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Edited Transcript of OCN earnings conference call or presentation 5-Nov-19 1:30pm GMT

Q3 2019 Ocwen Financial Corp Earnings Call

WEST PALM BEACH Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Ocwen Financial Corp earnings conference call or presentation Tuesday, November 5, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glen A. Messina

Ocwen Financial Corporation - CEO, President & Director

* Hugo Arias

Ocwen Financial Corporation - MD of IR

* June C. Campbell

Ocwen Financial Corporation - Executive VP & CFO

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Conference Call Participants

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* Bose Thomas George

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

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Ocwen Financial Third Quarter Earnings Conference Call. (Operator Instructions) The conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Hugo Arias, Senior Vice President, Treasurer and Head of Investor Relations. Please go ahead.

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Hugo Arias, Ocwen Financial Corporation - MD of IR [2]

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Good morning, and thank you for joining us for Ocwen's Third Quarter 2019 Earnings Call. Please note that our third quarter 2019 earnings release and slide presentation have been released and are available on our website.

Speaking on the call will be Ocwen's Chief Executive Officer, Glen Messina; and Chief Financial Officer, June Campbell. 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 a 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 you should not place undue reliance on such statements.

Forward-looking statements involve several 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 expenses, excluding MSR valuation adjustments net and expense notables and pretax loss excluding income statement notables and amortization of NRZ lump-sum cash payments, among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition. We also believe these non-GAAP financial measures provide an alternate way to view certain aspects of our business that is instructive.

Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported results under accounting principles generally accepted in the United States.

For an elaboration of factors I just discussed, please refer to our presentation and today's earnings release as well as the company's filings with the Securities and Exchange Commission, including Ocwen's 2018 Form 10-K and once filed its third quarter 2019 Form 10-Q.

Now I will turn the call over to Glen Messina.

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Glen A. Messina, Ocwen Financial Corporation - CEO, President & Director [3]

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Thank you, Hugo. Good morning, and thank you for joining us. Today, I'll provide an update regarding our progress in executing our key business initiatives and the actions we are taking to reposition Ocwen for profitability and long-term value creation.

Our CFO, June Campbell, will follow with a review of our third quarter 2019 financial results. I will then close the call with some brief remarks before opening it up for questions.

Please turn to Slide 4. During the third quarter, we made substantial progress against our key business initiatives while proactively addressing a more volatile and uncertain interest rate environment. With integration activities winding down, we are intensifying our focus and resource allocation on growth in continuous cost improvement. I continue to be encouraged by our high level of execution. Our integration efforts are largely complete. And in the fourth quarter, we expect to finalize our facilities' consolidation and begin the final phase of our legal entity simplification. In the third quarter, we realized $268 million of annualized expense savings, excluding net MSR valuation adjustments and expense notables compared to the second quarter of 2018 adjusted expenses for the combined Ocwen and PHH.

We remain on track to achieve at least $300 million of annualized, adjusted run rate expense savings by the fourth quarter 2019. At approximately our current servicing UPB levels, we are increasing our annualized total cost reengineering target to $400 million and expect to achieve this objective by the third quarter 2020.

Volume from our lending channels was up 29% over the same quarter last year despite the loss of HARP and NRZ recapture volume. We believe we can originate up to $10 billion of funded volume from our lending and flow MSR channels in 2020, assuming that we execute our plans and there is no change in the current market environment.

Since the end of the second quarter, we've been awarded $3 billion and closed $1 billion in bulk MSR purchases. We continue to be prudent and patient in our capital deployment in bulk MSRs, considering the volatile interest rates and what we believe to be lower returns and higher potential risks in the current market.

Due to the heightened interest rate volatility in the third quarter, we implemented a derivative-based hedging program that partially hedges the exposure for our interest rate-sensitive MSR portfolio, while we build a natural hedge through our lending channels.

We continue to reduce our cost of debt and improve match funding through the implementation of MSR financing solutions and enhancements to our existing structured finance programs. We closed the third quarter with $345 million of cash on hand and believe that our liquidity position and planned capital actions can support our near-term investment objectives. We continue to proactively engage our regulators and track our progress as it relates to our regulatory commitments.

As detailed on Slide 22, our actions to date have reduced the annualized pretax loss, excluding income statement notables and amortization of NRZ lump-sum cash payments, by nearly 50%. We expect pretax income, excluding income statement notables, but including amortization of NRZ lump-sum payments, to approach breakeven in the fourth quarter of 2019.

Lastly, we also believe we are on track to achieve pretax profitability, excluding income statement notables and amortization of NRZ lump-sum payments by the third quarter of 2020, both pretax income targets, assume we achieve our objectives and there are no adverse changes to current market and industry conditions or legal and regulatory matters.

Please turn to Slide 5. We believe the actions we have taken over the past 12 months are reshape in Ocwen into a diversified independent mortgage servicer and originator that can deliver performance through mortgage industry cycles. We are quickly building multiple channels to drive portfolio replenishment and growth, including correspondent lending, agency co-issue programs, flow MSR relationships, participation in the bulk market and portfolio retention.

Our product and service offerings include forward and reverse mortgages, agency, government and private investor products, residential and small balance commercial mortgage servicing and subservicing with a core competency in performing and special servicing. With the diversified product and service offering, a servicing portfolio of over $200 billion and 1.4 million customers, high servicer ratings from the agencies we service for and an improving cost structure, we believe we have meaningfully improved our competitive position due to the acquisition of PHH and the implementation of our plans.

Please turn to Slide 6. We believe we are implementing a clear and actionable road map to enhance our financial performance and competitive position. This road map is grounded in what we believe are critical success factors for our business, including competitive cost structure, customer focus and satisfaction, reputation with key stakeholders, operational execution, portfolio replenishment and recapture performance, ancillary income generation and access to cost effective capital.

We have identified several objectives that align to the critical success factors, including an industry top quartile cost structure, maintaining a high level of customer satisfaction, building a multichannel and multiproduct portfolio replenishment capability, leveraging structured financing and MSR capital vehicles for capital efficiency and maintaining a roughly 50-50 mix of owned servicing and subservicing over time. Our key initiatives are intended to position Ocwen as a high-quality mortgage servicer and originator with an industry top quartile cost structure.

Now please turn to Slide 7. Despite more unpredictable bulk MSR volume and lower asset yield expectations for MSR investment, we continue to target achieving profitability on a pretax basis, excluding income statement notables and the amortization of NRZ lump-sum payments by the third quarter of 2020. We expect the improvement in adjusted pretax earnings will be driven by a combination of factors that we currently estimate as approximately $132 million annualized expense reduction from additional cost reengineering, $10 million annualized of lower interest expense due to corporate debt retirement and $30 million annualized revenue increase from higher lending volume and MSR mix.

Our profitability road map as soon as we maintain a servicing portfolio UPB of at least $200 billion and achieve a roughly 50-50 owned and subservice mix over time. However, we expect MSR replenishment rates will vary quarter-over-quarter, especially while we are dependent on the bulk MSR market. As a result, our servicing UPB may also vary from quarter-to-quarter.

I will now provide additional details on our actions to achieve our cost structure, growth, capital and regulatory objectives.

Please turn to Slide 8. We are focused on executing 3 categories of actions to achieve a highly competitive cost structure: integration-related cost reengineering, including merger synergies; expense reductions based on expectations for the size of the servicing portfolio; and continuous cost improvement. We are viewing continuous cost improvement as a core strength that is necessary for future success. As such, we're integrating all our efforts into one consolidated cost improvement program with an aggregate total reduction target of $400 million on an annualized basis by the third quarter of 2020.

Our continuous cost improvement efforts are focused on optimizing strategic sourcing, offshoring, lean process design and technology-enabled productivity enhancements. Our investment in technology is relatively modest, but highly impactful. For example, our initial applications of robotic process automation have resulted in reduced cycle times for the affected processes by over 90%.

The entire organization is highly engaged in our continuous cost improvement efforts. Our employees have submitted approximately 200 cost and business improvement ideas, some of which have been incorporated into our total cost reengineering target. Our cost competitiveness objective is to achieve and sustain an industry top quartile cost position in our servicing operations. We measure our competitiveness on a servicing cost per loan basis with and without certain overhead allocations, which we benchmark to available MBA and other industry survey data.

Determining servicing cost per loan is not an exact science because overhead allocations are not always comparable and because servicing cost per loan will vary depending upon loan types and delinquency status. However, with these caveats, we believe that we will achieve top quartile performance for servicing marginal cost per loan in the fourth quarter.

We are fully aware that our competitors are also engaged in similar efficiency efforts. As such, we believe that cost improvement needs to be a continuous effort to remain in the top quartile over time. We maintained our prior estimate of incurring approximately $65 million of total upfront costs related to our cost reengineering program in 2019. Through the end of the third quarter, we incurred $51 million of these costs. We are currently evaluating if we will need to incur additional upfront costs in 2020 because of increasing our total cost savings target. Despite our progress in reengineering our cost structure, we believe that long-term profitability cannot be sustained without adequate scale. Therefore, we intend to make appropriate investments in growth to ensure that the size of our servicing portfolio is aligned with the relatively high fixed cost requirements of a leading mortgage servicing business.

Please turn to Slide 9. Growing our lending business is a top priority as we look to create a more balanced business mix and a natural hedge to our servicing portfolio. Our lending volume in the third quarter was up 29% from the same quarter last year despite the loss of HARP and NRZ recapture volume. We are seeing positive results from our correspondent lending build out and the improvement we made to our recapture lending platform. In correspondent lending, we have been optimizing our operations and have established relationships with over 60 correspondent lenders to date. We expect continued prudent growth in the number of corresponding counterparties we do business with and are achieving win rates in line with our targets.

Since launching in June, our correspondent lock volume and MSR purchases through the agency cash window program have grown to $331 million in the month of October. In addition, we have built a pipeline of approximately $2.2 billion per month in flow MSR purchase opportunities. In our recapture platform, our actions have resulted in over a 20% improvement in sales, loan processor and underwriter productivity. We are continuing to invest in this critical business channel and are executing a defined road map of staffing increases, process improvements and technology upgrades. We believe these actions will more than double our recapture rate of refinancing-related portfolio runoff eligible for solicitation.

Overall, we have achieved solid growth in our lending channels and realized annual run rate funded origination volume of $2.6 billion for the month of October. In addition to our organic growth initiatives, we continue to explore M&A opportunities to complement and accelerate our organic growth actions. We are focused on potential targets that can generate significant volume through mortgage lending cycles. Assuming certain business attributes and expected valuation levels, we believe the acquisition of a sizable lending platform could represent our best and highest return on investment alternative, while contributing to a more optimal business mix. However, we can provide no assurances that any such transaction will be consummated.

We continue to track a substantial pipeline of subservicing opportunities totaling over $20 billion in UPB and have received positive feedback from recent RFP activity and on-site visit from prospects. The subservicing marketing cycle tends to be prolonged, but we believe we are starting to see the benefits from our integration progress and are encouraged by the opportunities available in the market.

We've reviewed transactions totaling $69 billion in UPB in the bulk MSR market since the end of the second quarter. Despite our significant level of market engagement, we were awarded only $3 billion of bulk servicing UPB and closed on $1 billion since the end of the second quarter, as we are unwilling to accept the higher risk or lower return levels required to win the larger packages coming to market. About 1/3 of the transactions we evaluated did not sell as bid levels did not meet seller expectations. We believe this valuation disconnect is likely driven by the more volatile and uncertain rate environment, which may impact buyers and sellers view of value as well as recent strong cash flow experience of mortgage originators, which may reduce incentives for MSR sellers to transact.

For a portion of transactions that did close, it appears as if buyers are willing to accept riskier deal terms, particularly with respect to prepayment and rate risk. In certain transactions, we are seeing MSR sellers imposing restrictions on recapture activity and reducing the time frame and level of prepayment protections typically afforded to buyers were favoring transactions at fixed price with no adjustments for interest rate-driven valuation changes from the time of bidding to closing.

Asset yield expectations appear to be coming down in reaction to the overall decline in market rates. Although, we are unwilling to take an unreasonable amount of risk without appropriate pricing concessions, we have decided to lower our minimum ROA for Agency MSRs from 9% to 8.5%, which translates into a leverage pretax return on equity of approximately 13%. We continue to be focused on allocating capital to opportunities that provide us with appropriate risk-adjusted returns. We believe MSR sellers will demonstrate a greater willingness to transact in the future to the extent there is lower interest rate uncertainty and a decline in refinancing volume and gain on sale margins from recent levels. Nevertheless, the recent trends in the bulk MSR market confirm the importance of developing sustainable sources of MSR replenishment by growing our lending and MSR flow channels.

Please turn to Slide 10. We continue to enhance our financial flexibility and believe our liquidity position and targeted capital actions can support our near-term investment objectives. During the third quarter, our MSR financing and corporate debt retirement actions were essentially offsetting as we had borrowings of $136 million under our MSR financing facility and repaid approximately $143 million of corporate debt.

Our liquidity position was bolstered by a refinancing of $470 million of OMART servicing advance term ABS executed in early August. Despite extreme capital markets volatility, we were able to achieve a higher advance rate that resulted in an additional $40 million of funding and record all-time lows in funding cost for OMART. We believe this transaction demonstrates our ability to access capital at attractive rates under a variety of capital market conditions.

As part of our capital structure optimization, we are evaluating additional structured finance opportunities that could result in up to $200 million of incremental funding. As part of this effort, we expect to close a new $100 million Ginnie Mae MSR financing facility in the fourth quarter subject to completing the Ginnie Mae acknowledgment process and finalizing facility documentation. The facility is expected to have a 2-year term and initial borrowing should approximate $60 million to $70 million based on the size of our Ginnie Mae servicing portfolio as of September 30.

We continue to evaluate alternatives for MSR capital vehicles that could provide us with the ability to grow our servicing UPB with significantly lower capital requirements compared to MSR acquisitions. We are currently envisioning an MSR vehicle that would acquire Agency MSRs and enter into subservicing and portfolio recapture arrangements with us. We would also be invested alongside our partners and thus aligned in our investment objectives. We expect to begin vetting potential investor interest in the fourth quarter and early next year. The next phase of our MSR financing strategy and the MSR capital vehicle will be an area of focus over the next 6 to 12 months.

As part of our disciplined approach to capital allocation, we repurchased approximately $39 million of our 8.375% senior secured notes due 2022 during the third quarter. We believe this was a prudent use of capital based on returns as well as the positive impact on our leverage and debt service costs. To the extent, we are unable to allocate investment capital at appropriate risk-adjusted returns, we will consider additional debt repurchases or repayment as an alternative use of capital.

We believe our capital structure and liquidity actions, combined with the positive momentum in our business initiatives, can be positive factors as we look to extend the maturity date of our senior secured term loan, which comes due in December 2020.

Please turn to Slide 11. We continue to proactively engage our regulators and track our progress as it relates to regulatory commitments. During the third quarter, several regulatory reviews were completed that resulted in no material adverse findings. We continue to focus on driving strong compliance culture and fulfilling our regulatory commitments.

In the third quarter, we received court rulings on our motions to dismiss both the CFPB and Florida matters that date back to April 2017. In the CFPB matter, the court dismissed the CFPB's entire complaint without prejudice because the court found that the CFPB engaged in impermissible shotgun pleading and held that the CFPB must specifically allege and distinguish the facts between all claims. The CFPB was permitted to replead its case and filed an amended complaint. On November 1, we filed our answer and affirmative defenses.

In the Florida matter, the court granted our motion to dismiss with prejudice, add to 3 claims and part of a fourth clam, which means these claims are no longer part of the case. In addition, like in the CFPB case, the court dismissed the Florida case without prejudice because it found that Florida had engaged in impermissible shotgun pleading. Florida was also permitted to replead its case and did so on November 1. We are reviewing and planning our response to the revised pleading. Based on our review of the amended complaints, it appears the allegation set remain has been narrowed and, in some cases, reorganized into new accounts, but remain substantially unchanged. We continue to believe we have factual and legal defenses to the allegations in the CFPB and Florida matters, and we continue to vigorously defend ourselves.

Now I'll turn it over to June, who will discuss the results for the quarter.

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June C. Campbell, Ocwen Financial Corporation - Executive VP & CFO [4]

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

Please turn to Slide 13. Our third quarter 2019 reported net loss of $43 million was impacted by $18 million of reengineering costs, $6 million of unfavorable net valuation impacts and a $5 million gain on repurchase of senior secured notes, among other items. Third quarter net loss compares favorably to the net loss of $90 million in the second quarter of 2019, largely driven by lower unfavorable net valuation impacts. The positive pretax earnings impact from the amortization of the lump-sum cash payments received from NRZ in 2017 and 2018 was $24 million in the third quarter and $31 million in the prior quarter. The amortization of these lump-sum cash payments will have a $61 million positive impact to our pretax income over future periods from April 30, 2020.

Revenue of $284 million increased by $9 million from the prior quarter. This included $5 million less of favorable reverse portfolio fair value change compared to the prior quarter.

Non-MSR expenses of $179 million were $5 million lower than the prior quarter as we continue to make progress on our cost reengineering actions, which remain ahead of our expectations. The favorable MSR valuation adjustment of $135 million in the quarter is primarily due to a $252 million favorable valuation adjustment to our non-Agency MSRs associated with continued improved collateral performance, which was confirmed by our third-party valuation provider and recent market trading activity. This favorability was partly offset by a $63 million unfavorable adjustment primarily due to a 40 basis point decline in the 10-year swap rate and other valuation updates. The remaining $55 million reduction in MSR value was due to portfolio runoff.

The favorable MSR valuation adjustments in the quarter was offset by $198 million of unfavorable NRZ financing liability valuation change, which was recorded in interest expense. We have provided additional information related to the MSR valuation impacts on Slide 27.

I would now like to provide comments on our Servicing and Lending segment results. As outlined on Slide 14, our Servicing segment recorded a $13 million pretax loss compared to $59 million in the prior quarter, largely driven by a $39 million lower net unfavorable fair value change compared to the second quarter. Servicing revenue of $250 million increased by $8 million, largely driven by timing of servicing fee collections in connection with the final MSP loan boarding in June. Approximately $6 million of the higher servicing revenue was remitted to NRZ and offsetting interest expense. The servicing business remains focused on providing sustainable loan modification solutions to qualifying borrowers in need. We completed 6,245 modifications in the quarter, 15% of which resulted in some type of debt forgiveness, totaling $33 million.

As of September 30, the total UPB of our servicing portfolio stood at $217 billion, which is down from $229 billion at June 30. This reduction was largely driven by portfolio runoff of $9 billion and a net $4 billion decrease in subservicing primarily due to a legacy PHH subservicing client termination, which we disclosed last quarter. We do not currently anticipate any additional material subservicing terminations.

Please turn to Slide 15. The Lending segment recorded a pretax income of $9 million, $1 million favorable to the prior quarter. Forward lending reported close to breakeven results in the quarter, which is $3 million favorable to prior quarter. Revenue of $8 million was $1 million favorable, primarily due to higher margins in recapture and costs were lower due to cost and productivity improvement initiatives. We successfully ramped up our relaunched correspondent channel to $93 million of funded volume in the quarter. The reverse lending business recorded pretax income of $9 million compared to $12 million in the prior quarter, largely driven by $5 million less of favorable net fair value change compared to the second quarter. Reverse lending revenue of $21 million was in line with prior quarter. Excluding a less favorable net fair value change, revenue improved $5 million, driven in part by 32% higher volumes in the quarter.

As you can see on Slide 16, we ended the quarter with $345 million of unrestricted cash. At quarter end, we were fully funded on our servicing advance and committed warehouse facilities based on available collateral. Our liquidity was $34 million higher than prior quarter driven by $136 million of cash from a new MSR financing facility and $40 million from a better advance rate on the refinanced OMART ABS, offset by $138 million of cash used for the repayment of PHH bonds that matured in September 2019, repurchases of senior secured notes and scheduled amortization of our SSTL. Our working capital needs will continue to change as we support the growth of our lending business. We continue to closely monitor our balance sheet changes and look for opportunities to improve working capital requirements as part of our liquidity management initiatives.

We ended the quarter with corporate debt outstanding of $645 million following the repayment of $98 million of PHH bonds and repurchases of $39 million of senior secured notes and a corporate debt-to-equity ratio of 1.7x.

I'll now turn it back over to Glen.

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Glen A. Messina, Ocwen Financial Corporation - CEO, President & Director [5]

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Thank you, June. Please turn to Slide 17. Since our last earnings call, we have continued to make substantial progress with respect to our key business initiatives to position the company for profitability and growth. Our team is executing well and committed to delivering on the objectives of our key initiatives. We're taking actions to grow our lending platform, diversify our MSR sources, further reduce costs, lower our cost of capital and maintain a disciplined approach to capital allocation. We believe our actions and plans can result in a more diversified business that can deliver performance through the mortgage industry cycle and capitalize on growth opportunities. Our integration efforts are largely complete in the fourth quarter. We expect to finalize our facilities' consolidation and begin the final phase of our legal entity simplification.

In the third quarter, we realized $268 million of annualized expense savings, excluding net MSR valuation adjustments and expense notables compared to the second quarter 2018 adjusted expenses for the combined Ocwen and PHH. We remain on track to achieve at least $300 million of annualized, adjusted run rate expense savings by the fourth quarter 2019. At approximately our current servicing UPB levels, we are increasing our annualized total cost reengineering target to $400 million and expect to achieve this objective by the third quarter 2020. Volume from our lending channels was up 29% over the same quarter last year despite the loss of HARP and NRZ recapture volume. We believe we can originate up to $10 billion of funded volume from our lending and flow origination channels in 2020, assuming we execute our plans.

Since the end of the second quarter, we've been awarded $3 billion and closed $1 billion in bulk MSR purchases. We continue to be prudent and patient in our capital deployment in bulk MSRs. We implemented a derivative-based hedging program that partially hedges the exposure for our interest rate-sensitive MSR portfolio, while we build a natural hedge through our lending channels. We continue to reduce our cost of debt and improve match funding through the implementation of MSR financing solutions and enhancements to our existing structured finance programs. And we continue to proactively engage our regulators and track our progress as it relates to our regulatory commitments.

Our actions to date have reduced the annualized pretax loss, excluding income statement notables and amortization of NRZ lump-sum cash payments, by nearly 50%. We expect pretax income, excluding income statement notables, but including amortization of NRZ lump-sum payments, to approach breakeven in the fourth quarter of 2019. We also believe we are on track to achieve pretax profitability, excluding income statement notables and amortization of NRZ lump-sum payments by the third quarter of 2020.

I want to thank the Ocwen Board of Directors and our associates for their hard work and enduring commitment through our transformation. And with that, we're ready to take 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 Bose George of KBW.

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

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First, just you gave your target with hurdle rate for Agency MSR at 8.5%. And also, just on the Ginnie Mae side, do you guys have a target? And similarly, where do you see the market trading?

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Glen A. Messina, Ocwen Financial Corporation - CEO, President & Director [3]

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So yes. During the third quarter, as a result of lower interest rate environment, we have seen returns drift a bit lower on MSR returns. So we historically had targeted 9% to 11% range for Agency MSRs and an 11% to 13% range on Ginnies. We've seen the market pricing on both asset levels -- asset level pricings go up, which means returns come down. And we're seeing returns in that 8.5% to 9% range largely for agencies and Ginnies hovering right around 9%. Now for us what that mean -- I'm sorry, Bose, go ahead.

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

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Sorry. Go ahead, Glen.

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Glen A. Messina, Ocwen Financial Corporation - CEO, President & Director [5]

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Oh, I was going to say then obviously, we lever those returns as well with MSR secured financing. So it produces after leverage return of about 13% for us at the 8.5% level.

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

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Okay. And then just given what you're seeing in the market, are you reasonably comfortable that you can keep your MSR or servicing portfolio pretty stable over the next year?

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Glen A. Messina, Ocwen Financial Corporation - CEO, President & Director [7]

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Yes. We are focused on growing our lending channel, in particular, I'm proud of the progress we made during the quarter. We have more work to do for sure. But we are growing our lending channel rapidly. And our goal is to at least double the recapture rate in our portfolio retention platform, continue to grow our correspondent lending platform and achieve annualized volume through our lending channels plus our agency cash window flow relationships of $10 billion. And then obviously, we'll continue to participate on an opportunistic basis in a bulk market to achieve our portfolio replenishment objectives.

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

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Okay. Great. And then actually on the cost cuts, obviously, great work on that. Just the longer term in terms of attaining normalized profitability, is there a way to gauge what you need to do on the revenue side, sort of, the level of UPB or volumes, et cetera?

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Glen A. Messina, Ocwen Financial Corporation - CEO, President & Director [9]

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Yes. Those I think the road map that we laid out gave all the key assumptions to how we're thinking about the business, right? So we want to maintain at least $200 billion of UPB. We want to achieve about a 50-50 mix of owned servicing and subservicing. And then from a cost reduction perspective, achieving our $400 million cost-savings objective. We'll have some interest expense savings as a result of some of the corporate debt actions that we've taken, and then seeing about a $30 million revenue growth from our lending activities, which is, again, laid out in that road map. We think that gets the business to a place where we're profitable in the third quarter of 2020.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [10]

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Yes. That makes sense. But I was seeking more of a -- I mean that gets -- does that get you to sort of breakeven or a -- or your whatever target normalized profitability and seeking more of what you need to get to whatever that target rate is?

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Glen A. Messina, Ocwen Financial Corporation - CEO, President & Director [11]

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Yes. So again, we're -- as I think about the business from a framework perspective, we're pricing our MSRs to achieve a levered return of around 13%. So long term, that's the earnings rate that in theory is embedded into our assets, assuming that the pricing assumptions are materialized on a go-forward basis. And then we would expect our lending channels as we continue to grow them, particularly our portfolio replenishment -- portfolio retention channel will contribute positive earnings as well too, through the cycle, obviously, more earnings in a down rate environment, less earnings on an upgrade or a purchase market environment. We continue to believe our business has to return its cost of capital, which we expect to be in the low double-digit range -- high single-digit, low double-digit range to the business.

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Operator [12]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Glen Messina for closing remarks.

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Glen A. Messina, Ocwen Financial Corporation - CEO, President & Director [13]

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Thank you, everyone, for joining the call today. We appreciate your continued interest in Ocwen, and I look forward to talking to you next call. Thank you.

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Operator [14]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.