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Edited Transcript of OCN earnings conference call or presentation 28-Feb-18 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2017 Ocwen Financial Corp Earnings Call

WEST PALM BEACH Mar 1, 2018 (Thomson StreetEvents) -- Edited Transcript of Ocwen Financial Corp earnings conference call or presentation Wednesday, February 28, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael R. Bourque

Ocwen Financial Corporation - CFO and EVP

* Ronald M. Faris

Ocwen Financial Corporation - President, CEO & Director

* Stephen C. Swett

Ocwen Financial Corporation - Investors Contact

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Conference Call Participants

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* Bose Thomas George

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Henry Joseph Coffey

Wedbush Securities Inc., Research Division - MD of Specialty Finance

* John Devaney

* Kevin James Barker

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Leon G. Cooperman

Omega Advisors, Inc. - President, CEO, and Chairman

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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 Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As reminder, this conference call may be recorded.

I would now like to turn the conference over to Steve Swett. Mr. Swett, 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 Fourth Quarter and Full Year 2017 Earnings Call, which will have a special focus on Ocwen Financial Corporation's planned acquisition of PHH.

Please note that our Q4 2017 results and typical slide presentation have been released and are also available on our Shareholder Relations website for you reviewing.

Speaking on the call, we have Ocwen's President and CEO, Ron Faris; and EVP and CFO, Michael Bourque.

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, adjusted pretax income, adjusted pretax income before corporate debt expense, normalized adjusted cash flow from operations, yesterday's servicing cash flow, available liquidity and adjusted pro forma liquidity among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial position. We also believe these non-GAAP financial measures provide an alternate view 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 2017 Form 10-K, when filed, as well as our press release and investor presentation for the PHH transaction, which were available on our website.

Now, I will turn the call over to Ron.

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [3]

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Thank you, Steve. Good morning, and thank you all for joining the call today.

As you are aware, last night we announced that Ocwen reached an agreement to acquire PHH Corporation for $360 million in cash, representing a 35% discount to PHH's GAAP book value at December 31, 2017.

While the deal is subject to various closing conditions, including PHH shareholder approval and regulatory and other approvals, we are very excited about this transaction and believe it marks an important step forward in the continued evolution of our company and our industry.

I will talk more about PHH in a few minutes.

2017 was another challenging year for Ocwen and for our industry. However, the Ocwen team continued to execute well, and we made progress on many fronts.

While nobody here is happy about the reported financial results, we did reduce the size of our loss versus last year by $71 million, and we have improved our liquidity position.

In the fourth quarter, we made a strategic shift back towards our core businesses of servicing and sub-servicing, portfolio recapture and reverse mortgage lending. Exiting our other forward origination channels and making a decision to exit Automotive Capital Services.

We're excited to move forward with a bit narrower focus, building on each of these businesses for future success.

Note that after a strategic review, we have decided to remain in the Reverse Mortgage Lending business and are excited about its future, coming off a strong year in 2017.

We won't spend a lot of time this morning on our financial results, but I did want to hit a few key points and note that we have provided a lot of information in the accompanying investor presentation deck.

We reported a net loss of $45 million in the fourth quarter of 2017. These results included $50 million in litigation and regulatory settlement accruals.

On an adjusted basis, for which the reconciliation is available in our earnings slide deck on our website, we earned pretax income of $4 million, which included a $29 million benefit in connection with our OneWest CIT Bank claims recovery settlement previously announced.

For the full year of 2017, we recorded a net loss of $128 million, a $71 million improvement versus 2016, despite an increase in legal and regulatory settlement expenses of $24.4 million.

Our adjusted operating expenses were down $85.5 million or 8%. I would note, however, that despite these reductions, we still had over $175 million in nontechnology corporate overhead expenses, excluding legal and regulatory settlements. Additionally, we also incurred about $130 million of technology-related spending.

Both corporate overhead and technology spend remain important opportunities for further improvement. I'll discuss this more when I talk about PHH.

Our servicing business continued to perform well and posted a 6th consecutive quarter of pretax income, despite the continued challenges of portfolio runoff.

Our reverse mortgage lending business recorded pretax income of $24 million in 2017, and we have taken significant steps to improve the disappointing 2017 performance of our forward lending business.

Next, I would like to highlight certain significant updates since last quarter.

First, we continue to make progress resolving the regularly actions taken in April 2017, having now resolved the 28 states plus the District of Columbia, generally, on relatively similar terms to each other.

We continue to work to settle with the remaining 2 states and the 2 states' Attorneys General, but caution that we may not be able to do so on similar terms or other appropriate terms and resolving the remaining matters may require additional or different terms, some of which may be more challenging and costly.

As to the CFPB litigations, we have no material updates at this time, and we refer you to our most recent 10-Q and upcoming 10-K filing, which we expect to be out later this week.

Second, we continue to work diligently to complete the transfer of MSRs to New Residential, or NRZ. While obtaining the required consent has been and remains challenging, we have made good progress on this front with the agreements we signed in January 2018 to accelerate the implementation of concepts from the July 2017 agreements.

As part of this most recent agreement, the entire portfolio is now governed by the modified economic terms and other contractual changes effective January 1, 2018. Importantly, we received the remaining $280 million in cash in January.

We are in a greatly improved cash and liquidity position now, and we continue to work closely with NRZ to obtain consents to transfer the remaining MSRs.

Until then, we remain the main servicer on certain NRZ acquired portfolios.

Assuming the announced PHH acquisition closes, NRZ will become an even more important client and partner of Ocwen. And we are committed to providing them great service at competitive prices.

Third, including the cash received from the NRZ transaction in January 2018, we had over $500 million of adjusted pro forma liquidity as of December 31, 2017. As the cash received from NRZ represents a pull-forward of fees, which would have otherwise been earned over time, we will need some of this cash for working capital.

Clearly, some of that cash is going to be used for the PHH acquisition, but we are also working on a list of investment and other options that we think collectively can provide attractive returns to our shareholders.

We are also looking at our debt and capital structure to see if there are superior alternatives, especially considering the PHH acquisition.

Fourth, while not yet included in our financials you see today, we have decided to elect fair value accounting on the remaining -- on the remainder of our MSR portfolio as of January 1, 2018, specifically, our agency and acquired government-insured MSRs. This election adjusts the opening balance sheet for 2018, rating up the value of the asset as well as our equity. Given the difference between our current basis and fair value, this increases our book value by $82 million on January 1, 2018.

Going forward, the amortization of these MSRs will be reflected by changes in fair value.

Given the higher asset value in 2018, we forecast higher fair value change expenses akin to amortization of about $11 million in 2018 compared to the prior accounting treatment.

Since we do not currently hedge our MSRs, we may also experience additional P&L volatility from interest rate changes, given the sensitivity of these MSRs to rate changes.

For example, in January 2018 alone, the 34 basis point increase in the 10-year swap rate drove an estimated $30 million increase in the value of these MSRs, which would be a positive pretax P&L benefit in Q1 if valuations remain at that level.

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 9,700 loan modifications in the fourth quarter. For the full year, we helped over 45,000 struggling families retain their homes through affordable loan modifications.

Overall, we helped close to 120,000 families through our various pre-foreclosure resolutions, including but not limited to modifications, forbearance and reinstatements.

We also partnered with various nonprofit organizations, including the NAACP, NHS New York City and New Jersey Citizens Action on borrower outreach events in the fourth quarter.

Now I will turn to the PHH acquisition and its strategic rationale. I will start by providing you my current view of our industry. Most nonbank mortgage servicers are struggling to grow and to achieve or maintain adequate economies of scale. Smaller servicers are and will continue to struggle to invest in and maintain the technology, risk management and compliance infrastructure required in today's environment.

At the same time, the industry lacks capacity, especially capacity to service FHA, VA, nonconforming and nonperforming loans. If we see even a modest increase in delinquencies, the servicing industry will struggle, because many of the larger servicers have abandoned servicing all but the highest credit quality borrowers.

Consolidation under these circumstances is not only inevitable, it is necessary, in my opinion, in order to restore much-needed economies of scale, capacity and higher-touch servicing capabilities.

We believe that this acquisition if ultimately approved, provides a step in the right direction for us and the industry, and provides meaningful strategic operational and financial benefits to both Ocwen and its stakeholders.

First, the transaction increases Ocwen's servicing and portfolio retention scale, as the combined company would service 1.9 million loans on a pro forma basis as of December 31, 2017.

The combination of PHH's industry-leading servicing platform and our leading loss mitigation expertise is a powerful combination. Within the servicing and originations operations, we will have the opportunity to migrate to best practices and eliminate redundant management, technology and other costs.

Second, the transaction accelerates Ocwen's transition to an industry-leading servicing platform, Black Knight's MSP system, significantly reducing the operational and compliance risks and the costs associated with implementing a new servicing system from scratch.

By accelerating our system transition and combining our respective complementary strengths, we establish the foundation to eventually enable us to resume new business and growth activities to offset our servicing portfolio and revenue runoff.

Finally from a financial standpoint, the transaction provides tremendous opportunities for us to generate additional financial synergies for Ocwen. As I mentioned earlier, in 2017, we had over $300 million of corporate overhead and technology spend.

We estimate that once PHH is finished with its previously announced restructuring, they will have approximately $85 million in corporate overhead and technology spend on a stand-alone basis. Therein lies the biggest opportunity of all. As part of the integration, we must find best practices for technology, risk management, compliance and other corporate operations, and eliminate redundant and nonessential costs.

Additionally, we're excited by the prospect of joining with many of the experienced and knowledgeable PHH team to build a great combined and efficient business together.

Now let's turn to the transaction details. Under the agreement, PHH shareholders will receive $11 per share for a total purchase price of approximately $360 million in cash. Ocwen will also assume $119 million of PHH corporate debt as part of the acquisition.

One of the unique elements of this deal is that Ocwen is essentially acquiring PHH for a 35% discount to their year-end 2017 book equity, and we are paying less for the company than their expected cash balance at closing.

This is a function of the built-in losses expected for PHH, as they continue their restructuring and evolution to their previously announced 2.0 structure.

On Slide 7 of the PHH transaction presentation, we lay out a brief summary of the sources and uses of cash for the transaction. The $360 million purchase price will be paid in cash, with about $260 million of the purchase price being funded by cash currently on the PHH balance sheet that is otherwise available for distribution.

Ocwen also plans to secure a $50 million of servicing advanced financing against some of PHH's advances. We have received positive indications from our existing lenders that our existing lenders will participate in this advanced facility. Ocwen will contribute the remaining $74 million, which includes $10 million in deal expenses and $14 million in other items that will be subsequently recovered over time.

I would note that one of the assumptions made in the deal structuring is that PHH's remaining MSR and advance sales to NRZ won't close before our deal closes. Should that deal close before ours does, Ocwen's cash contribution to buy PHH may be further reduced by up to $70 million.

We anticipate that the deal should close in the second half of 2018, following the satisfaction of various closing conditions, including PHH shareholder approval and regulatory and other approvals.

Moving back to Slide 4 of the PHH transaction presentation. Ocwen will continue to focus its business on servicing, subservicing, portfolio retention and reverse mortgage lending. The PHH transaction is intended to add scale to all of these areas except reverse mortgages.

On the right side of this slide, you can see some of the key stats for the combined company. All figures are as of 12/31/2017, except for the $400 million cash number, which represents the amount of cash and available liquidity we expect the company to have assuming a 6/30/2018 closing date.

I would note that this number is net of about $150 million of anticipated mortgage-related investments and/or debt repayments, which we are currently exploring for our excess cash. We plan to update more about this in the future.

Together, the combined company will service about 1.9 million loans, totaling more than $325 billion in unpaid principal balance and is expected to originate over $3 billion of mortgage loans annually, including reverse mortgage loans, on a pro forma basis as of December 31, 2017. The combined servicing platform provides further opportunity for growth in originations as our 2 recapture teams can identify operating best practices and other synergies.

On the servicing side, PHH's extensive expertise with Black Knight's MSP platform will assist in driving what we expect to be a robust, well-planned systems transition process, where we believe significant operating efficiencies can be achieved. We can also benefit from PHH's management and employee expertise and where appropriate, from our lower-cost talent pool.

While any acquisition of this size has risks, some of which we've outlined in the presentation materials, we believe this is the right opportunity and the right time for us to invest in our future.

To summarize, our priorities will be the following: First, work with PHH to obtain all required approvals and close the transaction as soon as possible; second, identify and implement best practices of both organizations; third, migrate Ocwen's loans to the PHH MSP servicing platform as quickly and safely as possible; fourth, eliminate redundant and nonessential technology in corporate overhead; fifth, eliminate redundant and nonessential servicing and origination costs; and sixth, eventually resume servicing portfolio growth. We also intend to work closely with PHH's and our valued servicing and sub-servicing clients to ensure a smooth and successful transaction.

To conclude, Ocwen believes this combination is a win-win for both companies. All stakeholders should benefit from the larger, more scaled company with greater competitive advantages and the extensive expertise of the MSP platform provided by PHH as well as from lower overhead costs and other synergies. We have a high degree of confidence in our ability to execute a successful transaction.

On behalf of the Ocwen management team, we appreciate your time and interest today, and we'll be happy to take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Bose George with KBW.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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Sounds like a very good transaction, but had a couple of questions on that. First, can you just talk about the regulatory approval process? Who do you need approval from? And have these conversations already started?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [3]

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So yes, conversations have begun, but the really the formal process cannot begin until after the signing of the transaction. So now we can begin that process. You'll note in the slide deck that we provided that we did include information. We currently estimate that there is approximately -- there's over 30 states that will require approval. We intend to be very transparent, not only with those states, but all states. We anticipate having regular communications with our regulatory partners. They'll be the traditional Hart-Scott-Rodino filing at the federal level. There's also certain approvals and consents that will be required from Fannie Mae, Freddie Mac and Ginnie Mae. So I think those are the primary entities that we'll require obtaining approval from.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [4]

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Okay, great. And then actually in terms of the combined company going forward, is there any plan to add origination capacity -- forward origination capacity as well through acquisition or organic?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [5]

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So we actually noted as well in the slide deck that as far as adding additional retail lending-type capabilities, that's something we intend -- we do intend to explore once the companies come together. Right now, both companies are basically only performing recapture portfolio retention on their existing servicing portfolios. But looking at the ability to expand, particularly, retail lending beyond that is something that, I think, we'll explore thoroughly, and I would hope that there would be opportunities with that going forward.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [6]

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Okay. And then actually in terms of accretion-to-book value from this deal, should we just look at the PHH book value less the purchase price of about $200 million discount-to-book? Or are there other costs that we should sort of build into that calculation?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [7]

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Well, keep in mind that PHH has been losing money, and with their restructuring there going through, it's expected that, that could continue. So we would expect that by the time the deal closes, the premium-to-book value will not be as large as it is today, there's a discount -- sorry, will not be as large as it is today. So there is a number of factors that will come into play. It's difficult to say exactly what exactly it'll do until we know more precisely when the closing will be and how performance is up through that date.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [8]

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Okay. Makes sense. Actually just one more for me for us. The timeline to the MSP transition, does that happen at the close? Or does that take a little while after that? And also just on the origination side, is there a plan, because I think PHH is on -- encompasses their plan to switch that as well?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [9]

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So there is certain integration planning that we can do at this stage, but current thinking is none of that transfer of loans from our platform onto the PHH MSP platform, none of that would occur until after closing and probably for a period of time after closing. But we do believe that this significantly accelerates our ability to move to a new platform and as I mentioned in the prepared remarks, really reduces the risk associated with trying to do it on denotable basis. We will be looking at the technologies that we use from an origination perspective compared to what PHH is using and migrating to, and we would hope to kind of select the best product and over time, combine those operations as well.

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Operator [10]

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Our next question comes from Henry Coffey with Wedbush.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Specialty Finance [11]

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A big merger, big opportunity. You both have NRZ as a very large client. Could you give us a sense of what some of the other larger concentrations might be?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [12]

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So Henry, first of all, good to talk to you again. You're absolutely right that NRZ is a significant client for both Ocwen and PHH and will become an even bigger client under the combined structure. I would say, there really isn't necessarily on a combined basis any other single customer that is of significant concentration risk. So I think the focus is really -- while we want to work closely with our existing customers as well as PHH's existing subservicing customers to ensure a smooth transition for all, I think that from a concentration perspective, NRZ is really the primary focus.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Specialty Finance [13]

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The process of putting PHH into PHH 2.0 is probably going to take another year or 1.5 years. When you look at what you two can accomplish together, what is the path to profitability, and how long do you think it takes to get there?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [14]

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Yes. I'm not going to forecast kind of numbers or how long, but in my prepared remarks, I talked about the $300 million of corporate and technology costs that we had last year. We expect PHH to have $85 million or so of corporate and technology-related cost. That's a large opportunity for us to find ways for synergies, eliminating duplicate public company costs, duplicate corporate overhead cost. So a lot of the focus will be on finding best practices and opportunities to reduce the overhead and fixed cost burden that sits in both companies as they sit separately. But as they come together, there should be significant opportunities to reduce those costs. So that will be a big focus initially. A big focus will be on transitioning our loans off of our platform onto the PHH platform. Once we do that and combine some of our loss mitigation expertise into the existing PHH platform, I think we come out with one of the strongest platforms for servicing both performing, conforming loans as well as FHA, VA, nonconforming, nonperforming loans. So I think you're right, Henry, it will take some time, whether on a stand-alone basis or combined basis. But once we get there, I think we're positioned to be a -- have the capabilities to be a strong competitor in the industry once we get to that point.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Specialty Finance [15]

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You've obviously had a lot of experience of servicing transfer and all the regulatory approvals. Are there a lot of obstacles either in the Freddie Mac, Fannie Mae community or Ginnie to getting this deal approved? Or is it more just a question of working through all the complexities and challenges of just getting so many people to sign off?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [16]

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Well, as I briefly mentioned, while there have been some preliminary discussions, it's really very, very early in that process. As I mentioned in my remarks, I believe that this transaction is not only good for Ocwen and PHH, but it's good for the industry and the health of the industry. And I believe that the GSEs and other parties that are going to be -- we're going to need approval from will either understand that or will come to understand that. And we're hopeful that we will get support from all parties to move forward. So it's really -- it's difficult to predict exactly how long it will take, but we're confident that we can get to that point and close this transaction in the second half of this year.

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Operator [17]

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Our next question comes from Kevin Barker with Piper Jaffray.

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Kevin James Barker, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [18]

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I had a question around the minimum net worth requirement at PHH? Could you tell what that is and how that could affect the amount of cash as well?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [19]

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So Kevin, I don't have that information at my fingertips, maybe that's something that we can follow up with. But as part of structuring this transaction, we've worked with our team and the PHH team have worked to ensure that the resulting company will meet all regulatory capital requirements.

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Kevin James Barker, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [20]

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As part of the transaction, PHH is required to keep a minimum net worth. Do you have a number on what minimum net worth they have to have before the transaction closes? Or what that could be if there were to be adjustments to the actual price?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [21]

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I do not. In the prepared remarks, we talked about the fact that we would expect about $260 million as the purchase price to be effectively funded through available cash at PHH. But other than that, I don't have any other information at this time.

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Kevin James Barker, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [22]

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Okay. And then in regards to the cash contribution and the potential change in that, I believe it says $74 million that you're contributing. If they close the NRZ transaction, does that essentially remove your cash contribution, because they would have a cash infusion?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [23]

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So as I indicated in the prepared remarks, we -- if the NRZ transaction that is not yet closed -- the remaining part that hasn't closed to PHH were to close, our estimate is that would generate approximately $70 million of additional cash. So it would substantially reduce the $74 million contribution on a combined basis, if that were to occur first.

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Kevin James Barker, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [24]

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Okay. And then the closing dates for the transactions and any merger docs could indicate the end of September or the end of December. Could you give your expectation on when the closing date will be? And what could push it from September into December?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [25]

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So we -- I think that they'll be -- getting the various approvals is the primary -- the long pole in the tent, if you want to call it that way. As we said, we're -- we believe the transaction will close in the second half of the year. It could close potentially early in the summer or it could go into the fourth quarter, but that will all depend on the approval process, primarily. And as I mentioned, we're only going to begin that process now.

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Kevin James Barker, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [26]

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Okay. And then I'm assuming that PHH is suspended from any capital allocations they can do, whether it be buybacks or repayment of debt or any changes. Is that correct?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [27]

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There is going to be standard restrictions on their ability to -- on how they operate going forward. That might be a better question for you to ask PHH directly, but there will be standard kind of deal restrictions from this point forward for them.

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Kevin James Barker, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [28]

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Okay. And then in previous quarters, you talked about potentially selling the reverse business or spinning it off, is that still the case? And if so, could you estimate the current tangible book value of the reverse business?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [29]

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So first off, in my prepared remarks, I mentioned that after analyzing the reverse mortgage business, which generated for us $24 million in pretax profit last year, we've decided to continue operating the reverse lending business as a key strategic part of our go-forward strategy. And I don't have the capital allocated to that business at my fingertips. That's something maybe we can follow up with you on. It's not a significant amount of capital deployed into that business, but as I mentioned, that business was -- performed very well for us last year, and we're excited about the opportunities going forward. It is a challenging environment for reverse mortgages. Some of the little changes that went in effect last year are expected to reduce volumes in 2018, but we still believe that we have one of the premier platforms and are excited about that business going forward.

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Kevin James Barker, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [30]

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Okay. And then on a pro forma basis, do you have an estimate for the total amount of net operating losses between these 2 businesses when they are combined?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [31]

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We're not giving forecasts like that.

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Operator [32]

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Next, we have a follow-up from the line of Bose George with KBW.

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [33]

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Bose?

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [34]

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Okay, Guys. Sorry, I had my mute on. In terms of the relationship with Altisource, does anything change as a result of this transaction?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [35]

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So we have existing contracts in place with Altisource, and we will, of course, comply with those on a go forward basis, as we have in the past when we've done other acquisitions. We've been working closely with Altisource following the announcement that we're going to move to the Black Knight MSP system and this -- they will continue to work closely with us on that transition. So I think the way to think about is we intend to and will continue to comply with all of our existing contractual relationships that we have with Altisource, and we look forward to having them as an ongoing partner.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [36]

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Okay, great. And then just a couple on earnings as well. Actually, just the comment that you made about the $30 million increase in the book value in January. So that's on the overall portfolio now, right, as opposed to the piece that was fair valued. Now that everything is fair valued, the $30 million is basically what the value has increased on the overall MSR in January. Is that correct?

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Michael R. Bourque, Ocwen Financial Corporation - CFO and EVP [37]

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No, Bose, that's just the incremental on the -- for those MSRs for which we made the election in January.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [38]

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Okay. And how about for the other piece? Is that -- do you have an estimate for what happened there?

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Michael R. Bourque, Ocwen Financial Corporation - CFO and EVP [39]

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Well, we don't provide that. But just keep in mind, when you tend to have a big increase in fair value, you tend to have a big increase in the fair value of the liabilities, because the majority of those remaining MSRs are part of the NRZ structure. And so there'll be a large offset to that. If rates are going up, it still will be a little bit of a -- it still would be a positive impact, just because we still have some PLS MSRs that aren't part of the NRZ transaction, but we're not providing that number.

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [40]

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And the impact on the PLS portfolio that was already at fair value, the interest rate changes don't cause as dramatic of an impact to the fair value of those. So since most of what we took the election on here was the -- our portfolio of GSE and Ginnie Mae. It tends to be a more volatile portfolio, and now it will be on a mark-to-market basis.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [41]

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Okay, great. And then in terms of the couple of earnings line items this quarter were a little noisy. The interest expense line item, can you just talk about what's flowing through that?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [42]

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So first, I think keep in mind that we did close a portion of the NRZ transaction, I think, back in September. And so some of that creates some movement around -- on the income statement because of the closing and the change in economics of that transaction. But I'll see if Michael has anything to add there.

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Michael R. Bourque, Ocwen Financial Corporation - CFO and EVP [43]

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So Bose, we've got the reconciliations for you in the back of the slide deck. What ended up happening is you had kind of a big change in interest expense as well as a big change in the MSR values, just given changes versus kind of the prior quarter. So I think on the NRZ interest expense, for instance, on 39 of the slide deck, you can see it kind of changed about $100 million -- over $100 million quarter-to-quarter. The vast majority of that is offset in the MSR fair value line that's part of the servicing and origination expenses. So it's really just a big geography change from where it was the prior quarter. So spend a few minutes and just you can net some of those out. And we've got some of that laid out for you in the back of the deck in the -- as well as kind of the net impact for you. In the quarter, there was maybe a net $5.9 million of fair value related changes. So a lot of millions in the geographies, but that was the ending impact, and you can see that on our traditional slide 40 that has the MSR fair value analysis.

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Operator [44]

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Next, we have a follow-up question from the line of Kevin Barker with Piper Jaffray.

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Kevin James Barker, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [45]

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The detail in the fair value gains, you sort of -- you did about $5.9 million on a net basis. But you also had, what, a $63 million mark-to-market gain from the NRZ transaction, is that correct?

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Michael R. Bourque, Ocwen Financial Corporation - CFO and EVP [46]

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So Kevin, the way the NRZ transaction gained worth is we had a -- you'll recall, in the third quarter, we had about a $38 million gain, there was kind of a true up or a mark on the initial transfer in the fourth quarter. So you can -- you see on slide 7, the number now is up to $45 million. So maybe a $7 million incremental benefit. The remainder of the NRZ transaction gain that's laid out on the right side of Slide 7, that'll actually be -- that $18 million will be reflected in the first quarter of '18, assuming assumptions, et cetera, hold through the rest of the quarter. And so it's -- the majority of the impact is broken up between the third quarter that we've already recorded and will be in the first quarter of '18. So only a small impact in Q4.

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Kevin James Barker, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [47]

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Okay. And then also in your servicing expenses, there was -- you called out about a $38 million downward drop quarter-over-quarter. I believe that's back in Slide 33 or 38. Could -- was there -- what was the primary driving factor for the drop in servicing expenses in the servicing origination line?

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Michael R. Bourque, Ocwen Financial Corporation - CFO and EVP [48]

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Let me just get there.

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Kevin James Barker, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [49]

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Sorry, it's Slide 34.

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Michael R. Bourque, Ocwen Financial Corporation - CFO and EVP [50]

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Yes. So on -- if you look at -- it's there. You can also see it on Slide 36. There's going to be 2 elements to that. The biggest -- so you do have some fair value change riffling through that, that will largely be offset, again, in interest expense. But the recovery of the -- I believe, of the OneWest Bank CIT -- sorry, OneWest CIT Bank matter is recorded in the service or expense area. So that was the $29 million credit.

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Kevin James Barker, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [51]

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Okay. All right. Is there any other larger onetimes besides the fair value gains in the NRZ transaction, this credit from OneWest that we should be aware of there, $20 million or $30 million or anything above that?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [52]

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Well, we mentioned the $50 million of legal settlements and regulatory accruals. So we mentioned that without an expense in the quarter.

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Operator [53]

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Our next question comes from John DeVaney with United Capital Markets.

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John Devaney, [54]

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Ron, congratulations on this transaction. I think this is an excellent investment for Ocwen. My question has to do with -- I'm looking backwards in time -- and I've been an investor now for close to 3 years coming up in this March, I'm currently a 9% plus holder of equity in the company. I'm looking backwards and I'm trying to think about what Ocwen's real core competency is, what is your expertise in, what drew me into invest my money into your company. I mean, I did -- It hasn't necessarily worked out well, there has been losses I've taken and opportunity cost. But I look backwards and the thing that I know for sure and I continue to know to this day is, by far, in servicing subprime borrowers for the investor, and whether that's RMBS investors or NRZ as a big investor -- by far, Ocwen blows away every servicer in the world. In fact, Ocwen blows away Bank of America, Wells Fargo, J.P. Morgan, every -- Citibank, every big bank out there in 2012, '13 and '14, before Ocwen started a program of doing deeper-cup principal mods. Those big banks were incinerating the RMBS bonds, so bonds were trading at $0.02 and $0.05 on the dollar. And they weren't even a good deal there, they were being wiped out. I bought bonds at $0.05, $0.10 and $0.15 on the dollar. With 20 years of experience as a subprime investor, and I guessed correctly that Ocwen's mods were going to work, which they wound up doing. I made enough money in '13 and '14 to take the entire stake that I took in Ocwen, I mean, these are tens and tens of millions of dollars. And I made a big bet on Ocwen and the mod strategy, and that's really what drew me in. Now what I want to know going forward is, by far, Ocwen's biggest expertise is working in adverse borrowers. It doesn't feel like it, because regulators have attacked Ocwen during this whole 2 to 3 year period. They don't understand that, by far, Ocwen protects the investors, they protect the homeowners, keeping them in their home. It's kind of like a broken record, you guys keep saying the same thing. Now from my standpoint and more of my question kind is, where does the opportunity lie going forward? Is it in asset-light subservicing and selling this expertise to others, Wells Fargo, Citibank, Bank of America? Anybody should want to use Ocwen to help protect their investment. Similar to how NRZ owns a MSR asset, others should want to hire Ocwen, who has a history of reducing delinquency levels. When delinquency levels in non-agency, or agency for that matter, go down, the service -- the owner of the MSR has the obligation to advance all this money for the servicing advances. So Ocwen has made NRZ way more money, or anybody for that matter, because you've had a history of reducing delinquencies. So the question is, looking at this combination now, where you are picking up a lot of expertise from PHH, where is the opportunity? And how you think that the market is going to transform into the future? And can you win business going forward, as some of this regulatory stuff goes behind you? And that people -- smart people should realize that Ocwen is the best in providing investment returns to the MSR owner on or the RMBS investor.

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [55]

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So John, first, I appreciate the comments on the quality of our servicing and the performance in keeping homeowners in their home and improving value for RMBS investors as well as MSR investors. We do still have work to be done. We think this PHH transaction will help get us there faster and in the right way. We still need to move off of our existing servicing platform onto a more traditional industry-leading platform. I think, by doing that, not only will that be helpful from some of the requirements from a regulatory's perspective. But I think it will be easier than when we have conversations with a large bank or other large industry participants who may be interested in utilizing our services, because they will be very familiar or maybe even using themselves the Black Knight platform. But and as I mentioned and I think, we're in total alignment there that much of the ability to service delinquent or troubled loans or FHA loans that have hired delinquency profiles has really started to go away again. And we're going back to that place where we were before, where there is nobody out there who can handle those kind of loans if, in fact, we see an uptick in delinquency levels. So I think we're positioning ourselves very well with a bigger portfolio, a portfolio on a traditional industry-leading platform. We're going to be combining our expertise and our ability to do loss mitigation with that platform. And when we get to -- when we complete that integration, complete the transfer, we should be maybe the best-positioned servicer out there to not only acquire MSRs if they're available, but to partner with the likes of NRZ on opportunities as well as just to act as a fee-based up subservicer for large industry participants. So that's where we're striving to get to. I apologize, John, I know it's taken a lot longer than you had hoped for and than any others could have anticipated, but this transaction, I think, helps put us back on a path to get there and to really be better and stronger, once we do get there.

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John Devaney, [56]

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Another question real quick. Could you discuss a little bit the cost to service a nonperforming loan, once it goes like 60-plus delinquency, and then compare your opinion of what that cost is versus some of the larger banks like Wells Fargo or Citibank or BofA? Do you think that you have an edge because of your expertise in subservicing? And could, say for example, a Citibank or Wells Fargo, right, pay Ocwen to service FHA loans, which you're saying could be more delinquent? Or just a cross-section of loans as they become delinquent, is your cost plus a fair profit that a very large bank could pay you? Do you believe that those 2 items -- the sum of those 2 items are less than if, say, a Citi or a Wells tried to service these delinquent borrowers themselves?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [57]

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Yes. So John, I can't -- I'm not going to be able to get into the exact economics of it. But I do believe, as I think you do, that Ocwen does have a cost advantage in servicing delinquent loans over almost every other participant in the market, particularly the big banks. We've focused on the technology aspect of -- to produce 45,000 loan modifications this past year and really many, many multiples of that over the last 5 or 6 years. Most servicers, even though they have standard servicing platforms, are not equipped from a technology standpoint to efficiently and effectively and even compliantly do that kind of work, in my view. And so I do believe that we have a cost advantage, a quality advantage.

The performance of those modifications perform better than what we see from others in the industry. As you mentioned, RMBS portfolios where Ocwen is the servicer have performed very well. I know, I just in the past week met with our Community Advisory Council, which is made up of leading nonprofit groups from around the country, and they continue to reiterate to me that how pleased they are with Ocwen's ability to help struggling homeowners remain in their home, get back pay, produce cash flow for the loan investor as well as keeping the families in their homes. And in fact, they asked me questions like, well, if Ocwen keeps getting smaller and smaller and smaller, who is going to help all the struggling homeowners out there, if you're not getting anything new to service. So I'm hopeful that with this acquisition and over time, with more new business, if that time comes, we can resume our ability to help even more families and improve performance for investors. I think FHA in particular is a big question mark out there in the industry. We've seen a lot of the bigger players shy away from that product. It does have its challenges, but we have spent a lot of time over the last few years honing our skills there. And that's something that we'll be exploring as well to see if that's an opportunity for us going forward, particularly because many of the larger players have shied away from that.

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John Devaney, [58]

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So -- and one other question. So with respect to FHA, it is a good point. And Fannie and say Ginnie, right, ultimately, if loans go bad and there's a loss, they're going to pay. There just an insurance provider. So Ocwen has a proven history, I mean, it's all in the data in non-agency. I know for sure that over -- from 2012 looking on, I know for sure, it's in the data that Ocwen mods outperformed everyone else in the world in the subprime category by a very, very good margin. Which is one of the reasons I made so much money on Ocwen's lower dollar bonds. Now that logic would say that if Ocwen is the servicer on FHA, that FHA would want to encourage Ocwen to be the servicer, because if Ocwen has this history of mods doing better, then the government would lose less money on these putbacks. Is that a fair comment to make?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [59]

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So -- I mean, I -- clearly, if we're able to do a better job in loss mitigation and helping homeowners, that should reduce losses for Ginnie Mae and FHA the same way that it does for private label pools that we service. We've obviously struggled over the last few years with other aspects of our business. And I'm hopeful that, as I said before, moving to the new platform, combining our loss mitigation expertise with the strengths of PHH will result in a servicer that everybody can look to, whether it's the GSEs or Ginnie Mae or private investors or large banks, and say that's a platform that can handle the full spectrum of loans, they're efficient, they're compliant. And I'm hopeful that, that's where we're headed, and I think a lot of the pieces can come together with this acquisition.

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John Devaney, [60]

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And then with the acquisition, Ron, so which of these 2 companies' mortgage licenses for all the states are going to be used? You don't need both of them.

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [61]

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So you're correct, John, that Ocwen's current structure holds multiple sets of licenses. PHH has its own licenses. We would look to -- over time, to hopefully have a simpler licensing structure than we have today and as we would have combined on day 1. But that will -- is something that we need to continue doing our planning on and work with our regulatory partners on to get to the right place. But I agree, I would hope that, over time, we can have a more streamlined and hopefully, simpler licensing structure than we have today or that we will have as a combined entity.

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John Devaney, [62]

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And then the -- I mean, we're looking at a year, the -- maybe a year before being able to acquire MSRs, you need get this deal done, you need to get integrated. So another question is, can you take on subservicing for others? And would that be allowable? I mean, right now, you've got 2 states to go that have a cease and desist order saying you can't buy MSR, and you've got New York that we're now waiting on for a year to give the final answer on whether you can buy MSR. Now one question is, if you can't buy MSR and you have these -- this expertise, could you be hired at this moment right now as a subservicer?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [63]

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So John, I think that's a difficult question to answer. We -- and as you mentioned, our focus is really going to be on getting regulatory approvals for this transaction, migrating all the loans to the new platform. PHH does have a pipeline of potential subservicing clients. And I know that PHH management team and the Ocwen team will be looking to see if those opportunities can go forward, and hopefully, some of them can. But it really will depend on various circumstances. And we are just going to be in constant dialogue with our regulatory partners to make sure they understand everything that we're doing, that they're comfortable with what we're doing, that everything we're doing complies with their specific circumstances related to their -- not only their state laws and regulations, but any of the agreements that we've signed. So I don't think there's an easy blanket answer, but we would hope that -- but in the long term, by acquiring PHH and moving to their platform, which should happen sooner than if we do it on our own, that it will allow us to eventually get to the point to resume growth sooner than we would otherwise be able to do on our own.

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John Devaney, [64]

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Great job. I'm sticking with you guys. I believe in you as a manager, and I've been trading bonds backed by Ocwen servicing. I started my whole career -- Ocwen took over servicing in high LTV second lien bonds, which really introduced me to non-agency RMBS and Ocwen servicing team. And I've been -- really been a fan my whole career of the company, and I just wish you guys the best. And I really hope that a lot of the regulators can see what I've seen over all of these years. I think you've been somewhat unfairly sort of scapegoated politically on many fronts, but keep up the good work.

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Operator [65]

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Yes, we have a follow-up question from the line of Bose George with KBW.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [66]

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Just a quick follow-up on the $50 million litigation expense. When we think of that going forward, is there going to just be some of that, while you still work this out for the last couple of states and Attorneys General? And after that, that number -- it presumably falls pretty sharply?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [67]

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So Bose, first of all, keep in mind that a big chunk of that was related to a securities litigation matter that we settled and reported on in the quarter. So just to put it in perspective, a big chunk of that was related to that. And actually, very little of that expense is regulatory-related, although a small amount of it is. I think when you get the 10-K, you'll get an update on our significant litigation regulatory matters and hopefully, will get some perspective as to how -- where we're headed. We continue to work to try to put as many of those legacy things behind us as we can. We're not completely there. And in fact, the cost did go up in 2017 versus 2016, but we have made a lot of progress, and we would hope that, over time, those numbers do start to decline.

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Operator [68]

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Our next question comes from Lee Cooperman with Omega Advisors.

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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO, and Chairman [69]

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I apologize if this question was asked, because I joined the call late. I was tied up before. Are you guys now able to buy other MSRs? Are you able to get yourself into a growth mode? Is this the essence of what we're seeing today?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [70]

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So no, Leon, I wouldn't conclude that. We have regulatory settlements with various states that restrict our ability to acquire MSRs until May of this year. We still have restrictions from the state of New York. We also are limited in our ability to board new loans onto our existing platform. So I think you have to think of it in terms we need to get past May, we need to make progress with New York, we need to migrate onto a new servicing platform, which we believe this transaction accelerates. And once those things are done, we potentially could be in a position to resume growth. There is some opportunity, potentially, for PHH to grow, and we'll have to evaluate that, but there's -- we still have a lot of work and a lot of heavy lifting to do before we get to that point.

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Operator [71]

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Ladies and gentlemen, this concludes today's conference call. Thank you for attending and have a nice day.

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [72]

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Thank you, everybody.