Onity Group Inc (ONIT) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Ocwen Financial Third Quarter 2016 Earnings Conference. At this time, all participants are in a listen-only mode to prevent background noise. (Operator Instructions) We will have a question-and-answer session later and the instructions will be given at that time.

Now, I would like to welcome and turn the call to Mr. Stephen Swett. Please go ahead.

Good afternoon. Thank you for joining us today for Ocwen's third 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 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 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 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, illustrative servicing cash flow, and adjusted pre-tax 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 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; Ocwen's second quarter 2016 Form 10-Q; and once filed, Ocwen's third quarter 2016 Form 10-Q.

Joining me on the call today is Ron Faris, President and Chief Executive Officer; Tom Gilman, President of Automotive Capital Services; and Michael Bourque, Chief Financial Officer.

Now, I will turn the call over to Ron.

Good evening, and thank you for joining us today. Last quarter, I highlighted our superior servicing results for both homeowners and RMBS investors, our progress in resolving our legacy issues, our path to return to profitability, and our strategy for future growth. I intend to highlight much of the same today. However, I would like to start with our path to return to profitability.

Following last quarter's earnings call, I began to believe that we had a chance at achieving a quarterly profit, not next year, but in the third quarter. So, I challenged the entire Ocwen team to respond. From our press release earlier today, you already know the result. The team did respond and we achieved GAAP net income of $9.5 million, our first profit since the second quarter of 2015, and a $97 million improvement over the second quarter of this year.

Frankly, when I made the challenge to the team, I had hoped that we would get some help from a rise in interest rates that would have helped us recover some of the MSR impairment taken earlier this year. We didn't get much help from rates and we continued to incur some large legacy expenses, yet we still met the challenge.

Included in the third quarter results was an additional $10 million reserve for the potential regulatory settlement with California, which I will discuss further in a few minutes. If you adjust for the additional $10 million California reserve, third-party monitor spend of $15, new remediation and legal settlement reserves of $6 million, and a handful of other normalizing items all of which are summarized on pages 40 and 42 of our investor presentation; our illustrative adjusted pre-tax profit would have been $28 million, up $25 million or over eight times higher than Q2.

I'm also extremely excited to say that the Servicing segment reported a pre-tax profit of $33.2 million for the quarter, which is a $47.9 million improvement over the prior quarter's loss of $14.7 million. Included in the Q3 profit was $12 million related to gains associated with the execution of various call rates. Our capital markets and servicing teams did a great job executing these call rights and achieving this positive result.

Servicing revenue was strong due to our superior borrower assistance results and operating cost continued to decline. Going forward, we must closely manage our servicing corporate costs, maintain quality service, improve efficiencies, and better integrate with our lending business to improve our recapture rate. Our inability to grow over the past 30 months due to our regulatory constraints has resulted in a significant reduction in the size of our servicing portfolio and revenue. However, we have used that time to continue to improve our customer service, community relations, compliance, risk management, technology and processes. It has made us an even better servicer. This quarter's results for both our customers and shareholders help to demonstrate that.

Our lending segment, on the other hand, had a disappointing financial quarter, delivering only $3.6 million of pre-tax income, despite origination volumes rising 8%. But, we are continuing to make progress in rolling out new and improved origination technology which should help enhance results in the future. Bottom line, I believe for our Company to be successful long term, we will need a far better contribution from our lending business in the future.

Let me spend a minute explaining why I believe we can achieve better lending results in the future. Our existing servicing portfolio provides us a tremendous opportunity that we must take advantage of. We want to grow our mortgage originations, so we can better serve and retain our customers. At our current capacity, we're reaching only about 25% of our customers that can benefit from a lower interest rate or lower payments. We've intentionally ramped up slowly and carefully to maintain quality in an environment with intense regulatory scrutiny on the entire mortgage market.

The mortgage originations industry is very competitive. And to win, we need a competitive advantage. We believe we can gain that advantage through better technology. We're now about halfway through a two and half year project to implement a new proprietary loan origination system that will automate significant portions of the verification in underwriting process. It will implement systematic controls for items that we check manually today. Best of all, it should easily plug into third-party capabilities, including some of the more promising Fintech technologies.

We implemented a similar technology and approach in our reverse mortgage origination business a few years ago and dropped our operating cost by over 50%. We simultaneously improved our quality, cycle time and service. That is why we are one of the leading reverse mortgage originators in the country. We believe the key differentiator for all future mortgage originations is technology and we are making investments now to build this necessary foundation.

Automotive Capital Services or ACS continued to make progress, growing outstanding receivables by 66% over June 30, 2016. As we have briefly discussed in the past, we believe we have discovered a great opportunity in an underserved market. We are currently providing inventory financing to used-car dealers at an interest rate of 9% to 9.5% and we are earning a similar amount in fees. Later on in this presentation, Tom Gilman, President of ACS will discuss in more detail, our Auto Floorplan lending business.

Turning back to the total Company results, compared to the second quarter, Ocwen revenue was down $13.6 million or 3.8%, driven by UPB runoff in our servicing segment and lower margins in our mortgage origination business. Reported operating expenses were down a $113.3 million or 29% compared to the prior quarter. And adjusted operating expenses, as shown on slide 41 were down $57 million or 19%, highlighting the progress we have made with our cost improvement initiative.

As outlined on page eight, we continue to believe that we have substantial value, estimated at $463 million that is not currently reflected in our balance sheet. Our call rights gains this quarter were a great example of one of these items. While we have made great progress and reported a profit this quarter, I do want to point out that we will continue to face certain significant financial challenges and risks in Q4 and next year, including the exploration of HAMP at year-end, the continued run-off of the servicing portfolio, ongoing third-party monitor costs, uncertainty around regulatory settlements and actions, and known and unknown legal exposure.

Next, I would like to report on our ongoing progress in resolving some of the legacy issues, which have hampered our ability to grow and return to sustainable profitability. If you recall, in Q2, we agreed to settle the Fisher DOJ cases for $30 million. I want to note that we did incur an additional $2 million of legal expenses in Q3 related to these cases. The $30 million amount has not yet been paid, and the parties are working to finalize the settlement documents. We also received, last quarter, a positive report from Duff & Phelps, and a separate, more recent, positive report from Murray Analytics, which founded certain 2015 RMBS investor allegations they reviewed were also baseless.

In addition, this month we reached an agreement in principle to settle the previously disclosed consolidated shareholder derivative action from 2014. We believe this resolution will be covered in full by our applicable insurance coverage. This quarter, we received the long awaited upgrade to our servicer ranking from S&P to average.

We believe this upgrade eliminates a significant risk and any reasonable chance that New Residential could request the transfer away from us, for any of the related servicing rights it controls for effected servicing agreements come April 2017. We remain committed to providing new residential best-in-class servicing performance and we continue to work collaboratively with Michael Nierenberg and his team on various fronts to strengthen our partnership.

While we have not yet reached a settlement with the California Department of Business Oversight, which would, among other things, end the current consent order and associated third-party auditor. We believe we have made good progress since we last reported out to you. At this point, we believe the $25 million settlement reserve will be adequate although there is no final agreement and things could change. It is not appropriate for us to discuss any additional details at this time, but we would very much like to resolve this matter this year.

As for the New York Department of Financial Services, we are getting closer to requesting that their ban on us acquiring mortgage servicing rights on loan portfolios be lifted. We will be making this request after achieving over 170 specific benchmarks established by the New York Monitor in accordance with the 2014 consent order. We hope to make the request in the coming weeks.

I would note however, that even if we have the ability to acquire MSRs from a regulatory perspective, we would not necessarily expect to engage in significant transactions. Any future MSR acquisitions will have to take into consideration various factors, including but not limited to, our cost of incremental capital, the type of MSRs available, advance financing et cetera.

I would also like to note that our CFPB consumer complaint volumes continue to decline year-over-year. For the three month period of May to July, they declined at 28% and at a higher level than other mortgage companies. We continue working to resolve all of our remaining legacy issues. I would also note that notwithstanding our progress, we continue to invest in our compliance and risk management systems.

Next, I would like to briefly report on our continued superior servicing performance for both homeowners and RMBS Investors. We received some additional good news during the third quarter related to our performance under the US Treasury HAMP program through the second quarter of 2016. Ocwen, along with Chase, SPS and Well Fargo were assessed as needing only minor performance improvement, the best category. Nationstar and Citi received moderate improvement needed and Bank of America received substantial improvement needed.

Ocwen received three stars, the best rating on all primary compliance assessment metrics. Ocwen was the best or second best of all servicers in all secondary rating criteria established by the Treasury Department. Of the 7,811 streamline modifications completed by all servicers in Q2, Ocwen completed 4,112 or 53% of the total, industry-wide. Ocwen is responsible for 20% of all HAMP modifications completed live to-date. Ocwen has completed 52% more modifications than the next best servicer Wells Fargo and Ocwen has completed 48% of all HAMP principal reduction modifications done industrywide.

Without question, we had outperformed the rest of the industry under President Obama's Making Home Affordable Program. This is a great accomplishment and one that should be recognized. Overall, Ocwen helped more than 21,000 families through loan modifications in the third quarter, an increase in borrower systems over both the first and second quarters of this year, despite the run-off of our portfolio.

For the year, we have helped over 57,000 homeowners obtain a loan modification and retain their home. A large part of our success in helping families continues to be attributable to our partnerships with numerous non-profit housing counseling agencies across the country. In partnership with groups such as NID Housing Counseling and the NAACP, we've recently held very successful outreach events in Sacramento and San Bernardino, California along with an event in Des Moines, Washington.

We continue to work closely with our Community Advisory Council, which is made up of true leaders in housing counseling and housing advocacy. Having just met with the council in September, we are working together to try to ensure homeowners continue to receive the assistance, education and services they so desperately need as part of the homeownership process. Ocwen strives to be a leader in better serving consumers through partnerships with non-profits and government agencies.

As I've said before many times, without question, a homeowner who's loan is serviced by Ocwen has a much better chance of avoiding foreclosure than if their loan is serviced by any other company. Independent third-parties continue to recognize Ocwen's outstanding servicing performance. Earlier this year, Fitch upgraded our servicer rating. In our last call, I reported that Moody's had said that Ocwen continues to have the best total cure and cash-flowing metrics among all of the servicers they assess. This quarter, we saw S&P upgrade our servicer ranking. I hear from RMBS investors all the time how pleased they are with our performance. Indeed some have published analysis showing our superior performance that has and continues to benefit RMBS investors.

Moving forward, in terms of specific action items within our strategic business plan, we have the following key objectives; resolve our remaining legacy, regulatory and legal issues; improved regulatory relations and end the various monitorships on time; maintain adequate liquidity and a strong capital structure; further reduce and control operating costs while continuing to focus on compliance and risk management; complete our build-out of our mortgage-lending technology and then grow our lending business into a top originator; complete the nation-wide rollout of our Auto Floorplan lending business.

We believe Ocwen can eventually renew its growth even if at a more moderate pace than in the past and we do not believe we are a business in run-off. I also believe non-bank servicers such as Ocwen fill a much needed mortgage industry role that large banks generally cannot and do not want to provide. A profitable, healthy, effective Ocwen is critically important to the stability of the US housing market and for the non-agency RMBS market.

We have quality assets and our non-agency servicing portfolio has very little interest rate sensitivity. We also have substantial value that is not reflected on our balance sheet. However, to be profitable on a sustainable basis, we must get the remaining legacy issues behind us, we must become more efficient and we must resume growth. We seek to control our own destiny on the growth side by originating more loans and retaining our existing customers and mortgage servicing rights. We also seek to diversify through our commercial Automotive Floorplan lending business.

In a moment, I'm going to have Tom Gilman, spend a few minutes describing in more detail the business plan for Automotive Capital Services. I will then have Michael Bourque discuss the progress we've made on controlling our operating costs and maintaining adequate liquidity going forward. Before I do that, however, I would like to highlight the outstanding job our highly-qualified and diverse Board of Directors is doing.

Led by our Independent Chair Women, Phyllis Caldwell, the Board is actively involved in promoting a culture of compliance, diversity, risk management and service excellence. They are committed to carrying out our strategic business plan, and continually challenging management to do better. They are aligned with shareholders and all stakeholders to evolve Ocwen into a leader in mortgage and commercial auto finance, and more importantly, a model Company for others to aspire to. I'm honored to help carry out their vision.

With that, I would like to turn the call over to Tom Gilman. Tom is President of Automotive Capital Services and has over 30 years of industry experience. Before joining Ocwen in the fall of 2014, he served as President and CEO of TD Auto Finance, and before that as Chairman and CEO of Chrysler Financial. Tom?

Good afternoon, everyone. It's a pleasure to join the call today to describe for you the automotive lending platform that the team at ACS has been building for Ocwen. While still in our initial build out, ACS is seeing positive and significant progress towards its ultimate objectives. The concept of ACS came about through the identification of a niche within the auto lending environment. I had been independently studying the auto finance industry after having served as Chairman and CEO of Chrysler Financial as well as the President and CEO of Toronto-Dominion Bank's Auto Finance Group, as a result of the sale of Chrysler Financial to TD Bank.

I came to recognize the impact that the economy and other factors had on community banks, causing many to go out of business, almost 1600 of them in fact. These banks were primary source of financing for many independent used vehicle dealers. These used vehicle dealers relied on community banks to provide consumer retail installment financing for used vehicle customers, and they also relied on them for inventory financing.

Inventory financing, which is most commonly known as Floorplan Financing was not the cause of the problems at the community banks. Efficiently run floorplan financing businesses have been able to demonstrate strong performance in varying economic cycles with historically low actual losses. In 2009, on the day the day that Chrysler Corporation filed bankruptcy, Chrysler Financial had a multi-billion dollar portfolio of floorplan assets.

Within nine months, we had liquidated the entire portfolio and experienced a loss ratio of under 50 basis points. The lesson we learned from that performance, was that if you know what you're doing in the floorplan business, you can be very successful. Most of us have heard of the auto industry numbers that hit the headlines every month. There were 17.4 million vehicle sales in 2015, which represents the Seasonally Adjusted Annual Rate or SAAR. This describes unit sales of new light-duty cars and trucks predominantly through franchise dealers.

What many of us don't realize is that the used car market is twice the size of the new car market and independent used vehicle dealers represent almost 33% of the total used car sales in the US. New car dealers generally receive their floorplan financing through captive auto finance companies or from banks that provide the financing as a courtesy to the dealers that provide them large volumes of consumer retail instalment loans. Independent used vehicle dealers are different. Many of them lack access to a national finance company unaffiliated with a major national vehicle option.

Interestingly, according to the National Independent Automobile Dealers Association, of their 11,500 members, 61% finance their inventory with cash. There are only two major competitors in the used vehicle floorplan business and both are linked to large auction groups. Their annual originations, we believe, are about $1.7 billion each, representing about 40% market share of those independent dealers who use outside floorplan financing. This creates a significant opportunity for ACS.

Even more important is the fact that as a result of increased consumer leases over the past three years, in each year of 2016, 2017 and 2018, 500,000 off lease vehicles are projected to enter the used vehicle market, which we estimate will represent a $5 billion to $8 billion opportunity for inventory financing in each of those years. Ocwen executives and I saw this opportunity and that's why we join forces.

The first step after partnering with Ocwen was to build a team. Now fortunately, ACS has been able to hire a highly experienced team of auto industry executives to join me in developing ACS. Among those executives, our ACS has VP of Sales, VP of Credit, VP of Operations and ACS' General Counsel. Collectively we have just about a 150 years of experience in the automotive industry and in automotive financing.

Our next step was to create a product offering that was compelling to the independent dealers. Our initial market research indicated that many dealers had no real business relationship with our would-be competitors. In our prior experience, we knew that automotive lending is a relationship business. We believe that ACS' dealer relationship managers offer high quality advice and expert guidance to our dealer partners, which helps maintain the trust and disciplines we require of our dealers. Dealers also wanted a trusted partner and advisor and that was exactly what we could offer. Dealers also wanted financing to help them achieve their goals, not the goals of the auction houses.

ACS offers independent dealers an inventory financing program that supports their vehicle sales growth goals and improves their cash flow. We offer one simple term plan. Our 120-day term plan gives dealers the option to sell their vehicles within 60 days or they may hold their vehicles longer in anticipation of upcoming changes in consumer demand by paying extension fees.

A clear differentiator is the fact that ACS does not require curtailments if the card does not sell within a prescribed time period. We believe this unnecessarily restricts the dealer's cash flow. Instead, ACS charges higher extension fees matched to the aging of the inventory. ACS does not charge additional fees for vehicles that are not purchased at specific auctions as our competitors do. Buy it anywhere, just pay the standard booking fee is what we offer. We also offer a single monthly billing statement which makes the dealership's accounting and cash management much simpler than the daily billings they receive from our primary competitors.

The ACS loans to dealers are collateralized and can be understood as separate loans on a vehicle-by-vehicle basis. These loans have a short duration that reduces interest rate exposure. ACS holds the title as collateral. ACS' objective is to produce a nationally scalable and repeatable product offering that has minimal requirements from Ocwen's management and financial resources.

Floorplan assets are financeable asset class, as seen in past capital market transactions by our competitors. Anticipated financial returns on an unlevered basis are attractive. Interest rate charges to the dealer are approximately 9%, in addition to origination extension fees which potentially can yield a similar amount.

One of the most important processes at ACS is the underwriting process. Today, we concentrate on 16 characteristics ACS considers in relation to one another, as well as the overall circumstances surrounding the dealer's request for credit. We then make a quantitative and qualitative assessment as to the creditworthiness of a potential customer. Now as we learn more and more about the unique needs of the used vehicle business, ACS will develop additional criteria to help with the underwriting process. But based on our current processes, ACS' application approval rate to-date is about 40%.

Dealerships are subject to events of default, minimum reporting requirements and additional financial requirements. Also, dealerships are required to carry inventory insurance that's comprehensive in collision on all financed vehicles and garage insurance, which is general and excess liability coverage. Accepted insurance carriers are subject to minimum A.M. Best policyholders ratings.

ACS conducted a pilot program in two markets; Central Florida and South Florida. We set objectives to determine pilot success and we achieve those objectives within eight weeks.

ACS funded its first loan on September 17, 2015 and began a national rollout in December of 2015. As of today, ACS is open in 32 markets in 21 states and has 57 active dealers throughout the United States. We are generally finding that the ACS product offering is well received in the market with interest from a wide range of dealers across the US. We currently have approximately 50 staff in the business and at its peak, we expect that number to be no more than 175.

We also are working to secure warehouse line from one or more major financial institutions to help fund our medium-term growth. Currently ACS loans are funded through existing Ocwen liquidity. Once ACS reaches scale, we anticipate accessing the securitization market to fund further growth.

In summary, ACS offers commercial inventory financing of B2B product that does not involve consumer lending and presents a unique growth opportunity with attractive potential returns. By creating an automotive dealer lending platform, we will help broaden Ocwen into a multi-product diversified financial services company and ACS should lead the way to accomplish this for Ocwen.

Thank you, and I will now turn the call over to Michael Bourque.

Thank you, Ron. Thank you, Tom. In my comments today, I will briefly summarize our third quarter results and discuss the progress we have made on operational cost controls. I will also discuss and update you on our liquidity position. Please note that our earnings presentation includes all the regular slide that we typically include and I won't cover them all in my remarks today. As my comments will be focused on other areas, I will let you review these on your own.

As Ron said, we are extremely pleased to report a profitable quarter on a GAAP basis. This is a significant achievement for the Company, reflecting the focused efforts we've made over the last 18 months to invest in technology, reduce costs and improve operational efficiency across our platform. Ron covered the reported results and I'd like to direct you to Slide 42 in the appendix to see our adjusted pre-tax income, a non-GAAP measure which attempts to show the underlying performance of the business excluding legacy and other one-time matters. Adjusted pre-tax income for the third quarter was $28 million, an improvement of $25 million versus the prior quarter and a sequential quarter-to-quarter improvement for the third quarter in a row.

Turning to our cost performance, I refer you to slide 17 of the investor presentation to follow along. Total operating expenses were $272 million in the quarter, compared to $385 million in the second quarter, a $113 million or 29% decline, and we saw decreases in every single one of our cost categories. We recorded a $76 million decrease in servicing and corporate costs, a $10 million reduction in lending and new initiative spending, and a $27 million decrease in quote-unquote uncontrollable costs.

Beginning with servicing and corporate costs, as we've stated in the past, we are actively working to reduce these costs to align more efficiently with our current servicing portfolio and we achieved decreases in every cost category. Compensation and benefit costs were down $6 million from the prior quarter, where we saw the benefit of headcount reductions in our servicing and corporate divisions, while we continue to right size our teams. Most of our savings are from onshore reductions and we continue to identify additional savings opportunities within our various corporate functions. We also had a reserve release as we trued-up our year-to-date incentive compensation accrual.

Amortization and servicing & origination costs were $58 million in the third quarter, down $18 million from the second quarter. Reductions in amortization and servicer expenses as well as lower MSR fair value changes were partially offset by higher Ginnie Mae losses related to a HUD note sales program, which I mentioned last quarter and which should materially reduce future servicing losses on these highly delinquent loans. We'll provide more detail on this program on Slide 38 of the presentation.

I would also note that the $22.6 million lower MSR fair value expense was more than offset in NRZ interest expense, which was $25.2 million higher, as those two line items are linked and directly related to our rights to MSRs owned by NRZ. Technology costs were down $7 million versus the second quarter. Most of the decrease was related to a $5 million expense for customization and software upgrade costs which were incurred in the prior quarter, which were non-recurring.

Professional and service costs were $48 million in the third quarter, down materially from the $93 million expensed in the second quarter. The decrease is driven almost entirely by lower legal fees and settlement charges in the current quarter and we continue to make significant progress resolving outstanding legal matters. The third quarter did include an additional $10 million reserve for the potential future California regulatory settlement, and a $7 million additional reserve, which should now be final relating to the 2014 letter dating issue.

Lending & new initiative expenses decreased $10 million in the third quarter, driven by our CR Limited business, where our expenses were normalized in the third quarter after we had recognized six months of financial activity in the second quarter of this year. Finally, we saw a $27 million reduction in our uncontrollable costs in the third quarter. Most notably, our monitor expense decreased to $15 million in the quarter, down from $28 million in the second quarter. While we have little ability to control these costs, the continued downward trend in total expenses is welcomed.

Now turning to liquidity. Ocwen continues to generate strong cash flow. On Slide 18 you can see the illustrative cash generated by the servicing business, which is a non-GAAP measure but informative. Even in periods of losses, the business generates significant cash flow. Regarding our reported cash, our cash flow from operating activities in the third quarter was $178 million, driven by operating performance, reductions in advances, and lower working capital tied up in loans held for sale.

Moving on to Slide 19, you can see our term loan debt and liquidity position. We paid down the senior secured term loan further in the quarter. This $45 million reduction brought the ending balance to $324 million, which represents a 25% loan-to-value. There is a dedicated $1.3 billion collateral pool supporting this loan.

At quarter end, we had $264 million in cash, and we continue to believe that we can maintain sufficient liquidity to support our operational, and growth objectives. However, when looking at our cash number, bear in mind that we have approximately $77 million of key litigation and settlement reserves that we would expect to pay from our existing cash balance over the next three to six months. So our pro forma net liquidity, for lack of a better word, it's closer to $187 million.

As I mentioned in July, we continue to evaluate the optimal capital structure for our business in order to complement our business plan and provide the necessary capital for growth. We've made tremendous progress in reducing corporate debt by paying down the term loan book this year and last year, and we continue to explore our options.

In summary, we are pleased with our continued progress on right sizing the cost structure and the success we've had thus far allowed us to report our first profits for Ocwen in almost a year. As we move forward, we'll continue to look for additional opportunities to drive new revenue in our Lending segment and at ACS and to reduce our costs wherever we can with the dual goals of providing world-class customer service, and restoring the Company to sustainable and more predictable earnings growth.

That completes our prepared remarks. Operator, can you please open the call for questions.

Thank you. (Operator Instructions) Bose George, KBW.

Congratulations on the improved profitability. I had a couple of things. First, can you go through the things that went through the amortization line item you know the HUD note sales, is there anything else?

Sure. If you look at that page in the appendix, I think its Slide 25 Bose. There is really two things happening here that impact multiple lines in that center column. The first is the MSR fair value change. In the quarter, the MSR fair value didn't decline significantly as one would expect, given the run-off of the MSRs. We have more detail in the Q but we had some -- basically MSR value increases as a result of a periodic process we go through to update the FICO scores for our portfolio, to update the underlying collateral values and the underlying traits of the loans making up the MSRs.

So that largely offset what would be typically seen as the run-off or negative fair value change and that positive benefit there however was offset by increase in the interest expense payable to NRZ. You'll recall that dynamic where the cash payment is determined separately and then we basically split the payment between liability, amortization and interest expense. And so, since the liability which is linked to the fair value of the MSRs really didn't change this quarter. It all shows up as interest expense. So that's kind of the biggest driver on why the MSR fair value change went from $28 million to $5 million there.

To finish the comments on the second driver going on in some of these categories is around the Ginnie Mae losses and the HUD note sale program. In the quarter, we had $24 million of Ginnie Mae losses as a result of the note sale program, which is kind of in the fourth -- makes up the majority of the increase in that fourth graph in the center column. That was offset by a positive $18 million benefit in lower amortization that shows up in the first graph. And the way to think about this is, you accelerate basically claim losses by assigning, basically, these highly delinquent loans to Ginnie Mae. But then when you do that, you remove what's essentially a negative value in your MSR and so you show a positive amortization benefit

So there is an offsetting impact there. You can see the total results on Page 38 to help you piece it together after the fact. But at the end of the day, the net impact in the P&L between those two lines was about a $6 million loss.

Okay. And the operating expense -- the $23.6 million just went through operating expenses?

Yes.

Okay, that's great, helpful. Thanks. And then, actually just going back to a couple of comments from the call. I mean, you noted that, I guess you'll apply to New York to have -- for permission to grow again. But we still might not see a lot of growth and I'm curious, is it -- I mean, could we see a situation where you are at least acquiring enough or growing enough to stabilize your portfolio?

So, I just want to make sure I clarify. So, we have not yet made that request as I indicated in my remarks. We hope to do that in the coming weeks. We are definitely trying to, first and foremost, grow our origination volumes such that ultimately originations will eventually cover the run-off. It will all depend on when we get that approval and are not restricted from a regulatory standpoint. It all depend on, like I said, what kind of MSRs are available, what kind of returns we think we can do the math relative to our cost of capital. So there is really no way at this point, we can or would predict what kind of volumes we would do on the acquisition side next year.

Okay, thanks. And then, actually just one more, when we look at the HAMP income, going forward, after the program ends, this year I mean, will the -- essentially kind of the run rate HAMP revenues kind of run-off over that three-year period as the payments are phased out? And is there any offset to that? Are there other pieces that could go up?

Yes, I mean I guess, so without kind of giving guidance and that's not something we do. I mean it's an important factor to understand and while we know the industry is looking at different modification programs, it's uncertain how if and when anything else may happen. We've always been a big believer in modifications and that's something that's not going to change when the program expires.

Getting to the financial impacts, I think year-to-date we've recognized about $88 million of HAMP fees and rough order magnitude about $50 million of those have been associated with the modification concluded in the year or the upfront fee we earn. So, if you want to model out a change in HAMP fees in the future using that proportion, you can do that. You'll recall that HAMP fees are driven by first and upfront fee, and then you have success fees on each of the next three-year anniversary. So there will be a step down next year, but that tail will run off over two or three years, assuming nothing else changes around the program.

Okay, great. Thanks a lot.

Fred Small, Compass Point.

So just first one, assuming that your servicer ratings with the ratings agencies stay where they are currently, is there still a risk that NRZ can transfer servicing away from Ocwen next April?

We don't believe there is.

Okay thanks. Then looking at MSRs and the potential for acquisitions there. What are the -- I mean assuming you get cleared by and now from under the consent orders with the monitors, what are the most attractive areas for you right now that you would look? I mean I know there is not a lot of non-agency may be out there for sale, but would you look for Ginnie Servicing or are there specific areas you would want to acquire?

Definitely, our strength is the non-agency world, which as you pointed out, there may not be much of that available. We are originating FHA loans and so, and we have a portfolio of FHA servicing. So we're not opposed to looking at that as an opportunity. But it really will just depend on what's available and whether it makes sense for us at that point in time.

Okay, thanks. Then just following up on Bose's question about HAMP. Can you provide any color on the profitability of HAMP revenues, number one. And number two, as I guess the application deadline is the end of this year, but the [mods] will continue to be approved through, I think, September. Will you continue to receive the upfront fees over that -- will they trickle in over the nine months or does that all end this year?

So there is an opportunity for certain types of HAMP mods as long as certain things have occurred before the end of the year to still finalized and be eligible for payment next year, as you just described. I would expect, however, that the follow-up in the new modifications under HAMP will be pretty significant after the end of this year. So there will be some, but I would expect it will be pretty significant follow-up after that point of time.

Okay, got it. And then just on the profitability of revenues that you're getting from HAMP mods, does that basically just all fall to the bottom line or how should we think about the costs associated with that?

Yes, I mean, as Michael said, we're going to continue to do modification. So I don't know that there will be much of a change in our cost structure, simply because of the end of HAMP. As we do modifications, we do -- that does allow us to recover advances, it does allow us to basically record deferred servicing fees, which as you know, we don't record until we resolve the loan. So there still are benefits from continuing to do modification, some which will be included in revenue through deferred servicing fees, and then reducing advances will come through in lower interest expense. But I wouldn't model in anything for any meaningful reduction in operating costs just because of the program is ending.

Got it, okay. Then just maybe it could be in the presentation, and I just haven't seen it, but on the ACS business, can you just maybe explain, number one, where that is flowing through the -- where we see the impact of that in P&L or it's flowing through? And then on, just thinking about the business as it scales, what's a good run rate profitability or operating margin to assume for that business?

Yes. So maybe taking the first part of your question first. Fred, I mean, the way it will show up in, I mean in the quarter, it still relatively immaterial, but you've got a couple million -- well, the expectation is, you'd have obviously revenue flowing through fee income and other revenues. Your expense categories, you'll have kind of C&B in compensation and benefits, you'll have your provision for loan loss reserves that will hit OpEx.

And then, you'll have some other income from kind of -- the interest income basically, so your income components will be split between your revenue line and your other income, and then you'll have OpEx. And then, to the extent we're successful in putting together, first our warehouse financing, hopefully in the coming quarters, you'll then record interest expense as well. So that's how you would expect to see it right now. Those all flow through the corporate segments, and you can see the impact there, but it doesn't yet stand out.

I think just to be clear, in a quarter, ACS lost is about $1 million and we're excited to see that business continue to grow and get leverage on its cost structure and begin earning money for us. From a return profile, it's consistent with what we've said back when we first introduced the business in February, we're excited about this business.

As Tom mentioned, it's kind of a 9% interest rate on the top line and then you have a chance to earn potentially an amount similar to that in different fee as Tom gave some examples of that dealers can basically decide to do and that comes in the form of additional income. The operating expenses are going to be driven by people, and Tom talked about having potentially 175 folks at scale your loss reserves and then your interest expense.

So we think this is an attractive, could be very attractive from a return standpoint, and I would refer you to some of the earlier comments we've made. But, we think we can earn well above our cost of capital in this business.

Okay, great. Thanks a lot for taking my questions and congrats on the improvements.

Thanks Fred.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day everyone.