Onity Group Inc (ONIT) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Ocwen Financial's second-quarter 2016 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. And now I'll turn the conference over to your host, Stephen Swett. Please begin.

Good afternoon, and thank you for joining us today for Ocwen's second-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 Presentations' link.

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 Law. 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 different degrees 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 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, adjusted pretax income, 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 these 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, Ocwen's first-quarter 2016 Form 10-Q, and once filed, Ocwen's second-quarter 2016 Form 10-Q.

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 evening, and thank you for joining us today. Let me get right to it. First off, Ocwen continues to be the best servicer in the industry at helping struggling homeowners, and we are the best by a wide margin.

Please take a look at page 5 of the presentation. Ocwen is responsible for 49% more HAMP modifications than the next highest servicer, and we are responsible for three times more HAMP principal reduction modifications than the next best servicer. In fact, we've completed almost as many principal reductions' mods as the rest of the industry combined.

As we have said in the past, a borrower who has their loan serviced by Ocwen has a much better chance of avoiding foreclosure than if their loan was serviced by any other company. HAMP is a great program put in place by the President of the United States back in 2009 to help struggling families. We are proud to be such a significant part of the program and more importantly, the overall housing recovery.

And we are getting even better. In the second quarter we helped almost 20,000 struggling families obtain a loan modification and avoid foreclosure. But what is really amazing is that this was a 19% increase in families helped over the first quarter. In the last six months alone we have helped over 36,000 households.

We also continue to hold successful borrower outreach events alongside our nonprofit partners such as NAACP and NID housing counseling agency in California. These events take tremendous planning and resources, but they are well worth the effort. I suggest you go to ocwencares.com to find out more.

The Ocwen team is and should be proud. The news gets even better. Not only are we helping more families than other servicers, we are continuing to deliver best-in-class results to RMBS investors. As Moody's Investor Services said in a June 29 publication, quote-unquote, Among the servicers we assess, Ocwen continues to have the best total cure and cash flowing metrics. These are the metrics Moody's uses to measure servicers' overall loss mitigation performance. Again, not one of the best, the very best.

As a Company we continue to make progress in resolving our legacy issues. But there is more work to be done. During the second quarter we resolved in principal the two Fisher litigation cases for $30 million. We spent over $44 million defending these cases, including $23 million just this year. Assuming the settlement is finalized as we anticipate, this legal spend is now largely behind us. In addition, and as we expected, the long-awaited Duff & Phelps report finally came out and found that the 2015 RMBS investor allegations it reviewed were baseless.

We are also working to resolve other important matters. Included in our Q2 results is a $15 million reserve related to discussions with the California Department of Business Oversight to resolve our differences and terminate the existing consent order and related monitor. While there is no guarantee we will be able to settle, we are actively trying. We still have a lot of work to do with all of our regulators and we are focused on eventually returning to a more normal state.

Next, market conditions for servicers, especially non-bank servicers, remains challenging. Rates continue to go down, negatively impacting MSR values. Regulatory and monitor costs especially for us remain high. All of this and more impacted our Q2 results.

But there are some bright spots. Our revenue was up quarter over quarter for the first time in a long time. Interest expense was down. Even though operating expenses were up, this was largely due to the Fisher settlements, the regulatory settlement reserve, and increased spending on lending, new initiatives, and on our servicing technology.

As you will have seen in our press release, we actually would have had an operating pretax profit of $2.5 million if you strip out the large settlement and associated legal defense costs, the regulatory settlement reserve, interest rate driven MSR impact, monitored expenses, and our final $4.3 million payment to New Residential Corp related to last year's S&P downgrade. I realize this represents a lot of different adjustments, but the point is if we can get the legacy items behind us and eventually move beyond the third-party monitor costs, there appears to be a path back to profitability.

This is further highlighted if you look at the trend dating back to last year, adjusting for similar items in those periods. This is laid out on slide 36 of the presentation deck. Here you can see the regression in adjusted pretax income in the second half of last year primarily driven by the rapid revenue decline from the asset sales and then the lag in reducing expenses, and the subsequent improvement in recent periods as we continue our efforts to return the Company to profitability. This further reinforces the view that as the Company puts these legacy matters behind us we believe we can deliver positive earnings again.

Getting back to the second quarter, other highlights include the Servicing segment's pretax loss was only $14.7 million and down $53.6 million from the first quarter. Origination volumes were up 35% and pretax income went from $2 million in the first quarter to $7.5 million in the second quarter.

Our Automotive Capital Services initiative more than doubled its outstanding receivables and is gaining more traction as it expands nationwide. And we continue to have substantial value estimated at just under $500 million that is not reflected on our balance sheet. I recommend you focus on page 9 of the presentation to better understand its value and some of the assumptions used.

Let me close with where we are headed. Liquidity and capital are both precious, and we are focused on maintaining adequate levels of both. We have no current update on the status of our S&P servicer ranking, but we remain hopeful that an upgrade is possible given the outstanding servicing performance I highlighted earlier, and the upgrade we have received from [Fitch] earlier this year.

We remain focused on compliance, risk management, and service excellence. We are striving to regain approvals to be able to acquire MSRs again. We want to resolve our remaining legacy, regulatory, and legal concerns.

We intend to continue reducing costs while not jeopardizing compliance or service. We intend to continue to help homeowners who are struggling or who are eligible for a better mortgage product. We intend to continue to grow and improve the profitability of our lending business, and we intend to continue to invest in technology and our new initiatives such as ACS.

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

Thank you, Ron. In my comments today I will focus on a few key themes from the quarter: growth, costs, and liquidity, and let you review the traditional slides on your own. You'll note we've included the costs' slides introduced last quarter as well as the usual liquidity and MSR evaluation pages we typically provide.

From a growth perspective, our revenue of $373 million was an increase of 13% from the prior quarter and was the first sequential increase in quarterly revenue for Ocwen since the first quarter of 2015. Further, revenue increased across all of our major segments with servicing revenue up 6%, lending revenue up 52%, and revenue from our new initiatives increasing by $12 million. For a Company that's been facing pressures from declining revenues for the last 18 months this is a positive development.

In our servicing business we were able to perform almost 11,000 HAMP modifications of which over 4,100 were part of the new streamlined program. This is a US Treasury program consistent with prior programs, only it contains some simplifications to provide additional support for borrowers in need.

The impact of this was to bring in an additional $15 million of revenue for the Company while providing meaningful benefit to homeowners in distress. We also expect to see benefit from this program in the second half of the year, in particular the third quarter. We currently have over 9,300 additional borrowers in varying stages of modification completion as of July 25.

We also saw significant growth in our mortgage lending businesses. Our lending segment delivered revenues of $35 million, up over 50% from the prior quarter. This was driven by higher volumes in both the forward and reverse businesses, and we are pleased with the growth year.

We also continue to invest, particularly in forward originations. From a growth standpoint the forward business added 104 employees in the quarter, the majority of which are focused on sales and operations to help drive future growth.

From a new business perspective we are pleased with the trajectory of our Automotive Capital Services business. You can see the stats on the slide deck, but the business basically doubled in size quarter over quarter, and we are continuing on a path to roll out to 52 markets and 34 states by the end of the year. The customer feedback so far has been positive and our product has been well received.

We also in the process of establishing a warehouse line for this business, which will be a key next step to enable us to continue this growth trajectory. We anticipate securing that financing some time in the second half of the year.

Moving on to discuss expenses, total operating expenses were $385 million, an increase of 17% from the first quarter. This was driven by the following dynamics. A $65 million increase in servicing and corporate costs, a $19 million increase in lending and new initiative spending, and a $28 million decrease in uncontrollable costs.

Beginning with servicing and corporate costs, as we have stated in the past, we are actively working to reduce our servicing and corporate costs to align more efficiently with our servicing portfolio and provide a base from which to restore the Company to profitability. The results this quarter were mixed.

Compensation and benefit costs were unchanged from the first quarter; so were other expenses. However, we saw increases in the other three primary cost categories.

From a headcount perspective, total headcount was down both onshore and offshore, and the second quarter did include about $1 million in severance. I would note that in the past nine months we've eliminated about 400 onshore positions, and we announced in June the reduction of about 120 onshore positions. We ended up transitioning about a third of the employees to new roles in our lending business, saving on severance and filling key open jobs. Of the remaining population, about half left the business late in Q2, and the other half are expected to depart in the third quarter.

Amortization and servicing and origination costs were $76 million in the second quarter, up $7 million or about 10% from the first quarter. On page 18 you can see that higher costs were driven by higher MSR fair-value changes due to the higher CPR, and June to May losses were up related to a HUD-note sale, which should materially reduce future servicing losses on these highly delinquent loans. We provide more detail on this program on slide 32 of the presentation.

On slide 19 we provide details on our technology spend. Technology costs were up $6 million versus the prior quarter. The increase was primarily driven by a $5 million expense for customization and software upgrade costs which we don't expect will be a recurring charge.

Professional service costs were $92 million in the second quarter, up $51 million from the first quarter. Please see page 20 for details. This increase was driven by the $45 million in legal and regulatory reserves Ron already mentioned.

In addition to these items, we also saw a modest increase in general legal fees largely offset by a reduction in expenses related to third-party consultants and advisors. As Ron mentioned, we spent over $44 million defending the Fisher cases with $23 million of that in the first half of 2016. That expense is now largely behind us.

From a lending and new initiative spending perspective, expenses increased as expected. As we have said on prior calls, we are incurring additional expenses to grow these businesses and we expect to show higher quarterly expenses through 2016. Versus the first quarter, our lending business was up about $7 million and our new initiatives were up $12 million.

Finally, the third category is our uncontrollable costs including fair-value adjustments, impairments, and monitor expenses. While we did benefit from a significant decrease in these costs in the second quarter, they were still significant and we have little ability to impact these items.

Turning to liquidity. Cash flow from operating activities in the second quarter was $31 million. On the financing side we paid down our senior-secured term loan by $11 million in the second quarter, and by another $26 million in July, resulting in a current balance of $343 million.

During the quarter we also extended the maturity dates for our OFAF servicing advance facility, and two warehouse lines for one year into the second quarter of 2017. We continue to believe that we are maintaining adequate levels of liquidity and we are actively working to refinance our second-half 2016 maturities.

In summary, we remain focused on returning the Company to profitability. We are making steady progress, and the success we've had thus far allowed us to report the smallest loss for Ocwen in the last three quarters, and the first quarter-over-quarter increase in revenue since the first quarter of 2015. As we move forward we will continue to look for additional opportunities to drive revenue and reduce our costs with the dual goals of providing world-class customer service while restoring the Company to bottom-line profitability and eventually earnings growth.

I would like to close by sharing a quote from a paper published by LL Funds, an independent firm that last month provided an update to their 2015 white paper called In Defense of Ocwen. Their update concluded with the following statement, and I quote, quote-unquote, In this update we compared the servicing strategies of SPS and Ocwen, and compared to SPS, Ocwen's modification and liquidation strategy resulted in more homeowners retaining their homes, and at the same time also resulted in lower overall losses to the associated mortgage trusts.

They then went on to say, and I quote, quote-unquote, We can't find another servicer that does as good of a job at servicing troubled borrowers as Ocwen. This independent feedback in conjunction with the similar positive remarks from Moody's that Ron previously mentioned is a tremendous validation of the efforts of over 10,000 Ocwen employees, and is something we are all deeply proud of as we continue to improve and evolve our Company.

That completes our prepared remarks. Tyrone, can you please open the call to questions?

(Operator Instructions)

Bose George, KBW.

It's actually Chas Tyson on for Bose. Can you give us a little more color on the increase in adjusted operating expenses quarter over quarter given that uncontrollable costs were down by $28 million? And where you stand versus your cost initiatives at this point?

Sure. We laid out, Chas, in a lot of detail kind of the explanation on cost consistent with last quarter. I think the goals remain the same. I think we've had a lot of progress in the first quarter. This quarter we had a combination of some of the fair value marks.

We also entered into a HUD note sale that added some additional servicer losses and had some offsets and amortization that kind of muddied the story a little bit. And I think as we talked about, the increase in legal spending was certainly significant as the Company prepared to potentially go to trial on those Fisher cases.

So I think that's a lot of the story. We remain committed to continuing to address the cost structure. We talked about some of the actions we announced at the end of June relative to the US workforce, and we continue to look for further opportunities there.

Yes, on the headcount reduction that you mentioned, is there a way for us to think about the dollar amount that might come out in Q3 and beyond given to those employees who are leaving in June of Q3?

Yes, I don't think -- we're not disclosing that, plus you have to keep in mind, as Michael said, in some areas like our new initiatives and Lending we are also adding FTE, so we don't have a projection on where compensation costs are going. But in our Servicing business in particular we continue to take steps to reduce staff as the portfolio continues to run down as we continue to automate certain functions and find other areas for efficiency, but we don't have a projection for you.

Okay. Then you mentioned the potential for a settlement possibly with California. Of the $28 million in monitor costs this quarter, is there a way to think about what's due to California, what's due to New York?

We're not going to break that out, although keep in mind there are three monitors. There's the national monitor, there's New York, and there is California. As you noted the amount was still significant in the quarter, but it was down a little bit from the first quarter. So it is trending in a better direction, but at this point we are not breaking those numbers out.

Okay, then just last one. I think you guys had the contribution for the overall new initiatives. But do you have the contribution for just the automotive initiative in the quarter?

Revenue?

So from a revenue standpoint it is not a big driver, and the Company lost $1 million maybe a little bit more in the quarter. So it is not a significant top-line contributor at this point.

Just to remind you the way the business works is it -- there's interest income from the loans that it is putting out. I think in the past we've talked about how the interest rates on those loans is 9% plus. There's also significant fees that the dealers pay as cars come in and off the credit line, so as time goes on more and more fee revenue will be generated as well. But as Michael said, the numbers are still relatively small on the top-line side. The business doesn't have a lot of employees, but it is running right now at a small loss.

Okay, thanks very much.

Kevin Barker, Piper Jaffray.

Thank you.

This quarter you pointed out $15 million of additional fee revenue from the streamlined HAMP. Would you expect a similar result in the third quarter and fourth quarter?

As Michael said, we expect the third quarter to be strong as well, and then it will start to probably trail off after that. Not completely gone, but it will start to trail off. So we think the third quarter will be strong. We're not going to say exactly what that means relative to the second quarter, but the third quarter is where we will see the strongest results in the rest of the year.

That's a function of reaching out to someone immediately, being able to take advantage of the program, but you cannot keep doing it, is that right? But HAMP (multiple speakers).

There's opportunities -- there are opportunities to resolicit borrowers and continue. But a lot of the impact comes from the rollout of this new program by the Treasury Department, the initial solicitation to the eligible customers.

And now in this quarter we are starting to see -- in the second quarter we started to see customers finally achieving the three payments, actually completing the full modification process, which is really what triggers them starting to move into, for us, a revenue generating capacity. And so there's still a lot in the pipeline, as Michael said, but as the year goes on that will start to wind down.

Was there any additional expense with administering that program, or was it truly fees?

The number that we reported is the topline. In the first half of the year there were, relatively speaking, significant mailing related costs, for example, and other things that you have to do to get the solicitations out.

That's probably in the $3 million or so range, maybe a little bit higher. So that was a partial offset to the revenue that came in in the first half of year. But most of those expenses are largely behind us. To the extent that we do re-solicitations, there will be some additional costs, but the big spend has already occurred in the first half of the year.

Okay, and in relation to the California monitor you mentioned that you were in talks. And I didn't quite get everything you mentioned there. But could you just give us a little further detail at what point you feel you are at with California in regards to those talks? Seems like you put up a regulatory settlement; you obviously cannot state whether that's related to California or not, but could you just give us an idea of how far along you feel you are within those talks?

Kevin, to be clear, I think we are saying that the $15 million reserve that we put up in the second quarter is related to discussions that we are having with the California Department of Business Oversight. At this point, though, there is no way for us to project if in fact the settlement will occur and what that settlement will look like exactly.

But there are discussions going on and discussions to the point where under GAAP it made sense for us to record a $15 million reserve. And we are really not going into any more detail on that at this point in time.

Okay. And I assume is that your only reserve related to that specific issue, is that right?

Yes.

Okay. Then within the Fisher settlement where you have $30 million and you had $23 million defending the case in the first half of the year, would you expect that entire $23 million to go away in the next quarter, or is there other cases where you'll have legal spend, as well?

I think, Kevin, that the $23 million -- there was $13 million I think in the first quarter, $10 million in the second quarter. The settlement actually isn't official yet, so there will be some additional spend in the third quarter; we don't expect it to be of the same magnitude.

And I would say the docket of ongoing legal matters has been relatively consistent this year, so we would expect to see some decline in that legal spending accordingly. However, things can change, and we will see what happens. But that's our expectation today.

But that was our most significant case and where most significant legal spend was, and as Michael said and as we said in the prepared remarks, that spend is largely behind us now. There is some additional legal work that will need to be done to just bring it to final closure, and we hope that that occurs so there will be some modest spent on that particular -- those cases in the third quarter, but nothing like what we saw in the first half of the year, or in the latter part of last year.

Okay. Then on the other expense -- other revenue line, it went up $20 million this quarter in various segments including Servicing, Lending, and Corporate. I believe you cite $12 million of favorable NRZ interest expense. Could you just talk about the moving parts that are happening there and your expectations going forward on the other income line?

Yes, so we've actually got a page already in the back on other income and expense just so folks can see the different drivers of that category. As simple as it can be, the way the NRZ interest expense works generally is to the extent there's a change in the fair value of the liability, in this case it came down in the quarter, your payment is basically a function of UTB times servicing fee. To the extent you have a fair value decrease that actually wouldn't show up as amortization of the liability.

And then the offset is basically a plug in its interest expense. So we saw decline in fair value of that liability in the quarter, which means that you had higher amortization of that liability and less interest expense period to period. And that represents some other smaller pieces around the changing advance balance and other things. But the biggest driver of that is associated with the fair value of the liability change.

Page 37 is where some additional details on that line item.

Okay. Then one last question. Your tangible net worth to total capitalized Servicing portfolio by my estimates is roughly 28 basis points. The FHFA requires a minimum of 25 basis points. Do you have any plans to address that via Servicing sales or some other maneuvers within the balance sheet in order to maintain the 25 basis points requirement?

So Kevin, I think the calculation is actually done at the license OLS entity. I think you are running the calc on the consolidated OFC basis. So without getting into a lot of detail, you have a much higher equity value and tangible net worth in Ocwen Loan Servicing. And then if you think about the unconsolidated OFC entity, that would be the entity where you had a lot of the buybacks that have taken place historically.

So there's a larger value in OLS, a potentially offsetting value in unconsolidated OFC that would get you to the $650 million of consolidated equity that I think you're probably running the calc off of. So we don't feel that we are in any jeopardy relative to any of the tangible net worth requirements from any of the federal or state regulators or any of our lenders either.

What's that number at today at the segment level? At the subsidiary level?

It is nothing we've communicated, but it's north of $1 billion.

Okay. Thank you for taking my questions.

Sure.

Fred Small, Compass Point.

Hey, how are you? Thanks for taking my questions.

Following up on the other revenue line, the change in the fair value of the liability there, that's related to the rights to MSRs that NRZ now owns?

That's correct.

So if they mark down their rights to MSRs, or MSRs then that drives through revenue increase on that line for you?

Yes, so it is related to the interest expense, and we determine the change in the liability independent of the counterparty using third party valuation analysis that's provided -- that we run on those MSRs. That's what drives the change in total other income and expense.

Okay, so a change in the liability for you isn't necessarily related to how they mark the rights to the MSR?

Yes, I cannot speak to their process, but we had a third party valuation updated every quarter that assesses the fair value of our liability. In the past when it was a different party that activity was more closely coordinated with the two separate public companies, and we each have our own processes.

Okay, got it. And just to make sure -- see if I'm looking at part of this right. On slide 38 the $8.4 million, that's what you are saying shows up as lower interest expense?

That's correct.

Got it. And where does it break out the specific impact of revenue from that?

That doesn't impact revenue. Maybe I'm a little confused.

There's no impact to other revenue on the -- what you were saying before?

No. It shows up in the total other income and expense net line.

Okay, I got it. So just on the other revenue piece, what drove -- is that at a sustainable run rate at $38 million, or were there different components that drove that broken out somewhere?

Some of that other revenue is being driven by some new initiatives which they will be a little bit of disclosure about in the 10-Q that comes out. So maybe -- we expect to file that, so it'll be available tomorrow morning. Maybe after you've had a chance to look at that we can discuss that further.

The other thing I would say though independent of that, Fred, is you did see a pickup in the Lending segment and some of the other revenue categories. I think that business saw higher fee income and also had some favorable mark-to-market activity given some of the things happening, particularly in the reverse market. And so some of that is true run rate improvement.

It is mark-to-market, but -- sorry. So of the $38 million how much do you think is mark-to-market or related to reverse, or we should not think about it as growth of new initiatives?

The growth in new initiatives that Ron's talking about is $12 million.

Okay. Got it. And how much was that in the first quarter you think?

It was zero.

Okay, got it. Then somewhere in the presentation they was a note about the UPB, the $3.3 billion of UPB non and re-performing that you sold. Should we expect to see more of that?

Not necessarily. That related to a transaction where one of the GSEs wanted to resecuritize loans that had been modified. I think the way it works is they have to pull those out of securities and put them on their balance sheet, so they were looking to resecuritize those. And as part of that they were looking to consolidate Servicing into a smaller group of servicers.

And so we agreed to sell the mortgage Servicing rights effectively to the GSE to help them facilitate that transaction. So while we have the potential ability to sell additional Servicing rights, we are not saying now that we are going to or not going to. And that particular transaction was somewhat of a special circumstance where we wanted to work with our business partner to assist them in something they were trying to accomplish.

It worked out well for us. We got good value. We were able to use the proceeds to pay down the term loan, so it made sense all the way around.

Okay, great. And you said that was all -- it broke off for a second -- you said that was all GSE related, right?

Yes.

That was all, okay, got it. Then last one.

On the different MSR assumptions, if I look at slide 29 -- if I just think about maybe the first three steps, but would there be a difference between book value, fair value and internal assumptions, or fair value and internal assumptions, what sort of profitability do you assume there on the Servicing?

Or is there a way to think about the incremental improvement that drives that value? Because my overall question is how you think about valuing the MSR relative, or do you, relative to Ocwen's ongoing profitability as a servicer?

I guess one thing, and this has come up in the past, Fred. We follow the traditional valuation, the MSR valuation models and the standard that's used by the industry relative to looking at the economics here.

So it includes things like advanced financing cost. It includes your variable Servicing cost, it includes some of the -- I'd say maybe a small fraction of some of the risk and compliance costs for the industry. And it isn't meant -- necessarily meant to reflect Ocwen's overall risk, compliance, regulatory infrastructure, and some of the changes and buildout we've made over recent years.

So it's really more just a direct asset valuation view with some of those initial costs as the industry looks at it. So I don't know that that necessarily helps, but that's really what's in these numbers. So I don't know how I can give you better clarity.

(Multiple speakers). At the end of the day the value there is going to depend on how much money Ocwen can make servicing it. Is that the right way to think about it?

What I would say is this is a big -- this is your direct cost revenue less direct expenses as the industry thinks about it. And the big adjustment from fair value to internal assumptions is going to be based on our cost structure and our utilization of offshore resources and being able to service loans more cost effectively than some of our competitors.

So that persists, that's real even though some of those costs have drifted up over time, as they have for the rest of the industry, that's going to be the starting point for the analysis. And then you'd have to make an assessment of some of our corporate overhead and how you think that can change over time to ultimately assess our profitability.

Great, thanks a lot.

Thank you.

Ina Lee, Nomura.

It is actually Indroneel Chatterjee speaking for Ina Lee. She's unable to take this call.

I would like to focus on slide 9 please. The deferred servicing fees, are they captured in the NRZ subservicing contract? Because on your last Q you mentioned about 400 million bucks worth of deferred servicing fees, which I know mostly accrued to you through the waterfalls. Is that captured on this page somewhere?

No, that is not captured on this slide. The deferred servicing fees that we are referencing here relate to the non-agency portfolio that we own outright that's not part of the NRZ portfolio.

So as we look at this balance sheet, there are substantial of -- pockets of value that are not recognized in your GAAP financials. Why wouldn't you make the reference to that asset on the slide?

To some degree, Indroneel, you do have -- the NRZ subservicing contract and the value that we are picking up there reflects some of that, so that might be -- that's probably part of it.

I recognize where you are going and that there's a much larger deferred servicing asset on that particular portfolio. And much of that over time is going to accrue to the subservicer, and in this case us. But I think that where we've try to reflect that is primarily by providing this NRZ fair value estimate on this page

The way to think about it, Indroneel, is we've taken the base value using as fair-value would be calculated from a third-party valuation firm for those -- for that subservicing value. And you can see the expansion of that $277 million on page 29 where you reflect those -- that core subservicing in the Ocwen cost structure, updating some assumptions around deferred servicing fees and discount rate.

And you can see that the value of that subservicing could be well beyond that $277 million. But we thought just to give people a general sense of the concept, it was probably appropriate just to use a fair value concept consistent with how we are showing the MSR valuation difference on our own agency asset.

But if I look at page 37 of your 10-Q from the first quarter, you pulled in $160 million on the NRZ deals, and you sent back about $77 million to NRZ. So that's $84 million a quarter. I presume there are servicing fees associated with that. But even if the life of that book is four or five years, that itself is worth more than [$3 million or $4 million].

This slide underestimates the value of the deferred servicing fees. Because you wouldn't be recognizing deferred servicing fees on that page, would you? You don't recognize them as fees on your income statement until they're actually collected, or is that actually a non-cash item?

We only recognize it when they're collected.

So am I clear in stating that this page understates the value of your balance sheet by $3 million to $4 million? And then if I look at the master sales supplements for the HLSS deals I can figure out the waterfall of how that money goes from you to NRZ and what's retained by you, right?

Yes. The right mechanism would be through the waterfall, that's correct.

All right. Moving on.

On the short-term term loan you guys got $26 million of cash from sales that have closed, but the cash hadn't accrued, so is there anything left? I should just add the numbers up, but forgive my laziness, are there any asset sales that have closed whose proceeds are yet to accrue to the balance sheet to pay down the short-term term loan?

From the announced asset sale last year they all had their own different structures. We have about $56 million or so of receivables left on those asset sales. We've got about $15 million, $16 million reserve against some of that, and so we've got a net kind of receivable of, I think, $36 million remaining to collect on that.

It could be the full amount, but we were conservative at the time of the deals, waiting to see how some of the process around recoveries on advances and the like would go. We expect the majority of that to come in in the second half of this year.

So I would imagine the near term loan would be down to about $300 million, because you have a 3% fee that hits that term loan balance as of March 31, 2017, right?

The fee is correct. Depending on -- obviously if we recover those proceeds we'll turn around and pay them down to the term loan. So it is going to be dependent on those collections. But that's right.

So if I did the math right, you're going to have $300 million of bank debt at [350 a buck]. That's [750] of debt over here, and you're talking about $4 a share of additional off balance sheet assets. Assuming all the disingenuous shorts in the world as well as all the monitors want to keep going at the Apple, why are you not buying back stock right now? I cannot imagine spending 400 million bucks in additional fees or fines over the next two or three years.

Your bonds traded down to [$65 or $64]. We are market makers in these, and given the RP capacity you have and the fact that the stock is already trading at $2.10 in the aftermarket -- I'd imagine you are being cautious because there's so many uncertainties with S&P and NRZ, but you and I both know that NRZ is not going to pull the deal because it is too expensive to service this elsewhere, so why not buy stock or bonds before the bonds pop in your face?

Indroneel, as I said in my prepared remarks, capital and liquidity are precious to us right now. We still have some legacy issues that we are working through.

You saw for example the settlement on the Fisher cases, which we need to preserve for things like that. So I get your point, but we are being -- we want to manage this Company soundly and capital and liquidity is precious.

And again, as we've said in the past, we don't make forward-looking statements as to whether we are or are not going to repurchase debt or stock, and we are not making any here. But we are saying that preserving capital is a top priority for us.

I think this is an amazing call and I really, really thank you for giving us the details. I would hope that you could provide another 8-K in the short -- well, not the distant future -- that would highlight the off balance sheet assets in more details. Because I think there is a lot of investors who aren't necessarily familiar with how (inaudible) services work.

And if in particular you could focus on the call right to the deferred servicing fees I think a lot of shorts will realize that there's a tremendous pocket of value in this balance sheet that could be offsetting any fees that could hit this Company in future. I cannot imagine that California, NYDFS, and the National Mortgage Settlement [Monitor] will keep on having at it for the next two or three years continuously, but even then that would really help. But thank you for your time.

Thank you, Indroneel.

Thank you. And this ends the Q&A portion. Thank you all for attending the Ocwen Financial Corporation's second-quarter earnings call. This concludes the conference. You may now disconnect. Have a wonderful day.