlier, we reported $31 million or 9% reduction in total OpEx compared to fourth quarter. This is made up of the following dynamics; an $80 million reduction in our servicing and corporate costs, a $4 million reduction in our lending and new initiative spending and a $53 million increase in our uncontrollable costs. We'll dive deeper into the individual expense categories to provide greater detail on the specific drivers.

Let's move to the Servicing and Corporate costs on slide 11. In total, Servicing and Corporate costs totaled $237 million in the first quarter, which was down $80 million or 25% compared to the fourth quarter. We have achieved expense reductions in almost every category, and I want to walk through each to highlight the drivers of the reduction.

Compensation and benefit costs were $80 million in the quarter, down $6 million or 7% from the fourth quarter. This reduction was achieved by reducing onshore headcount. Management actions resulted in the elimination of 260 onshore positions over the last six months and we are in the process of identifying additional savings, particularly in our onshore staffing.

I would note that the insourcing of certain technology and facilities functions in 2016 will add staffing in these two departments. We believe this expense will be more than offset by savings in our purchase services expenses. Going forward, we will continue to focus on our staffing levels. We anticipate additional reductions in the US and for the staffing in India to adjust down through attrition. We also believe there is some redundancy in our corporate functions that we can eliminate or reduce.

Servicing and Origination costs were $56 million in the first quarter, down $36 million or 39% from the fourth quarter. Page 13 shows more detail on what makes up this category. Lower costs were driven by several factors. About $2 million was due to the decline in the servicing portfolio at fair value. This can be considered akin to amortization. We had a $21 million benefit from lower servicer expenses and uncontrollable advances related to our smaller agency portfolio as well as continued process and management focus. We also saw $11 million reduction in Ginnie Mae losses after legacy claims were cleared up in the fourth quarter and $2 million of other expense reductions due to our smaller portfolio and the lower CPR in the quarter.

On page 14 you can see detail on our technology costs. Technology costs were $26 million in the first quarter, down $10 million or 28% from the fourth quarter. We saw savings around most expense categories in this area. Our servicing platform expenses and imaging expenses were down. We also saw $7 million lower infrastructure expenses.

Professional services are covered on slide 15. These expenses were $41 million in the first quarter, down $20 million or 33% from the fourth quarter. The vast majority of the savings in this category was the non-recurrence of a large legal settlement we incurred in the fourth quarter. We also had a $4 million benefit in the quarter in the form of a recovery from a third-party vendor for their contribution to a previously incurred legal settlement. We have specifically reduced our use of third-party consultants and advisors from last year and we continue to look for opportunities to reduce legal expenses while still effectively managing our exposure.

Finally, other expenses were $22 million in the first quarter, down $9 million or 29% from the fourth quarter. With regard to our lending and new initiative costs, we saw a reduction of $4 million to $24 million. Other than a slight increase in compensation and benefit costs as we build out our new auto lending platform, we saw modest reductions across several categories. We expect expenses to increase in these areas as we continue to build out what we believe can be a meaningful earnings growth driver for Ocwen for the future.

Finally, as I mentioned, the most significant pressure on expenses in the quarter was in uncontrollable items. We use the term uncontrollable because we have no or limited ability to influence, limit, or reduce MSR valuation changes or monitoring costs. Our uncontrollable costs were $68 million in the first quarter compared to $15 million in the fourth quarter.

Much of the increase was due to the $38 million swing in our Ginnie Mae valuation allowance. It moved from $8 million benefit in the fourth quarter to a $30 million additional reserve in the first quarter, given the decline in interest rates. To date, our Ginnie Mae MSR has been impaired by $47 million.

We thought it would be helpful to share a sensitivity analysis to understand how the value of the Ginnie Mae MSR changes with interest rates. As you'll see on slide 18, if all other assumptions remain the same, for every 5 basis point change in the 10-year swap rate, we estimate a $2.6 million financial impact. If rates go down, the impact is negative. If they go up, the impact is positive to the point we recover our impairment to-date.

Pulling this all back together, you can see there are many different drivers of our cost structure and we are focused on each one. From a Servicing and Corporate cost standpoint, we made considerable progress in the quarter, and hope to hold the line at a minimum on things like uncollectible advances and Ginnie Mae losses while driving further improvements in areas like headcount and purchase services.

If you were simply to take the first quarter results and annualize them, we would deliver at the high end of our previously communicated cost improvement initiatives savings range. We remain focused on our execution here and also on identifying and creating additional incremental savings.

In the area of lending, we're going to add expenses. We don't believe it will be massive, but we're going to add loan officers in the origination space as well as continuing to build out our Automotive Capital Services business. We are being diligent in our expenditures here and we'll provide more updates in the future.

Finally in the area uncontrollable expenses, we can't predict what interest rates will do, nor do we know how monitor spending will trend over the next three quarters. We hope you found this enhanced, more detailed disclosure helpful. As you can appreciate, there is no quick and easy way to right-size the Company. That said, we're focused on the entire cost structure to drive meaningful, sustainable progress in the areas we need to with the ultimate objective of restoring the Company to profitability.

That completes our prepared remarks. Operator, please open the call to questions.

(Operator Instructions) Bose George, KBW.

Actually just one -- first one, just on expenses. On the Ginnie Mae losses, that line item, what's the longer term run rate? Could that go to zero or is there some number there that's just part of the cost of doing business with Ginnie Mae?

Michael, you want to take that?

Sure. Realistically, Bose, it's probably unlikely that it ever goes to zero. You'll face transactions where your incentive economically to buy out a loan when it begins going delinquent and modify it and try to re-deliver it, but ultimately, you do run into some claim losses upon re-delivery or filing of those with Ginnie Mae, but we were -- I think, in rough order magnitude, we had about $80 million of claim losses last year. So $16 million in the quarter is obviously puts us at a different trajectory and we'd hope to continue to make progress here and work that down further but it's unlikely it go all the way to zero.

Just in terms of potential acquisitions, have you had any conversations with regulators about when that could happen or is there any way to kind of think about that kind of entering the dialog with regulators?

That remains a major focus of mine and the management team, to regain the ability to compete with our competition on a level playing field, and we have made some progress in some areas on that. At this point, we cannot predict when we will receive approval by New York or California to resume MSR acquisitions.

That being said, there is no guarantee that even after receiving that approval that there would be meaningful amounts of servicing to be acquired, but we do look forward and are very focused on trying to get back to the point where we could compete effectively in the market on that front.

Henry Coffey, Sterne Agee.

We know what doors are closed. What doors are open when you look at the sort of field of opportunity?

Well, I think the ones that we've talked about, we are trying to effectively grow our mortgage origination business so that we don't need to rely on servicing acquisitions the way we did historically. We have some restrictions, but they're very minor on the origination front and generally, have the ability to operate in most states around the country.

We also see some of the commercial lending businesses such as Automotive Capital Services as an area where there is no real restrictions from us expanding. There may be some capital restrictions. Ultimately, we want the business to expand nationwide, get to the size where we are utilizing warehouse funding and securitization to help fund the business.

We're not at that scale yet. So there could be capital constraints, but other than that, we don't see any meaningful constrains. It's more about execution, hiring sales people in different markets across the country and signing up dealers to start using our service.

And in the reverse mortgage businesses, is that a dwindling tail or an opportunity to (multiple speakers)?

Some of the problems in the -- some of the issues in the reverse business are more structural across the industry. We have seen that market overall shrink but that is still a market that we're excited about, focused on. You saw in the quarter we continue to increase the amount of future anticipated tail income (technical difficulty) and are focused on not only continuing to be a leader but continuing to increase market share if we can at acceptable price levels.

And then, with cash flow being what it is, is the goal to continue to pay down corporate related debt or are you going to be more likely to accumulate cash?

We were very pleased with the amendment to our term loan that we received during the quarter, as it gives us a lot more headroom through February of 2018, when that loan matures. We still do have that maturity coming up in early 2018. We have $350 million of corporate debt that comes due in middle of 2019 and so, we need to be cognizant of that and focus on at some point how we recapitalize the Company and deal with those debt maturities.

The good news is, none of them are imminent. So we continue to look at all of our investment opportunities, whether that be opportunities to repurchase stock or pay down debt, but it's critically important that we maintain adequate liquidity in the business. Servicing advances can fluctuate. If delinquencies were to rise for some reason, we need to maintain liquidity to make sure we're managing that as we've seen things like monitor cost can increase somewhat unexpectedly. We need to maintain liquidity to deal with those kind of unexpected events.

So I would expect that we would focus on maintaining strong liquidity as we talked about in the prepared remarks, but we're also looking at all of our other alternatives, and we would like to see, at some point, an overall recapitalization of the business.

Kevin Barker, Piper Jaffray.

You mentioned on the press release you had $8.8 million interest rate impact on the MSR, and then, later on you mentioned that there is a $33 million fair value impact on the MSR. Now part of that was one of increase versus the actual impact. Can you reconcile the difference between those two and help us understand what the -- how much was related to interest rates versus just an increase?

Yes. So, Kevin, the easiest way or the simplest way is probably to start on the last page of the deck. We've got various reconciliations there around the fair value changes, as well as the movements for run-off, both discrete in the quarter and then the quarter-to-quarter variances.

Yes, but Michael, I think the question really is the $8.8 million versus the first quarter of 2015, and if you try to reconcile the $8.8 million and the $33 million, the $8.8 million was versus the first quarter of last year, I believe right, Michael?

Yes, that's correct.

And the $33 million was the actual impact in the first quarter of 2016.

So that's a pure -- so $33 million of fair value mark purely related to interest rates and changes in your model due to interest rates.

Right. So, rates went down significantly in the first quarter, and as a result, we had to take further impairment primarily on our Ginnie Mae portfolio. There was a modest amount on our agency portfolio that's mark-to-market. Keep in mind, we also have an agency portfolio that is not mark-to-market and where we still have a carrying value below fair value, but we did see the fair value above carrying value on the agency portfolio decline as well, but that did not impact the P&L as much, only by a couple of million, because most of that is not carried at fair value.

So, the Ginnie Mae MSR fair value change was in an impairment due to changes in your insurance recoverability or your expected profitability from the Ginnie Mae MSR or is that purely because of interest rate changes in your prepayment expectations?

Yes, interest rates go down, repayment speeds are expected to pick up. That's with the model say. So, it's very similar to last year, you saw that same portfolio have -- as rates went down maybe at certain quarters where we had losses, rates went back up, we recover, they went back down, so it's been up and down. I think this was the most significant quarter that we've had and it's on top of some impairment that was already there. So, at this point, I think we'd say the impairment is total, something like $47 million. So it's -- that's the kind of life-time impairment on that portfolio due to the interest rate changes.

Okay. And then, was there any particular expense or fair value mark that went through the expenses versus [accounts] revenue? Where any of these contract revenue items or were they all considered expenses?

They all are expenses.

Okay. And then, in regards HAMP and the acceleration of the modifications that you're doing through HAMP, what was the difference in HAMP fees that you had this quarter versus last quarter?

You'll see that in the Q when it comes out. If you give me a second, Kevin, I'll pull it up for you. Maybe you have another question (multiple speakers).

And then, you mentioned some capital markets options for looking at your debt outstanding. Could you expand upon what type of funding options you think you have or some other opportunities or type of restructuring that you could do or maybe even sell MSRs that you could do in order to pay off the Senior Secured Term Loan?

As you saw last year, we sold MSRs as one of the means to pay down the term loan. We have -- I think virtually all the proceeds from MSR sales are required to go to pay down the term loan. To the extent we do sell anything, that's where those funds would go but we at some point could look to simply refinance into a new term loan or refinance both the unsecured and the secured loans in some fashion together, so there is a variety of options that could be available to us.

We've met various banks, we've got various ideas on what potentially could be done with the amendments that we received on the term loan in the first quarter. We have more room to think about that. So we haven't made any decision on any of that at this point. But as I highlighted, it is something that we remain focused on and it's important to the business to ultimately accomplish.

Okay. And then in regards to capital requirements from the FHFA, your capital levels on a [net worth of your servicing] portfolio and tangible net worth ratio has declined over last couple of quarters. Are you doing anything to alleviate that or attempt to stem that decline outside of cutting expenses, have you received any waivers for the FHA or FHFA?

No, we're still in compliance with all of those capital requirements. So we've not had any reason to seek any sort of amendments or waivers.

Is there a particular requirement that you're most concerned about or is there a certain one that you're -- that you think will be the most constraining?

No, there is no -- obviously, we need to stay within the capital limits and we're focused on that, but there is none that we are eminently in trouble on or that we're specifically focused on, but obviously, we want to reduce our expense levels, return the Company to profitability, so that we don't run into that problem down the road.

So, Kevin, just to answer your question, HAMP fees were $26 million in the fourth quarter and they dropped to $23 million in the first quarter.

Would there be a reason why they would drop given the increase in HAMP modifications or was that just due to lower fees on that [program]?

It's more of a change in the pay for success fees, how those carry over from prior quarters, than anything else, but hopefully, with the execution of the Streamline HAMP program here, we'll see some benefits come through the HAMP fee line later this year.

(Operator Instructions) Michael Kaye, Citigroup.

The two year standstill ends with NRZ, I believe, April 2017. So, about a year away. Are you planning on doing anything with that before that happens like perhaps renegotiating with NRZ before that happens?

Michael, we're not going to comment on any private negotiations there we may or may not be having. We're -- as I mentioned in the prepared remarks, we have been providing the various rating agencies the updates on the solid performance that we've had on the improvements that we continue to make to our robust control environment. We did receive upgrade from Fitch earlier this year. So we're hopeful that we're able to receive an upgrade from S&P at some point before that April date.

As I also pointed out, we maintain very good relationships with NRZ and if we were not upgraded, it would still -- we think that we still have solid relationships with them. It would be challenging for them to find another servicer to take on such a large portfolio, particularly when they're receiving good performance and service from our servicing. So it is something that we pay a lot of attention to. And we are focused on, but we're not going to be able to talk about any discussions we may or may not have.

Okay, thanks. That was helpful. Any update on the Liberty Rental Finance business? I thought, last quarter you said that you earned some sort of pilot phase. Is that still ongoing? How is that coming along?

Yes, it's still ongoing. I would frame it as still in the pilot phase. The volumes are still fairly low. We've recently rolled out some new products and they are going to be starting to put at least some of the loans on balance sheet here, but it's still pretty early on and still, I think, more in the pilot phase, whereas the Automotive Capital Services business, we are focused on expanding into other markets, hiring sales people across the country and trying to build a national platform there whereas in Liberty Rental Finance, it's still too early to know how fast we might grow there and how successful that business might be, but we're still committed to it at this point, and have actually been [expanding] the product mix.

Fred Small, Compass Point.

On the technology business and the cost that you saved there, that looks pretty good in the first quarter. Are there other opportunities to reduce costs on the technology side or has most of that been taken out?

You will see -- some of the technology decline is the result of just having a smaller servicing portfolio, and as the portfolio continues to go down, technology spend, some of it will go down because in some cases we pay on a per loan basis.

We also, as Michael mentioned in his prepared remarks, are insourcing certain technology functions which will add to our compensation costs somewhat this year, but we expect that we will receive -- those will be more than offset by savings that we can get from insourcing, some of the technology infrastructure-related cost that are -- had historically been managed by a third party and we are now bringing in out.

So we're not going to get into magnitudes but there are opportunities for that to -- that spend to go down both from the just volume reduction related decreases as well as our ongoing efforts to continue to in-source more of the particularly the infrastructure-related work.

Okay. And I'm just looking at slide 14. You consider the infrastructure there, which categories is that in?

Think about that as what we would pay for things like hardware servers. In the past, we had outsourced some of that and there was some savings by moving it in-house. So, that's what makes up that category.

Okay, but those aren't going away entirely?

No, they are not going to go away entirely. No.

Okay, got it. And then, just on the legal cost and the swing in legal cost in the quarter, what's the expectation for the balance of 2016? I know that you had talked either I think on the last call or in the K about higher legal costs for the year potentially?

Yes, so we're not going to give specific guidance but keeping in mind that the various monitors that we have, we use third-party lawyers to assist us in managing those relationships, and those relationships with key regulators. We have a handful of large litigation cases and you'll see, to the extend there is any updates on any of those, you'll see that in the Q that comes out. As we mentioned last quarter that one of those has been very, very expensive, and would likely continue to be expensive for us to depend. So it's very difficult for us to predict where our legal expenses will be, particularly when it relates to having to manage ongoing or new litigation or managing ongoing or new regulatory inquiries, et cetera.

That being said, our law department is focused on looking for ways to better manage the expenses, do more of an in-house, if that's at all possible. We're seeking, as we have been from all of our vendors, lower rates wherever it's feasible. So we're focused on managing them as best we can, but we can't really control or predict in many cases where those will go.

On the CapEx spend, just that sort of hit a higher level now. Is that normalizing around this $20 million a quarter and what's that going to and what do you think a normalized level is?

I think some of that, Fred, and without giving specific guidance is from a -- probably a little bit elevated given the startup of some of the technology stuff in-house and getting some of our own equipment set up and things like that. So, that's what drove the impact there.

Okay, do you have any sense of what a normalized level of CapEx for the business is right now?

It's by no means a run rate, but we are not going to give specific guidance on that.

Okay. And then just lastly, how many shares did you buyback in the quarter and what's the -- can you continue to do the buyback with the term loan amendment or what's the status there as regard to repurchase?

So, as a result -- we had a plan put in place back in November that carried into the new year and in January, we bought back 990,000 shares for $5.8 million and that ended in the end of January or early February. We are allowed to do share repurchases up to a cap or we have a repurchase basket under the term loan. I think it's $20 million or $25 million in roughly equal amount in potentially for high yield bond repurchases, after which we'd have to pay down the term loan further.

Okay. So, you bought back a million shares or around a million shares at close to $6 but you haven't done anything since. Was there anything stopping you from buying back stock down here below [two and three]?

No, as long as we remain within the boundaries of the amendment that took place at the end of the quarter.

Do you expect you'll continue to repurchase shares?

As I commented earlier, we'll evaluate all alternatives, but we're not commenting right now on whether we will or won't repurchase shares. As I mentioned, it's critically important for us to think out in the future about the maturity of the term loan, the maturity of the corporate debt, to think about maintaining liquidity for just our ongoing business to make sure if there is swings in advances or other things, we have adequate liquidity to deal with that. So, while I'm not going to give guidance on what we're doing and we evaluate things periodically, those are higher focuses of ours right now than share repurchase.

Ladies and gentlemen, that concludes Ocwen Financial's First Quarter 2016 Earnings Call. Thank you for attending. You may all disconnect.

Thank you everybody.

Thank you.