Onity Group Inc (ONIT) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ocwen Financial Third Quarter 2017 Earnings Call. (Operator Instructions) I would now like to turn the call over to your host, Mr. Stephen Swett. Sir, you may begin.

Good morning, and thank you for joining us today for Ocwen's Third Quarter 2017 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 & 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, such as certain statements relating to our expectations and strategies for growth, or costs and our cost improvement efforts, and the financial and other impacts of our July 2017 agreements with New Residential Investment Corp., or NRZ.

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 presentations posted online and our comments contain references to non-GAAP financial measures, such as adjusted operating expense, adjusted pretax income, adjusted pretax income before corporate debt expense, normalized adjusted cash flow from operations, illustrative servicing cash flow or servicing cash generation. 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, company's reported results under accounting principles generally accepted in the United States.

For an elaboration of the factors I just discussed, please refer to today's earnings release as well as the company's filings with the Securities and Exchange Commission, including Ocwen's 2016 Form 10-K/A and Ocwen's third quarter 2017 Form 10-Q.

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

Thank you, Steve. Good morning, and thank you all for joining the call today. I'm going to start the discussion today where I left off at the end of the call last quarter by providing some updates on our go-forward plan. In short, we are closely examining each of our businesses and product lines, especially those that are not generating acceptable returns and those where we may be able -- where we may not be able to effectively support longer-term growth. As I said last quarter, we will not hesitate to scale back, close or sell underperforming businesses or product lines.

As previously reported, we disclosed -- we closed our correspondent lending channel for forward originations earlier this year due to unacceptable margins. We have now as of yesterday, also effectively exited the forward wholesale lending channel for similar reasons. We continue to explore opportunities to improve servicing scale, reduce corporate overhead, reduce interest rate risk and reduce funding risks. As I mentioned last quarter, opportunities could include strategic transactions and/or selling certain assets or businesses. As we announced on October 24, we are seeking to focus the company's operations on mortgage servicing and our retail forward lending channel, primarily through retail lending recapture. While we believe that our reverse mortgage business, Liberty Home Equity Solutions, Inc., has performed well, we are currently evaluating our long-term strategy there, including the potential sale of the reverse lending business or some assets of the business. Barclays Capital is advising us on the alternatives related to our reverse mortgage assets and business.

As noted in our earnings release, our reverse mortgage portfolio ended the quarter with an estimated $98.7 million in undiscounted future gains from forecasted future draws on existing loans. These projected gains have not yet been recognized in our financial statements but could potentially be realized earlier on a discounted basis through a sale transaction.

In addition, we have also been evaluating our long-term strategy for our Automotive Capital Services business, which provides floor plan lending to independent car dealers. While we still believe this business has long-term potential, it is a relatively capital-intensive business and still in the startup phase. As Ocwen's ability to raise capital at competitive levels in the current business and regulatory environment is limited, we believe the Automotive Capital Services business may be worth more to a depository institution and investment fund or an existing auto industry participant than it is to the company. Consequently, the company is considering the potential benefits of monetizing its investment in this business in the near term. To date, this new initiative has operated at a loss and currently consumes approximately $12 million in capital. Exiting the business could over time improve our bottom line, reduce leverage and improve our overall liquidity position.

In our last discussion, I summarized our primary objectives to be, first, resolving our regulatory issues, which we have made substantial progress on, having now settled with 21 states plus the District of Columbia, generally on relatively similar terms to each other. We hope to eventually settle with the remaining 9 states and 2 states attorney general, but caution that we may not be able to do so on similar terms or other appropriate terms. And settling the remaining manners may require additional or different terms, some of which may be more challenging and costly.

Second, expeditiously completing the transfer of the MSRs to New Residential or NRZ. Here we made good progress in Q3, having received $55 million in cash from NRZ but there's a lot more work to be completed as obtaining the required consent has been and remains a challenging process. We are working closely with NRZ to obtain these remaining consents.

Third, resolving our legacy high-exposure litigation to reduce future uncertainty. This remains a focus and a challenge. We have made good progress this year but still face various high-exposure litigation cases, including but not limited to various securities matters and the CFPB. We remain focused on resolving these as best we can and I'll refer you to our 10-Q for more details.

Fourth, reducing our corporate overhead expenses. As I reported in our last update, we have identified various cost-out opportunities, which have begun to occur and should be substantially completed by year end. However, as we shift our business strategy more towards just servicing and recapture, additional work is needed here. We are reevaluating all of our corporate cost in this light.

Fifth, is improving our liquidity and reducing leverage over time. We have and continue to make progress on this front. As we close more of the NRZ transaction, we expect liquidity should improve. In addition, as mentioned above, we are exploring various alternatives for some of our business lines, which could result in sales of assets. We have not yet decided where, when and how that potential cash will be deployed but some reduction in overall leverage may result from any transaction that occurs.

Finally, and most importantly, we continue to reduce RMBS losses and keep struggling families in their homes through effective servicing and loan modifications. As reported, we completed an additional 6,500 loan modifications this quarter. In Q4, we will be partnering with various nonprofit organizations, including the NAACP, NHS New York City and New Jersey Citizen Action on borrower outreach events.

Before I turn the call over to Michael Bourque, who will discuss in more detail the NRZ transaction as well as some financial updates, I would like hit on a few additional highlights. Our net loss in Q3, '17 of $6 million was a significant improvement over the first 2 quarters of this year. Our reverse mortgage business continues to perform very well and remains an industry leader. Our Servicing segment had its fifth consecutive profitable quarter. Our retail recapture direct lending channel showed positive momentum. Our overall liquidity position improved in Q3 despite paying out certain significant legal settlements. We have signed an agreement to move to a new servicing platform. We have withstood hurricanes impacting our offices in St. Croix, Florida and Houston, along with significant storms in our Mumbai and Manila offices. Additionally, we are working very hard to assist our customers who have been also impacted by these hurricanes. We continue to go above and beyond to help consumers struggling with their mortgage payments as demonstrated by our industry-leading loan modification and principal forgiveness results and community outreach involvement.

And finally, our management team and staff have continued to stay together and continued to perform at a high level under challenging circumstances. I would now like to turn the call over to Michael Bourque, our CFO. Michael?

Thanks, Ron, and good morning, everyone. I wanted to first start with a discussion of the NRZ transaction and summarize some of the key financial impacts. You can follow this discussion on Slide 6 through 8 of the presentation.

As background, Ocwen entered into various rights to MSR transactions with HLSS, now NRZ, from 2012 to 2013. In those transactions, the advances received sale treatment. For various reasons, the MSR component of the transaction was treated as a financing liability and the underlying MSRs were never deconsolidated from our balance sheet. The cash received for the MSR portion was treated as a financing liability. Both the MSR asset and the offsetting financing liability are carried at fair value. The quarterly fair value mark-to-market of the MSR is recorded in servicing and origination expenses and the quarterly fair value mark-to-market of the financing liability is recorded in interest expense.

On July 23rd of this year, Ocwen entered into various agreements to effectuate the legal transfer of the MSRs underlying the 2012, 2013 rights to MSR transactions, subject to the receipt of all required third-party consents. After receiving the consents, the MSR ownership will transfer to NRZ, and NRZ will be pay us a lump sum payment, which equals the contracted price in basis points times the UPB at the time of the transfer.

Over time, the contracted lump sum price falls, reflecting the reduced future cash flows being purchased. For September, 2017, the price was 34.4 basis points. The payment by NRZ is primarily to compensate Ocwen for the reduction in servicing fees down to 13 basis points over the remaining life of the original agreement, the loss of REO- related compensation, fees on call right transactions and other economic changes to the relationship.

As part of the July agreement, Ocwen will act as the sub-servicer for an initial 5-year term. Similar to the 2012, 2013 agreements, the July 2017 transaction will be treated as a financing. We will retain the MSRs on our balance sheet and we will not deconsolidate the MSR and associated financing liability even after consents are received and NRZ becomes the legal owner of the MSR.

Each lump sum payment will simply increase the existing financing liability. This means there will now be 2 elements to our financing liability, the first part from the initial rights to MSR transaction, which reflects the fair value of the corresponding asset -- corresponding MSR asset. And the second part, which reflects the fair value of the lump sum payment received under the July 2017 transaction.

As consents and cash payments are received from NRZ, the financing liability balance will grow. Since the financing liability is carried at fair value, each reporting period we will update the value to reflect the underlying MSR cash flows, which have a finite term.

So all -- once all the transfers with NRZ occur, we expect the fair value of the financing liability to then decline over time. Because the cash flows depend on the remaining life of the servicing asset, it is possible that if interest rates rise enough, the value of the underlying liability could increase in some periods. In most periods, however, the liability should decline in value and we will record a reduction in interest expense. This mechanism effectively results in the amortization of the lump sum payments and the recognition of Ocwen's foregone economics to income over the remaining life of the original 2012, 2013 contracts.

Now given the fair value accounting model and the nature of the consent process and payment mechanics, there are 2 specific impacts worth noting. First, there is a chance to have MSR characteristics in a particular consent group that are different from the average, upon which the contract price is based, creating potential income statement variability. The transaction with NRZ was based on a pricing schedule linked to the weighted average service fee of the entire rights to MSR population. The first transfer group, for example, had a lower weighted average service fee than the overall population. Thus, we were effectively paid more for these MSRs than their underlying characteristics would indicate in a fair value analysis. This difference resulted in a benefit to the income statement by reducing our interest expense. The implication of this, however, is that in the future, we will receive less cash for transferred populations than the fair value analysis indicates, which will result in an increase in interest expense in those periods. Over the entire transfer population, the positive and negative impacts on the income statement from these underlying MSR characteristic differences would cancel out, assuming no portfolio runoff during the time it takes to complete all the transfers and ignoring any impact from changes in fair value assumptions or any underlying collateral. Nevertheless, we expect some income statement variability between reporting periods as the consent process is completed.

The second noteworthy impact relates to differences between the total payments we expect to receive and the fair value of the economics transferred to NRZ in this transaction, the financing liability. This is primarily the result of utilizing market-based assumptions in determining fair value. Assuming no change to fair value assumptions in the future, this would result in a permanent benefit to Ocwen. However, changes in interest rates in particular could result in additional fair value changes. And depending on which way rates moved, the impact could be either positive or negative.

I now turn to the impact in the third quarter 2017 and direct you to Slide 8, specifically the middle column of the analysis, which shows the impact for the population of servicing transferred in September.

Given the UPB of this population, NRZ paid us $55 million in cash. However, this population only had a fair value financing liability of $17 million, primarily because the weighted average service fee was lower than the average of the entire NRZ population. This $38 million difference was recorded as a reduction in interest expense in the quarter.

You can see below in the chart that $31 million of this benefit was related to the differences in the MSR characteristics or weighted average service fee, which means we're likely to see offsets to that amount in the future. There was a $5 million benefit related to differences between underlying NRZ deal assumptions and the fair value's assumptions. Examples of the drivers of these differences are things like delinquency rates, collection rates, et cetera. The remaining million benefit reflects the amortization of the fair value financing lability in September. Assuming the fair value assumptions don't change in the future, these last 2 impacts would be a permanent benefit to Ocwen.

On that note, I direct you to the remaining consents column, where you can see how this impact should play out, again, assuming no major changes to the underlying fair value assumptions or underlying collateral. We expect that the specific characteristic differences would, other things being equal, result in future losses that offset the benefit to interest expense recognized in this quarter. However, we expect to recognize the remaining benefit from the difference between the NRZ-specific deal terms and the fair value assumptions as additional transfers take place.

Ideally, these 2 financial impacts would be perfectly offset across reporting periods but that may not be the case. Additionally, there could be changes to the fair value assumptions and underlying collateral, which may result in changes to the information presented on Slide 8. I'm sure this will take some time to settle in. The third quarter 10-Q, which was filed this morning, has additional information as well the relevant material agreements with NRZ. I will also make myself available as needed in the future to answer any questions.

Moving onto the financial results. On Slide 10, we have the traditional financial information for the quarter. We recorded a per-share loss of $0.05, a $0.31 improvement from the second quarter. Our revenues of $285 million were down $26 million versus the prior quarter, driven by lower servicing revenues, primarily from portfolio runoff and lower HAMP fees. Our lending revenues were about flat. Our operating expenses of $273 million were down $7 million from the prior quarter. We had $26 million lower legal fees and settlements and $10 million of favorability in our Ginnie Mae and GSE, MSR fair value mark-to-market changes versus the prior quarter. These benefits were partially offset by a $15 million increase in our servicing reserves and the $7 million write-off of internally developed capitalized software related to our exit from the forward lending wholesale channel.

Our other expenses were $38 million, which was $35 million better than the second quarter. This was driven by the reduction in interest expense from the mark-to-market impact on the NRZ transaction.

The net loss of $6 million was helped by a $23 million benefit from the release of a reserve for previously recorded uncertain tax positions. As the applicable statutes of limitations expired for these tax positions in September, our reserve is no longer necessary.

Finally, the business generated $120 million of operating cash flow. This was primarily driven by a reduction in advances.

In the remainder of the financial presentation, we include our typical slides. I'd like to take 1 minute though to highlight a new slide, Slide 13, that shows our employee headcount. Given the potential changes we've announced to our strategic direction, we have separated the headcount into our service and corporate resources, which purposes of this slide exclude our ACS employees that currently sit in corporate and our lending resources, which for this chart include ACS. You can see the trends clearly. While never easy, the management team has been focused on rightsizing its servicing and corporate headcount, given the continued runoff of our servicing portfolio, while balancing our desire to provide exceptional service within a robust control and compliance infrastructure.

In the last year, our servicing and corporate headcount is down 18%. Despite that progress, there is still a need to do more and we're focused on that.

Moving on to the lending data. While we've been trying grow our lending businesses, we have maintained about 1,000 resources, predominantly in the U.S., across forward lending, reverse lending and ACS. As we explore different options for most of these businesses, we expect to be able to serve our remaining retail recapture business with far fewer resources, and they're in the process now of designing what the remaining organization will look like. We expect this should result in significant cost savings in the future.

With that, we'll now ask the operator to open up the call for questions.

(Operator Instructions) Our first question comes from Bose George from KBW.

So just wanted touch on the accounting that you went through for the NRZ contract. So when we think of the cash impact, do you guys -- is it really the reduction of the 13 basis points servicing fee and the ancillary issues you mentioned while the interest expense marks will just net out over time to 0? So we should just really think about that 13 as kind of the economic impact of the transaction?

Yes, so there is -- I guess, that's partially right. I think if you just think about the go-forward economics and specifically as it relates to cash, what will flow through kind of operating cash flow, it will be the resulting impact of the 13 basis points to the P&L. The upfront cash payments we receive through the mechanism I described effectively compensate us for the forgone economics by switching to these new contracts with NRZ. And so those upfront payments through that fair value mechanism effectively amortized to income subject to certain assumptions over the remaining life of the original contracts, that -- those cash flows will actually show up as a financing cash flow. So it won't be an operating cash, but we will reflect those cash flows as received, obviously, up front.

Okay. So those cash flows will basically reduce interest expense in the quarters it comes in, is that right?

To the extent there's an initial mark-to-market impact between the fair value of the transfers in that period, but just generally the way to think about is assuming everything kind of was equal and you had a consent population that perfectly match the fair value, going forward, Bose, you'd have kind of amortizing -- that amortizing cash balance or that amortizing financing liability offsetting interest expense over the next 2 or 3 years.

Okay. And so the cash benefit you mentioned is really a cash flow benefit as opposed to an income statement benefit?

Well, we get the -- it's effectively pulling forward cash we would have otherwise received over the next 2 or 3 years. We're getting paid for that up front as the transfers occur. So we'll record the cash today, we create the financing liability. Because it's effectively a financing transaction that the recognition of that cash from a flow standpoint will show up in cash from financing activities instead of operations. But it's cash into the company. And then the recognition of that cash kind of to income over time is through that interest expense mechanism.

Okay. So that's make sense. And then just in terms of the ancillary there -- the couple of the other components apart from the 13 basis points, is there a way to think about how much that adds up to? Is that another couple of basis points or...?

So the reduction from kind of the overall economics we received down to the 13 basis points was effectively covered by those upfront payments. So we mentioned the change in servicing fees, we mentioned the change in some of the REO commissions. We've effectively given up our right to earn fees on future call right transactions. So these upfront cash payments compensate us for that and so the go-forward economics of 13 bps is kind of what's left.

(Operator Instructions) Our next question comes from Fred Small from Compass Point.

Just on the -- are there -- thinking about the cash coming in from NRZ, are there -- what are your options for that as it comes in. I know at one point you had talked about, and I don't know how connected it is to the fee accounting you were just discussing, but does that stay -- do you have to keep that on the balance sheet and then sort of bleed it in over time? Or can you actually go and do something else with that cash?

No. I mean, Fred, once we receive -- Sorry, Ron. Go ahead.

No, I mean -- so we can choose to do whatever we want with the cash, but as Michael mentioned, from an accounting standpoint, it will go on the balance sheet and then generally amortize into income over time. Since we are receiving less cash going forward and receiving more cash upfront, you can assume that some of it would be utilized for ongoing operations. But we have discretion over how to utilize the cash once we receive it.

Okay. But then, does that -- I mean, if you receive the cash and record some liability for the long-term value of the transaction over time that, I guess, I think Michael you were describing the sort of -- this would -- bringing in the cash now -- you bring in the cash now and there's an offsetting item for it on the balance sheet or on the liabilities, and then that reduces operating interest expense over time?

That's correct.

Okay. And so if you were to do something else with that cash, does operating interest expense -- is that no longer -- does that benefit no longer flow through over time?

No, I mean, it's -- think about it as 2 separate. Once we have the cash, we have a cash, as Ron described. And that financing liability, it's really just a mechanism by which we recognize the benefit of that upfront payment to income over time. It's just recognizing the fair value of that liability as it changes. As we service, our obligation goes down so that liability presumably shrinks. As we reduce the liability, we have a credit to income and that shows up through interest expense. But it has nothing to with the actual cash received on day 1.

Okay. Got it, I think. And then does the receipt of cash for the full transfer and the change in the economics, does that trigger any payment over the next year to debt holders?

Any of that cash have to be used to pay down debt? No?

No.

And then second question, do you have any estimate of the time or the one-time cost that you think you'll incur in transferring the system of record over to Black Knight?

Yes, there will be a cost and we're not going to kind of disclose that at this time partly because we just signed a contract and we're still working through the overall implementation plan. But it'll primarily, be around having to take employees that currently are, say, in the servicing operation today and dedicating them over the next couple of years to working on the implementation process. And obviously, we would need to backfill those positions in servicing operation during that time frame. There may be some other costs as well, but we're not disclosing what our estimate of that is at this point in time.

In terms of the -- sorry, just 2 follow-ups. In terms of the timeline you said the next few years. I mean is that -- that's for everything and, I guess, full implementation. Do you have an estimate of the timeline for sort of the bulk of the transfer to the -- to Black Knight to occur?

Yes, it will take -- I mean it will take potentially a couple of years before anything starts to transfer over.

Okay. Got it. That's helpful. And then just in terms -- I mean I know that you haven't talked about the one-time -- I was asking about the one-time expense, but just sort of from an ongoing perspective, any sense of what run rate expense is for MSP and the full sort of Black Knight sweep versus real servicing?

Yes, I -- we're -- I don't think we're disclosing that, but our contract with Black Night is going to be similar to what other industry participants have, I would assume. And our contract that we had with our existing vendor was on kind of similar type terms. So we're not expecting any significant change there.

Ladies and gentlemen, that concludes today's call. Thank you for attending the Ocwen Financial Corporation Third Quarter Earnings Call. Everyone, have a great day.

Thank you.