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Edited Transcript of OCN earnings conference call or presentation 26-Jul-18 12:30pm GMT

Q2 2018 Ocwen Financial Corp Earnings Call

WEST PALM BEACH Jul 27, 2018 (Thomson StreetEvents) -- Edited Transcript of Ocwen Financial Corp earnings conference call or presentation Thursday, July 26, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Catherine M. Dondzila

Ocwen Financial Corporation - Senior VP, CAO & Principal Financial Officer

* John V. Britti

Ocwen Financial Corporation - CEO, Executive VP & CIO

* Stephen C. Swett

Ocwen Financial Corporation - Investors Contact

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Conference Call Participants

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* John Devaney

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Ocwen Financial Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded. I would now like to turn the conference over to Mr. Steve Swett from ICR. Sir, you may begin.

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Stephen C. Swett, Ocwen Financial Corporation - Investors Contact [2]

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Good morning and thank you for joining us for Ocwen's Second Quarter 2018 Earnings Call. Please note that our second quarter 2018 earnings release and slide presentation have been released and are available on our website for your review. Speaking on the call, we have Ocwen's Chief Executive Officer, John Britti, and Chief Accounting Officer, Cathy Dondzila. As a reminder, the presentation and our comments today may contain forward-looking statements, made pursuant to the safe harbor provisions of 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, adjusted pretax income, adjusted pretax income before corporate debt expense, normalized adjusted cash flow from operations, available liquidity and adjusted liquidity, among others. We believe these non-GAAP financial measures provide a useful supplement to discussion 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 in today's earnings release as well as the company's filings with the SEC, including Ocwen's 2017 Form 10-K, and first -- and second quarter 2018 Form 10-Q, which are available on our website. Now I will turn the call over to John.

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John V. Britti, Ocwen Financial Corporation - CEO, Executive VP & CIO [3]

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Thanks, Steve. Good morning, and thank you for joining us today. First, a few comments about our executive team. As you know, our colleague, Ron Faris, concluded his tenure as President and CEO of Ocwen after 27 years. We thank him for his stewardship and wish him the best. As we have also previously said, Glen Messina will assume the role of Ocwen's President and CEO upon the close of the PHH transaction. Until that time, I will serve on an interim basis as CEO of Ocwen. As announced last week, Cathy Dondzila, our Chief Accounting Officer, serves as our principal financial officer for SEC reporting purposes until we name a new CFO. The CFO search process is already underway.

Since our last earnings release, our focus has remained on the strategies that we have previously outlined to drive stronger financial performance and continue the transformation of Ocwen. While there are many things we do day-to-day to improve performance of the company, such as managing the efficiency of our operations and providing excellent customer service, we have been, and continue to, focus on 4 key areas in the near term. These are helping homeowners resolving legacy, legal and regulatory matters, investing our excess cash, and preparing for the closing of our acquisition of PHH. We realize that these current areas of focus may not, in themselves, be sufficient to complete a transformation that enables us to resume growth and profitability. Nevertheless, success in these 4 areas, particularly the closing of the PHH transaction, and capturing its potential synergies, are necessary steps in that process and positions us very well to move our business forward.

Regarding the first area, an important part of the Ocwen tradition is our motto that we all take to heart. That motto is helping homeowners is what we do. In the second quarter, we helped over 10,700 families remain in their home and get a fresh start through a loan modification. Modifications help homeowners into a sustainable performing loan, while also providing better outcomes to mortgage loan investors. Our Servicing segment achieved all this while having its 8th consecutive quarter of positive pretax earnings. Since 2008, we have provided modifications to over 786,000 families and we remain an industry leader in providing sustainable loan modifications to homeowners. In addition to modification activity, our forward lending business specializes in helping homeowners access better loan terms for refinances, while our reverse lending business helps senior homeowners access equity in their homes. During the quarter, we helped over 1,100 of our servicing customers refinance into a better loan. Meanwhile, our reverse lending business helped over 1,200 seniors and their families convert home equity into cash. With regard to legacy matters, we believe that as a result of court rulings, settlements and ongoing negotiation, we are continuing to make progress on this front. These legacy, legal and regulatory issues remain a focus as they have both hampered our ability to grow and create uncertainty for our investors. I refer you to our second quarter 10-Q disclosures for more detail on our progress in these matters.

Another important task has been the deployment of excess cash. As discussed on last quarter's earnings call, we've executed cleanup calls that we own. We own cleanup calls in approximately $18 billion of BBB and we expect to continue deploying capital on these calls. In the past few months, we've executed calls on 14 deals with unpaid principal balance of about $85 million. In general, we believe these calls have attractive asset returns that we estimate will see 10%. We've also deployed cash into somewhat lower-yielding short and medium-term investments that reduce our debt service cost.

Notwithstanding the importance of the first three areas, a particular area of emphasis in recent months has been, and will remain, developing a successful integration plan for our pending acquisition of PHH. We believe this transaction will have many operational financial benefits, including helping us move on to the Black Knight MSP platform more quickly and with less risk than a de novo implementation might require. The transition to MSP is a necessary condition for future growth in our Servicing portfolio. In addition, we believe it will help Ocwen to achieve more efficient scale and operations and utilize best practices across 2 great companies to optimize our longer term performance. As noted in our press release this morning, we are encouraged by our progress towards closing the transaction, and we are currently targeting a close in the third quarter of 2018. The Ocwen and PHH teams have been developing detailed integration plans to support this effort and allow us to realize synergy as quickly as possible, while minimizing the impact upon our customers and mortgage loan investors.

Based on more detailed plans and analysis, we have raised our target for annualized run rate synergies to $100 million, which we [began] to realize was about an 18-month close, and which is higher than our previous estimate of $50 million. This target refers to pension reductions and run rate expense. Please refer to our investor presentation for more detail on our analysis of potential synergy. In keeping with our commitment to provide excellent service to our customers, we are paying particular attention to the more than 1 million Ocwen customers that will be moving onto the MSP platform. While change inevitably results in concern, we're making every effort to minimize the impact on our borrowers and ensure excellent service throughout the transfer process. The transfer process will occur over several months following the closing of the merger. This dedication to customer service is one reason we anticipate some delays in realizing the full synergies that we believe are achievable.

Before turning it over to Cathy, let me cover 3 other areas -- funding our balance sheet, our Lending business, and our MSR valuation. Regarding our balance sheet, Ocwen has always sought to maintain a manageable debt burden and strong liquidity. We continuously evaluate options for improving our cost of funds, and when appropriate, delever the balance sheet. Through the second quarter, for example, we voluntarily paid down the senior secure term loan debt by $50 million to approximately $240 million. In late June, we opportunistically tested the waters on refinancing our remaining first lien term loan debt with the object of improving term. We ultimately chose not to move forward. The term loan market experienced oversupply and widening spreads at the end of June, as prior excess demand flipped to oversupply. The mortgage sector in particular was negatively affected by a very large issuance of unsecured debt. We believe that further progress on some of the areas I just discussed may improve views of Ocwen's credit. As such, in coming months, we may decide to renew our efforts to [re-advance] our term loan or seek other forms of financing to optimize our balance sheet. In the meantime, we closed on a refinance in mid-July of a $225 million advance facility on much better terms than our prior facility. That refinancing bolsters our view that it would be in shareholders' best interest to hold off, at least for now, on the term loan financing. We remain opportunistic in seeking to improve our overall balance sheet cost and risk.

Turning to Lending, as you'll note, our overall lending performance is down quarter-to-quarter and our forward lending business continues to struggle to achieve breakeven. It is obvious to anyone following the mortgage industry the past several months that's seen a sizeable decline in both volume and profit across the industry. This has been true in both the forward and reverse lending industries. While we are far from immune to these general trends, we have, I believe, nonetheless, weathered them better than most. Our volume in margins in both forward and reverse have held up better than the industry as a whole. Some of this is a function of the underlying business. For example, our forward lending business relies on recapturing loans from our Servicing portfolio. Our Servicing portfolio is less interest rate-sensitive and more credit and equity-sensitive than most servicing portfolios. As a result, stronger employment conditions and home price appreciation drive more loan activity in our portfolio as compared to the industry as a whole.

We also believe credit goes to our management of these businesses. We continue to look for ways to improve performance by evolving with the market. We are investing in marketing technology and process changes in efforts to stay ahead. Notwithstanding these efforts, we fully expect the second half of the year will remain challenging for our Lending businesses.

Regarding MSR valuations, we saw essentially no impact from the 15-basis point increase in benchmark rates from the end of Q1 to the end of Q2. Secondary market trading in servicing assets show MSR prices remain at near record multiples, in excess of 5x annual cash flow for conventional servicing according to various industry sources. While there are potential demand dynamics that may modestly improve valuations, it seems unlikely that we'll be seeing much upside in MSR valuations even if rates continue to rise.

I will now turn it over to Cathy Dondzila, our Chief Accounting Officer, who will provide you more details on our second quarter results.

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Catherine M. Dondzila, Ocwen Financial Corporation - Senior VP, CAO & Principal Financial Officer [4]

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Thank you, John. My comments today will be brief and focus on our second quarter results as compared to the prior quarter. As previously noted, our second quarter investor presentation includes more details on our results and is available on our website.

We recorded a free cash loss of $28 million in the quarter versus a pretax profit of $5 million in the first quarter. As a reminder, our first quarter results were dominated by a large increase in the value of our MSR versus a small decline in value for the second quarter. We also recognized a gain in connection with the NRZ transaction amendment in the first quarter. As John noted, we don't expect to see significant increases in value in the near term. Adjusting for various items, as shown on Slides 23 and 25 of the investor presentation, our adjusted pretax loss was $9 million in the second quarter. Our adjusted pretax performance was driven primarily by poor Lending segment performance. Overall revenue of $254 million declined $7 million from the prior quarter, primarily due to an overall decline in revenue contributed by the Lending segment due to lower margins in the quarter, driven by higher interest rates, wider investor spreads and higher competition from reverse mortgage volume.

Regarding our MSRs, as many of you will recall, at the beginning of the year, we made an accounting election to carry the remainder of our owned MSRs at fair value. As a result of this election, we no longer reflect MSR amortization separately as an expense. The impact of the amortization is now captured in the mark-to-market fair value adjustment in MSR valuation in expenses. We have provided additional information in regards to the MSR valuation impact for you on Page 27 of our slide deck. As noted by John, our Servicing segment delivered its 8th straight quarterly pretax gain, recording a pretax profit of $2 million. Notwithstanding our substantial effort to develop integration plans for our acquisition of PHH, we continue to manage cost and Servicing performance. While Servicing revenue of $231 million was slightly higher versus the previous quarter, we continue to see improvement in controllable expenses. During the quarter, for example, we reduced headcount by over 300 in Servicing, as we found efficiencies in our operations. This continuing positive trend in controllable expenses was, however, more than offset by the quarter-over-quarter change in the MSR valuation.

In our Lending segment, we posted pretax income of $1 million in the second quarter, which is down by $7 million as compared to the first quarter. Much of the decline was a result of the drop in reverse lending profitability driven by higher competition for lower reverse mortgage volumes in the industry; higher interest rates and wider investor spreads, lowering investor pricing and execution margins in the second quarter. Overall, funding volumes were challenged compared to the prior quarter and we continue to see margin compression and rates increase and prepayment rates decline. Due to continuing effort to improve efficiencies, margins in forward lending were down only slightly. Changes in HUD's reverse program, however, pushed down volumes in the reverse lending industry by 33%, as Q1 volume had been bolstered by residual closings under the prior higher margin program. As John noted, we continue to look for ways to improve our Lending businesses, but conditions remain challenging.

During the second quarter, cash flow from operating activities was $97 million, compared to $99 million in the first quarter of 2018. The cash generation was primarily driven by improvements in our portfolio delinquency, and the higher net servicing advance recoveries of $100 million -- $111 million during the quarter. We ended the second quarter with $228 million of cash on the balance sheet and available liquidity of $384 million. We view available liquidity as including foregone and available credit on advance facilities and warehouse lines, with pledged assets that we choose to fund with corporate cash that can be quickly converted into cash. We had total corporate debt outstanding of $590 million, representing about 1x debt to book equity ratios, which compares favorably to our peers. In summary, we continue to make progress operationally and our current financial position provides adequate liquidity and balance sheet strength for the near term. Thank you.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of John Devaney with United Capital Markets.

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John Devaney, [2]

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Hey, there, John. One of the questions that I have kind of relates a little bit to the liquidity. I'm trying to analyze pro forma the combination of PHH going forward, and I understand that NRZ owes PHH funds from a previously announced acquisition. Could you tell us what that number is? Is it $70 million to $100 million?

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John V. Britti, Ocwen Financial Corporation - CEO, Executive VP & CIO [3]

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So there is a -- yes, so they were set up to acquire some MSRs. I think the net effect is closer to $70 million. I'll have to get you the -- I'll have to look it up to get the exact numbers, but I think on a net basis, it's roughly $70 million impact, mostly in the form of advances.

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John Devaney, [4]

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Yes, and then when -- what are the terms of that transaction more or less? Is that closing as those rights transfer over to NRZ? And what's the expecting receipt of those funds?

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John V. Britti, Ocwen Financial Corporation - CEO, Executive VP & CIO [5]

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So I can't give you anymore update or details on that. What I can say is that there is a deal outstanding between the two, but I actually don't -- I can't give you specifics on when that's likely to close or expected to close.

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John Devaney, [6]

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Okay. And then I've got another sort of a statement and then question, and it has to do with Ocwen's decision to invest in calling some of these deals. You've now said you've invested almost $160 million of the company cash. I'm extremely in favor of this strategy. One of the things that I think is out there on the $18 billion of call rights and residuals that are controlled by Ocwen -- and this also would point to what I believe could be extraordinary value for both Ocwen and especially your partner NRZ. I think that the residuals and call rights could have harvested value in the near term as well as into the future, that would benefit both companies tremendously. So I'm very encouraged to see that Ocwen has decided to deploy this strategy.

Let me just sort of back up and tell you that I'm a bond trader for 20 years and I own, in my book, thousands of written-off bonds. I bought a bunch of bonds on purpose at $1, $2, $3, $5 or whatever, that I just thought I was going to get interesting come on, knew they would be written off. In the fourth quarter, I sold 28 bonds that are still, to this day, written off for $10 million out of my portfolio and it was a nice surprise. And 75% of all those bonds are serviced by Ocwen. I'm a believer in Ocwen's ability to protect the cash flows on the private label deals. That is -- Ocwen's core competency is effectively doing loss mitigation efforts on at-risk borrowers. And it's been proven that Ocwen has delivered the best cash flows against the whole universe of the private label securitizations over any services out there. [Unintelligible] you participated in government programs like HAMP that have modified agency securities, but I'm very close to the private label.

So it's turned out that some of the very seasoned deals have flipped and where the lending rate to the borrower was at 7% and the funding for the bonds was at 3%. That means there's 4% of income in those deals up for grabs to cover losses, or that income actually becomes the property of the residual owner if it could build back up. Now, the trend is interesting because I had bonds that I honestly thought couldn't ever get any money and I sold them for $10 million for 28 different bonds. And what happened was in a lot of these Ocwen deals, is that Ocwen was so effective at most [mitigation] efforts that they drove the actual loss rate below the excess spread rate. In this example I'm giving, the 4% spread maybe only was impacted by 2% of loss. That 2% of the extra income, it actually created a situation where many deals had $10 million of collateral and only $5 million of liabilities in the bonds. And I sold these bonds that still are written off, but they were pointing at having a claim against the greater collateral pool.

So one of my questions is, in understanding how call rights and residuals work, John, is of, say, $80 million that you recently invested to call these deals, right, did you spend $80 million to get a collateral that has a current market price that's over the $80 million, like say, $120 million or $150 million? Because there are deals that I've researched in the Ocwen directory that currently have $10 million of collateral and $5 million of bonds, where no bond has ever been written off. So somebody owns the residual and call right to those deals. And so I can say it again, that you guys probably are smart knowing which is which inside the whole portfolio. And did you spend $80 million to get a greater amount of collateral than the $80 million?

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John V. Britti, Ocwen Financial Corporation - CEO, Executive VP & CIO [7]

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John, first of all, thanks for your discussion of our performance in the bonds. We do agree with your point of view that the actions we take to manage those homeowners is both good for them and good for the investors. Regarding the calls, I guess I would say this, which is I think your inference is accurate. I won't get into details about how much, but we do think that the value of what we've called is greater to Ocwen as a holder than what we had to pay. And we do think we pick up value in a variety of ways, some of which I think you highlighted. So yes, I would say the answer to your question in the short version would be yes.

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John Devaney, [8]

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Well, are you marking-to-market the value of that collateral or are you carrying it at cost?

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John V. Britti, Ocwen Financial Corporation - CEO, Executive VP & CIO [9]

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It depends on the sources of value. In some cases, we do end up marking up components of it right away. In other cases, we don't because of the GAAP accounting rules, we can't take all of what we think are the sources of value into income immediately. So it's a mix.

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John Devaney, [10]

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Okay, great. Also, can you comment at all on the NOL that you think that you're inheriting from PHH and efforts that you might be doing to preserve the NOL? The very interesting thing about the transaction with WMIH and KKR buying Nationstar -- and I've recently done an enormous amount of work on that deal. I think that KKR pulled the trigger, bam, and they bought Nationstar because of the January 31 ruling on RESPA that said that basically, the commissions that most mortgage servicing firms have received related to the forced-place insurance, the CFPB has called them kickbacks was, in fact, allowable, which I tend to -- and dozens of servicers have made settlements that paid the CFPB and now they say that that's fine. I think that the ruling has wide implications for the 3 million relationships that Nationstar has and the 1.8 million combined relationships now that Ocwen has, because the Borders are cheering this. The CFPB was looking into Borders that were receiving kickbacks from the loan originators or commissions that have been going on for 20 years, to refer these clients to loan originators.

Then the real estate industry started having the originators pay their advertising fees and the CFPB really has gone after using RESPA to any of the ecosystem in the whole mortgage servicing and origination industry, and said, "Listen, you just can't pay any partner anything to do anything." And these relationships are valuable to Nationstar and Ocwen, millions of relationships. This is why Nationstar has just announced, in this merger, that they're getting into credit card lending, insurance businesses. They're expanding into a lot of other areas because Nationstar holds the keys to 3 million relationships. Nationstar has done an excellent job saving all of those borrowers money, mainly refinancing all these government agency loans. So they've got a lot of credibility for helping all those homeowners out there.

Now that this RESPA ruling was ruled on the D.C. court en banc that the commissions are actually okay, that I think that that was the trigger point that made KKR's control vehicle pull the trigger and quickly buy Nationstar, and decide to merge with them to harvest the [$6 billion] of NOL. The marketplace right now has put a value of the $600 billion of NOL at something like $900 million. Now, on the merger call by the analyst Kevin Barker from Piper Jaffray had a discussion with Jay Bray, who said, "Yes, the book value of Nationstar is expected to go up from $18 to $24 based on this asset of the NOL coming onto our balance sheet. But then Kevin got Jay to say, and yes, that if Nationstar is impossible, that the book value would go to $10. So the marketplace right now just lent an extra $900 million through the debt issuance that I think you might've been referring to; it's putting that positive value on a very large NOL that's now been merged into the Nationstar.

And just as an aside, I believe that now, like Nationstar had said in their merger presentation, that they expect to be able to do some merger and acquisition deals. I think we saw that [ITECH] announced in an 8-K that they got unsolicited inquiries to buy the company to their board, and now they hired Houlihan to look at it. But I think that consolidation is coming in this industry and it's in part driven by -- I think the trigger was the RESPA ruling. And now I'm encouraged to see the NOL from the old WM Company get a very large positive value. It's based on that Nationstar is a different company and they're earning $225 million a year; and the accountants are saying that it's allowable for them to include that on their balance sheet.

But I've been looking at the 10-K statement from Ocwen Financial. You reported that based on -- and it's some adjustments you made to approximately $700 million of NOLs that Ocwen Financial has. You thought that those are now worth $100 million or whatever. You said in the 10-K, based on tax reform, that you made haircuts to that. So that is an asset to Ocwen that might be worth $0.80 if Ocwen could ever flip positive, but I've done a significant amount of work on the NOL asset and trying to figure out who's going to be able to use it, when they can use it, and also thinking about this RESPA ruling and why I believe that that ruling may flash the green light, triggering to some of the big private equity players out there that in fact, it might be safe to invest in this area again.

So if I state again, John, that I know what you said in the 10-K your NOL is worth, you don't need to comment on that. But I've been reading in the PHH financials and I can't figure it out. They've got some big numbers of losses and adjustments to it. How much present value of NOL do you think might be there on PHH? And are you taking steps to try to preserve that?

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John V. Britti, Ocwen Financial Corporation - CEO, Executive VP & CIO [11]

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So John, I think we can say that we are taking steps to try to optimize the tax effects, our merger, our pending merger. I think it's premature right now to probably take -- just try to estimate the value of the NOLs that might come over. Obviously, the most important thing, in order to take advantage of NOLs, both the ones that we have today and any that we might pick up in the deal of the merger, is to return to profitability and that's certainly our primary focus. And I think as you noted, we are picking up scale and a much larger customer base as a result of those mergers, so that makes us hopeful that we can use that to help leverage our -- that customer base and the scale to get closer to profitability.

And I do think there are some opportunities potentially to use that customer base to provide them with value-added services and so on. So I think that there's some opportunities there, but that's something that I think in the past, the industry and we have been probably a bit more hesitant to do. Certainly, what we really want to focus on is the kind of bread and butter of our business and getting that right first. But we will be looking also at opportunities to provide other value-added services to our company.

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John Devaney, [12]

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And then another question I have, I saw a news release from Freddie Mac and I know that you've worked there before, that had discussed that Freddie Mac entered the lending market for servicing advances. And it's now competing against the private sector. In their statement, it said that they think that it's in the interest of the agency to provide liquidity in this area and that it could help certain firms in a downturn with their own liquidity. Can you say whether or not the -- some of the improved terms of funding have come from Freddie Mac to Ocwen in advanced facility?

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John V. Britti, Ocwen Financial Corporation - CEO, Executive VP & CIO [13]

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So I can say that we have not -- we are not a participant in the Freddie Mac pilot that they've talked about publicly for financing. And I think it's MSR and advances. I would say that it probably is an opportunity for others in the industry, including potentially ourselves, if Freddie Mac remains interested -- or Fannie, for that matter -- in supporting the financing of advances. Without getting into gruesome detail, as you know, Freddie and Fannie have a big influence on the ability to pledge their advances at all and often times, it's difficult, if not impossible, to pledge Freddie Mac and Fannie Mae advances to a financing facility. So their participation would be very helpful and I think it's beneficial to market participants to the extent that I think it's offered broadly. And we probably would be a little bit concerned if it didn't ultimately produce a program that was more broadly developed for the industry or to kind of one-offs.

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John Devaney, [14]

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Yes. And then about the reverse mortgage business, could you confirm that you had put on the -- the company had put on the slide deck last quarter that you had invested funds in calling deals, as well as purchasing reverse mortgage tails? And Ron, in response to a question from Sam Martini at Omega, had said that those reverse mortgage tail assets were -- the discount rate that Ocwen had discussed, I think there's about $0.60 or something like that, maybe a little more now, that would add to Ocwen's GAAP book value as an adjustment. That's currently not reflected in the balance sheet, so I that Sam was just trying to confirm that there's a number of assets, almost a couple of dollars, that potentially could be increase to Ocwen's GAAP book.

And then Ron had said, "Hey, if anybody is listening out there and wants to sell these things at 15%, give us a call." So I had actually missed that in the slide deck last -- it said that you invested in reverse mortgage tails. So could you just confirm that? Did you buy a reverse mortgage tail from -- and give liquidity to another participant in the marketplace that wanted cash? And what kind of discount rate can you buy those at? That seems like it's a risk-free investment to purchase that from other people that need cash.

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John V. Britti, Ocwen Financial Corporation - CEO, Executive VP & CIO [15]

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Yes, so first of all, I think as we noted in our press release, we have an estimated $106.7 million non-discounted future gains from future draws, which I think is referring to a tail on our reverse book. We do continue to invest in effectively purchasing tails. I guess the best way to think about it is it's the equivalent of correspondent lending in a forward space. We do buy tails effectively through our correspondent type of relationships in the reverse space. I don't want to get into details about who we might enter into transactions with, but I can tell you, I don't think there are any -- that we didn't do any large single transactions that are notable in the quarter. And I would say that from a -- we think we're getting them at attractive yields in that kind of 10% to 15% range.

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John Devaney, [16]

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And then my last question, John, it just involves the -- you just discussed some of the cost saves from the PHH transaction. What is the -- your expected pickup to GAAP book value following the merger maybe by the end of the year? I know that PHH has GAAP book of $16-something a share and you're buying at $11. That's 5 points times 32 million; I think there was $168 million utilization in Ocwen shares. That was $1.20. You're saying that you think there's $100 million of cost saves that you're going to wind up picking up, although I think that some of the Street firms have covered [unintelligible] Chase. There could $40 million or $50 million of some losses in the second, third quarter and fourth quarter. So if you put all that in a blender, is it still going to be $1.20 of pickup to Ocwen's GAAP book value if you merge with the company and they expected to lose some money but you pick up these cost saves? Like what is the pro forma pickup to the GAAP value because of this merger?

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John V. Britti, Ocwen Financial Corporation - CEO, Executive VP & CIO [17]

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Well, so John, as much as I might like to, I -- we don't usually -- we don't provide detailed forward estimates of our earnings or our balance sheet. I guess what I would say is this. As we mentioned, we do think that there are -- we're targeting $100 million in saves, as you note. I think that as we also mentioned, we haven't estimated publicly some of the expenditures to get to that point. So we will be incurring some expenses for training, severance and other items during the period of transition, which as we note, were targeted. It will take about 18 months.

So as you think about your blender, I think you probably do need to assume that there will be some transition-related expenses, as well as some time to get to that run rate. But I'm not going to give you a forward estimate of our book value. The other thing is that purchase accounting is a ticklish thing. It could take a little bit of work to kind of flow through. So I don't know that we're in a good position to estimate that today based on the numbers we've got, even if I wanted to provide you a number.

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John Devaney, [18]

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Yes, great. Well, please keep up the good work trying to [beat] the market with your core competency, which really for all these years, is the number one reason why I became an investor that Ocwen does -- has the best outcome for the investors on performing loan modifications. And that's certainly benefited the RMBS holders the best. And then as I said on another call, that Fannie, Freddie and Ginnie should all want Ocwen to use your expertise in effectively dealing with delinquencies to help protect the insurance guarantee that those agencies have. So keep up the good work. Keep doing everything the same with helping homeowners and doing these mods to protect investors. I think that regulators are going to realize and see the value that you provide to agencies, investors and to homeowners. And I am looking forward to the whole company turning over a new leaf and with regulatory permission, of course, being granted the opportunity to partner with the likes of NRZ, one of Ocwen investors, to start to [sub] service and use the global competency of dealing with these borrowers to grow the business and win new business into the future. And I'm here for the long haul and thank you very much.

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John V. Britti, Ocwen Financial Corporation - CEO, Executive VP & CIO [19]

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Thank you, John, appreciate it.

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Operator [20]

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Thank you. This does conclude today's question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.