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Edited Transcript of OCN earnings conference call or presentation 2-May-18 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2018 Ocwen Financial Corp Earnings Call

WEST PALM BEACH May 3, 2018 (Thomson StreetEvents) -- Edited Transcript of Ocwen Financial Corp earnings conference call or presentation Wednesday, May 2, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael R. Bourque

Ocwen Financial Corporation - Executive VP & CFO

* 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

* Samuel F. Martini

Omega Advisors, Inc. - Partner & Co-Director of Research

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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 First Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Mr. Stephen 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 First Quarter 2018 Earnings Call. Please note that our first quarter 2018 earnings release and slide presentation have been released and are available on our shareholder relations website for your review. 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 statements, whether as a result of new information, future events or otherwise. In addition, the presentation and our comments contains references to non-GAAP financial measures, such as adjusted operating expense, adjusted pretax income, adjusted pretax income before corporate debt expense, normalized adjusted cash flow from operations, illustrative servicing cash flow, available liquidity and adjusted perform liquidity, among others. We believe these non-GAAP financial measures provide a useful supplement to discussion and analysis of our financial condition. We also believe these non-GAAP financial measures provide an alternate way to view certain aspects of our business that is instructive. Non GAAP financial measures should be viewed in addition to, and not as an alternative for, the company's reported results under accounting principles generally accepted in the U.S. For an elaboration of these factors I just discussed, please refer to our presentation, today's earnings release as well as the company's filing with the Securities and Exchange Commission, including Ocwen's 2017 Form 10-K, and the first quarter 2018 Form 10-Q, which are 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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Good morning, everyone, and thank you for joining us today. As you have already seen from our earnings release, earlier this morning, I'm very pleased to report that Ocwen reported a profit in the first quarter. While it's tempting to simply end my prepared remarks right there, there is so much more to report on. For those of you who may be new to the story, Ocwen is a leading mortgage servicing and lending company with special capabilities. We are the largest servicer of nonconforming mortgage loans in this country. We are also one of the leading reverse mortgage lenders in the U.S. While reporting our first quarterly profit in over a year is important and demonstrates progress on the financial front, we are most proud of the tremendous impact we had this quarter helping consumers achieve financial stability. Ocwen Loan Servicing has a slogan, helping homeowners is what we do, and help, we did. During the quarter, we helped almost 11,600 families remain in their home and get a fresh start through a sustainable loan modification. Our performance, helping homeowners in Q1 represents a 19% improvement over the prior quarter. We also helped almost 1,100 of our servicing customers refinance into a better loan through our forward lending business. That's almost 13,000 families helped in the first quarter alone, and all of them should help improve RMBS performance. But that is not all we did. Our reverse mortgage subsidiary Liberty also had a great quarter. Liberty has a tagline, changing lives. And changing lives we did. In Q1, Liberty helped change for the better the lives of 1,200 seniors and their families through a reverse mortgage. On top of that, our reverse mortgage lending business had a record quarter recording a $9.8 million pretax profit and the Servicing business had its seventh consecutive profitable quarter. I'm very proud of the Ocwen Loan servicing, Homeward Lending and Liberty teams that make up Ocwen Financial Corporation and that achieved these outstanding first quarter results. At the corporate level, we also had a very busy and fruitful quarter. As most of you already know, we received $280 million from new residential during Q1, following the completion of our amendment to our 2017 agreements. We largely completed the liquidation of our Auto Lending business, we remained Fannie Mae Star or servicer total achievement and rewards performer for 2017 and we announced that we intend to acquire PHH Corporation, later this year for $360 million.

We also continued our progress on the regulatory front, but there is still more to do there before we can resume growth. I'm also pleased to report that we have identified some good opportunities to profitably deploy our excess liquidity. For example, in March and April, we executed on some of our owned call rights and called a total of 11 deals with an unpaid principal balance of over $80 million. We intend to hold the loans for now, most of which are performing with coupons above 9%. We are also strategically deploying capital in our reverse lending business and Ginnie Mae servicing business to improve margins. These accomplishments reflect not only the quality of our management team and staff, but part of the ongoing transformation of the company. Strategically right now, the team and I are focused on the following: closing the PHH transaction; transferring our servicing portfolio to the MSP servicing system; integrating Ocwen and PHH and achieving the anticipated economies of scale; vigorously defending ourselves against remaining litigation claims and resolving what we reasonably can; effectively deploying our excess liquidity; helping even more struggling homeowners achieve financial stability; continuing to improve and grow our mortgage and reverse lending businesses; ongoing risk and compliance management; and eventually returning the company to sustainable profitability. I will now turn the call over to Michael Bourque, our CFO, who will provide you more details on the PHH acquisition and our first quarter results. Michael?

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Michael R. Bourque, Ocwen Financial Corporation - Executive VP & CFO [4]

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Thank you, Ron, and good morning. My comments today will be brief, beginning with a short update on our announced merger with PHH. I will then review our financial results for the first quarter and our balance sheet and liquidity position. As noted, our first quarter investor presentation, including financial and cost slides are available on our website. Let me begin with a few comments on our announced merger with PHH. Integration planning efforts began almost immediately after the deal announcement and continued to move forward at pace. As we stated at the time of the acquisition, we believe an Ocwen PHH merger provide significant economies of sale, improved operating margins and accelerates our transition to an industry leading servicing platform. We still believe that to be true today. From a closing perspective, we are working closely with all stakeholders, including regulators and the GSEs to obtain all necessary approvals and consents. PHH has scheduled its shareholder meeting for June 11, 2018, to consider and hopefully, approve the transaction. We remain on track with the timing we laid out on our last call and expect to be able to close the acquisition in the second half of this year. Please understand that beyond this, we do not plan to comment further or answer questions regarding the merger or the ongoing integration planning process.

Turning to our results. Our first quarter results demonstrate continued operational improvement for the company, despite various headwinds. We recorded revenue of $260 million, which was down $17 million from the prior quarter, primarily due to portfolio run off and our exit from the forward wholesale lending channel. We recorded pretax income of $5 million, which was a $50 million improvement over Q4. Adjusting for various items, as shown on Slide 21 and 23 of the investor presentation, adjusted pretax income would have been $6 million in the first quarter. Regarding our MSRs, at the beginning of the year we made a change in accounting elections to carry the remainder of our owned MSRs at fair value. Previously, we had only carried our POS MSRs and a very small portion of our GSE MSRs at fair value. This brings us more aligned with how most of our competitors account for the assets and added $82 million to our shareholders' equity in the quarter. As a result of this, however, it could lead to additional income statement volatility, driven by interest rate changes. With this accounting election, you will note that we no longer reflect MSR amortization as an expense. This impact is now captured in the fair value mark-to-market. Please note that the fair value changes related to the MSRs, which were previously recorded in servicing and origination expenses have also now been reclassified within operating expenses as MSR valuation adjustments net. In our slide deck, we've tried to lay out the MSR impacts for you in a clear way and will be happy to follow up on any questions. Because of this change and the first quarter profit, stockholders' equity increased $0.58 per share, or $85 million from the end of last year and currently stands at $630 million. Please refer to our 10-Q, which was filed this morning for additional details, which includes previously disclosed MSR amortization reflected as part of the MSR valuation adjustments net for prior periods. Our Servicing segment delivered $20 million of pretax income, including $20 million of favorable interest rate change, fair value adjustments for Ginnie Mae and GSE MSRs. This was our seventh consecutive quarter of profitability in the servicing business. Servicing revenue was $226 million, down 5% quarter-to-quarter, primarily due to the runoff of our servicing UPB and the NRZ transaction. Servicing expenses were down -- I'm sorry, servicing expenses were $171 million. We also continue to focus as a company on cost reductions, a process and we expect to continue once the PHH acquisition closes. In our Lending segment, overall funding volumes were down significantly compared to the prior quarter due to our exit from the wholesale channel on the forward lending side and an overall slowdown in activity in the reverse industry. However,, due to continued efforts to reduce our cost structure, and improved margins driven by increased investor demand for reverse mortgage securities, our Lending segment produced $9 million of pretax income in the first quarter compared to a $4 million loss for all of 2017. During the first quarter, cash flows from operating activities was $99 million, compared to $4 million in the fourth quarter of 2017. This generation was primarily driven by the collection of $71 million of advances. At quarter end, our financial position remained strong. We ended the quarter with $286 million of cash on the balance sheet and available liquidity of $467 million. We had total corporate debt outstanding of $644 million, representing a 1.0x book-to-equity ratio. I note that following the quarter, we paid down an additional $25 million of our term loan, reducing our leverage further. Adjusting for accrued litigation and regulatory reserves, our voluntary April paydown of the term loan and cash allocated to complete the merger with PHH, our pro forma adjusted liquidity at March 31, 2018, was $330 million. In summary, we continue to make progress operationally and our current financial position provides adequate liquidity and balance sheet strength for the near term. Now I will turn the call back on over to Ron for a few closing remarks.

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

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Thank you, Michael. As most of you know, I will be retiring as CEO at the end of June, after more than 27 years at Ocwen. I have been participating in these quarterly earnings calls for almost 17 of those years and this will be my last. It has been an honor to represent and serve Ocwen shareholders, Ocwen employees, our corporate and consumer clients, our Community Advisory Council and so many other stakeholders. I especially, want to thank Fannie Mae, Freddie Mac, Ginnie Mae, our many lenders, and especially, Michael Nierenberg and the new residential team for their constant support as we have addressed our challenges and opportunities these past few years. I look forward to seeing Ocwen expand relationships with the GSEs, Ginnie Mae and new residential in the future. I thank all of you who have reached out over the past couple of weeks to wish me well. While I was not directly part of the search and selection process for the new CEO, I can say that the independent directors conducted a thorough process in ultimately selecting Glen Messina. I've known Glen for many years and I have great respect for him and his capabilities to lead. With the pending acquisition of PHH, it is a good jumping off point for me and allows for a truly fresh start for Ocwen. I look forward to helping the board, Glen and the Ocwen team with this transition. I am hopeful that at some point Ocwen will, once again, be in a position to compete for new servicing growth. Most of all, I look forward to Ocwen continuing to help homeowners and changing lives for the better. As much or more than any other organization that I'm aware of, Ocwen has helped this country rebound from the housing crisis and I believe we can and will be an important part of the housing and mortgage industries going forward. Thank you. This completes our prepared remarks. Operator, please open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Bose George with KBW.

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

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Let me just start by saying, Ron, best wishes in your retirement it has been a pleasure working with you over the years. In terms of questions, now that you've settled with the states, what is the outlook for the $21 million of expenses that you called out, the litigation and regulatory settlements, that number going forward?

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

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So look, we have been spending a fair amount of legal fees in working towards the settlement with the various states and the good news is that, that's largely behind us now. But we still are defending ourselves against the CFPB actions and the Florida and Massachusetts actions. And so we will still have ongoing legal fees associated with those matters. Hopefully, we can come to a reasonable resolution, but if not, we'll continue to vigorously defend ourselves. I think the good news is, with the states, the settlement amounts were under $2 million in total, so that was good. And we -- but it's difficult for us to predict where those remaining litigation cases will ultimately end up or how much it will cost to continue to prepare for our defense.

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

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Okay, makes sense. And then actually just in terms of the new accounting for the MSR, the -- if you could just point out the slides that breaks -- that sort of shows the breakout to get to that $17.1 million number?

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Michael R. Bourque, Ocwen Financial Corporation - Executive VP & CFO [5]

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So Bose, there's a couple places you can see the impact. I think first, at the highest level on the summary results on Page 7 of the deck. The way to think about the net $20 million benefit in the quarter is you will note that quarter-to-quarter, we're about $80 million worse in OpEx. This was driven by large favorability in the fourth quarter last year that didn't repeat to that extent in the first quarter this year. However, we were about $100 million better in interest expense. And so if you look at those 2 lines together, that makes up the $20 million favorable kind of P&L impact that truly represents the kind of sum impact for the quarter. We've added an additional slide that also tries to give folks a more adjusted view or an alternate view of the results on Page 14, whereby, we took the MSR valuation adjustments and the NRZ interest expense and moved them up into revenue, which is akin to how some other servicers report to try to take some of the noise out of the different pieces of the income statement. And so you can see that there. And then finally, we have our kind of traditional reconciliation slide, which is, I believe, 24 or 25, Slide 25, that breaks out the traditional line item details and it all ties back to the numbers I just described. So I would take a look at those, Bose. If you have additional questions on how things go between the pages, let me know. But hopefully, it's all there for you.

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

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Okay, great. And actually just one last one for me. The $114.5 million, the gains from the expected future draws on the existing reverse loans, are there any offsetting expenses we should think about when the draws take place? And then just what's the rough timeframe when those are likely to happen?

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

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Yes, very little expense. I mean basically, all the expense incurred in originating the loan that has already been baked in. So as the borrower makes these additional draws, we have modest amount of expense in our Capital Markets Group to basically securitize those through the Ginnie Mae process, but very, very little expense. Those tails flow in over 3 to 4-year period. But keep in mind that each month, each quarter, we add to that population through new originations. So you've actually, I think, seen a gradual increase in that balance that we report over the last year or so because we've actually been adding more to it than we've actually been recognizing into the P&L. But 3 to 4 year time horizon.

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Operator [8]

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And 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 [9]

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Ron, I can't thank you enough for everything you've helped us with over the years. It won't be the same without you. But congratulations, its been an amazing -- you guys have helped me as much as probably you help your customers in different times. So just going with Bose's question, to understand the reverse mortgage business, if you stopped originating today, would the business be profitable in the future or do you need to continue to...

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [10]

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No, so that's an excellent question, Bose (sic) [Henry], so while not our any intent by any means, as you saw, we had a record quarter. But if we were to close down the operation tomorrow, yes, we would have some cost to close down the operations, but those tail income amounts that we described would continue to be generated and common over the next 3 to 4 year timeframe that I just mentioned. So that's a good question. If we did close up the operational piece, which you don't intend to do, we would still earn that income over the next 3 to 4 years with -- as I mentioned in my answer to Bose, with virtually no expenses.

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

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And then in terms of the actual nature of that business, is it all direct, is it some direct and some purchase from other originators or what is it?

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

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Yes, good. So I think what maybe distinguishes us is, we are pretty effective in what I would say all 3 channels. We have a correspondent channel, we have a wholesale channel and we have a direct-to-consumer channel. We don't spend as much money on advertising as some of the competitors do, to drive some of their retail business, but that's very expensive. But we have a more balanced business model that has all 3 channels and we're very focused on making sure that all 3 channels are performing well and performing profitably. We are much more focused on bottom line profit that we are on generating just a volume of loans. And so depending on different cycles that we go through, you'll see more correspondent or some quarters you'll see an increase in wholesale, in some quarters you'll see retail do better or less volume depending on what the circumstances are and where the market is, but we think that we have a really good business model there because we have all 3 channels. And just to remind everybody, we don't directly service the loans. We do our own mortgage servicing rights, but we use third-party servicers to service the reverse mortgage portfolio.

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

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And then on the forward servicing business. I mean, that, on operational basis, that business is profitable now. Obviously, you have the PHH transaction in front of you, that's a lot to digest, the platform transition, that's a lot to digest. As you go forward, there are still other portfolios and other companies that are in need of a stronger partner. Thoughts on acquisitions on the long term?

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

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Yes, so as we reported, the Servicing business has been profitable for the last 7 quarters. But it is -- does remain challenged because the portfolio gets smaller and smaller every quarter and so revenues go down and some of our expenses are fixed, which eats into that margin. Look, it's really difficult at this stage to, as it has been for quite a while, to discuss future MSR acquisition opportunities. With the most of our settlement agreements that we entered into, we -- our restrictions on acquiring MSRs in most states ends on April 30, but really ended this is past April 30, so but we still do have restrictions on boarding loans on to our existing servicing platform. It's one of the reasons why the PHH acquisition is so important to us. But I would note that as many of you are aware, we still have restrictions from the state of New York on our ability to acquire bulk MSRs. And so if we continue to look towards the future and prepare ourselves for the future, when we might have opportunities to either acquire MSRs or maybe part or with somebody like New Residential on deals that they do, but there's not much more we can say about at this point in time because we still do have certain restrictions on us.

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Operator [15]

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And 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 [16]

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Ron, congratulations. I wish you the best. Good luck in retirement. In regards to the transaction with NRZ, the $280 million in cash, how is the -- can you walk through some of the moving parts on how the gain associated with that cash is recognized through the income statement outside of the MSR net that you showed of $17 million this quarter? And would we expect roughly $17 million to continue for the foreseeable future?

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Michael R. Bourque, Ocwen Financial Corporation - Executive VP & CFO [17]

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So Kevin, the way to think about it is it's basically a gain that represents the cash flows that we sold to NRZ as part of the kind of restructuring or the amendment of the transaction. And so while we've got the cash up front, we'll effectively continue to recognize the earnings. Those -- that -- what we receive the cash for, frankly, between now and the end of those contracts, which run out into early 2020. The benefit, basically, will come in through a rights to MSR liability kind of marked to market that shows up in interest expense. And so on Line 24, that benefit is broken out, you can see it for the fourth quarter and the first quarter. Depending on the fourth quarter, maybe isn't a perfect comparison just because we hadn't yet closed the entire transaction, and so I think in the fourth quarter, the number was something like $5 million and so it was a little less than we would expect going forward. But as time passes, that number will come down just because the size of the portfolio will continue to run off. But it's effectively an approximation of the additional cash flows that NRZ acquired through the restructuring, between when we entered the agreement and when that -- those initial contracts would have expired. So that should remain consistent, assuming all else remains equal, but will come down as the portfolio declines between now and then.

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

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So it's basically contract expense going through interest expense. Is that the right way to think about it?

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Michael R. Bourque, Ocwen Financial Corporation - Executive VP & CFO [19]

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Yes, you can think about it that way. It's a deferred gain or something like that. But just given the nature of how we account for this as a financing liability instead of kind of a sale transaction, it flows through interest expense.

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

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Okay. And then how much was it going through interest expense? I can't quite reconcile that on Slide 24.

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Michael R. Bourque, Ocwen Financial Corporation - Executive VP & CFO [21]

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Yes, so it's the liability runoff line, which is the third line down under NRZ expense on Slide 24. So actually when I glanced down, I looked at the wrong line. But it's the RMSR liability runoff, which is the amortization of the rights to MSR liability, it was $36 million in the first quarter.

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

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Okay. And so we should see something slightly less going forward coming through on the interest expense until early 2020. Is that right?

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Michael R. Bourque, Ocwen Financial Corporation - Executive VP & CFO [23]

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Yes. And the way to think about it is the upfront cash that we received, we'll have to recognize that to income over time. And so there's a couple years left of that to run out and that's how to think about it.

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

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Okay. And then in regards to the drop in expenses, in operating expenses this quarter. Obviously there's been a dramatic move in headcount for lending initiatives and other initiatives that you have in place. Do you still feel like there is runway to have the operating expenses decline again in the second and into the third forward, given you're about to go through the acquisitions of PHH?

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Michael R. Bourque, Ocwen Financial Corporation - Executive VP & CFO [25]

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Yes, I would say we do. We're not forecasting anything or providing guidance, but really for the last couple years, the team has been very focused on gradually reducing headcount and, I think if you go back, you've seen a consistent kind of 3% to 5% reduction per quarter in our Servicing business. In the corporate functions it's maybe a little bit more challenging to enact that kind of run rate, given just the relative fixed nature of that. But it's something the team continues to focus on and it's something that, as we are in our planning process now around the PHH integration, we are kind of mindful of how the 2 companies will come together. But we're not taking the brakes off. There's no guarantee at this point the transaction will close. But we expect it to and hope it will. We are still running our business as we had been prior to the announcement of the deal. So we -- with continued pressure on the top line, it's just a reality of where we find ourselves and we continue to push the teams to continue to find productivity.

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

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Okay. And then regards to the servicing origination expenses, which dropped significantly in the first quarter versus what we saw in previous years. Now part of that might have been Ginnie Mae losses, which typically go through. But is there any other items that may have come through on the servicing origination line that were a benefit this quarter in particular?

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Michael R. Bourque, Ocwen Financial Corporation - Executive VP & CFO [27]

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Yes, so I think if you look at the adjusted OpEx block in the appendix, servicing origination expenses actually went up in the quarter on an adjusted basis and that's really -- that really reflects - we had the $29 million recovery of a claim in the fourth quarter last year that we didn't adjust out from our results. And so that, obviously, didn't repeat in the first quarter. So it looks like servicing origination expenses would have risen. I think the number was about $13 million and so the difference between that $29 million headwind quarter-to-quarter and the actual $13 million increase was driven by lower Ginnie Mae claims, lower other servicing expenses and just kind of continued execution within servicing.

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Operator [28]

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And our next question comes from Sam Martini with Omega.

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Samuel F. Martini, Omega Advisors, Inc. - Partner & Co-Director of Research [29]

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I had just 3 questions, all pretty much housekeeping. Can we talk about sensitivity? You always have the segment in the Q on the segment on the correlation to rising rates, but your rates short above 35 basis points or so in Q1 and up another 25 basis points quarter-to-date. Obviously, it's a month and not 3 months, but can you just post us on balance sheet sensitivity, post NRZ to an incremental 25 basis points rate rise, question one? Question two, on the tail draw present values, I just wanted to confirm that the right present value number is $81 million, which I'm pulling out of the Q, but that's not in the balance sheet. And it was $66 million a year ago, went to $67 million, went to $68 million, went to $70, went up $11 million in the quarter. And I'm just curious looking forward, if you could talk through how that may or may not evolve in the future? I'm also curious, using a 12% discount rate to present value that, what you think market discount rates are if you wanted to monetize it? Because that would seem to me to be reasonably attractive. And then finally, maybe a question for Mike. Any thoughts on the balance sheet. Your loan is trading well above par at this point, L plus 5, the loan market is probably the strongest capital market in the United States right now, other than Internet stocks that are no money. But other than that, I'm just curious if there's plans to just continue to delever organically, with unscheduled paydowns together with amortization or if there's some more formative plan in place to look at that loan, even if you took it down to L plus 4% or L plus 3.5%. I mean that's -- all accretes to shareholders So those are the 3 questions.

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [30]

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Okay, Sam. So let me start and then I'll pass it over to Michael. On the first question, I think, one of the things that people need to think about in our industry is that the reason MSR values go up when rates go up is because prepayment speeds drop and you basically extend out the life of your income. But prepayment speeds can't go to 0. And so there's always going to be some people that move or whatever. And so the rate movement has been so dramatic over the last 4 months or so that the amount of upside there is probably significantly muted at this stage because the valuation firms have already lowered their prepayment speeds so low that there's not -- it's not much lower that they can go. So while I think if rates were to go down, there's actually some cushion in there where if rates were to go down, you probably wouldn't see the valuation firms increase prepayment speeds a lot until they go down a lot. So in some ways, even though we're pointing out that by marking everything to market now, it does allow for more volatility, where we are in the interest rate cycle relative to our particular portfolio, we may not see a lot of volatility for the remainder of the year, even if rates do go up 25 basis points or down 25 basis points just because of how -- where the value (inaudible).

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Samuel F. Martini, Omega Advisors, Inc. - Partner & Co-Director of Research [31]

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(inaudible) Right, okay, understood.

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [32]

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Okay? (inaudible) trail draws. Yes, so on tail draws, first of all, Michael I'll just have you confirm that the amount that's in the Q, that you referenced, Sam, is basically the discounted number -- the undiscounted number that we reported in our earnings release. This is an asset that rarely trades. There are not many eligible buyers for the asset, because generally you would need to be a Ginnie Mae type of issuer in order to buy the assets. So the most likely buyers would be another reverse mortgage issuer. But I think our belief is that as you pointed out, 12% is a good return and that it should be something that another firm would be interested in acquiring, if that was ever something that we wanted to do. It's really hard to predict whether it's 12% or 10% or 15% discount rate, but we think that, that's a reasonable number. And if there's others out there in the world listening and they want to sell them to us at that level, we'll definitely take a look. But as far as the jump in the quarter, a lot of that is just assumption based and some of it has to do -- there was a -- the fourth quarter, we saw volumes rise up a good bit and some of the -- there was a pull forward of volume related to some of the changes that the industry had made. And so that's probably some of what increased that balance. We may have to come back to you on the details unless, Michael, you've got additional information at this stage.

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Michael R. Bourque, Ocwen Financial Corporation - Executive VP & CFO [33]

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Yes, that's what I would have said. And as Ron mentioned in his answering a question with Bose, as we committed to originate, we kind of top up or potentially grow the population of estimated future sales. And so we've seen that balance increase, obviously, over time. But look, it's a complicated asset. We do go through third-party valuation, processes to ensure we've got a good view of it. But it's something that -- I guess to answer the other part of the question, Sam, is you're correct, it's not on the balance sheet today. And so this is kind of incremental value above and beyond the balance sheet.

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Samuel F. Martini, Omega Advisors, Inc. - Partner & Co-Director of Research [34]

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Got it. So that sort of $0.60, not in your book value that you talked about earlier.

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Michael R. Bourque, Ocwen Financial Corporation - Executive VP & CFO [35]

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Correct.

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Samuel F. Martini, Omega Advisors, Inc. - Partner & Co-Director of Research [36]

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And Mike, while I've got you, can you just update me, I know we sold most of the deferred servicing fees in the NRZ trade, but I thought there was a stub piece that remains outstanding. It's usually in the Q and I haven't sort of scanned it yet to find it. What's the remaining amount of sort of present value deferred servicing fees that are out there for us?

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Michael R. Bourque, Ocwen Financial Corporation - Executive VP & CFO [37]

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Yes, I was actually just skimming the Q myself. I'm drawing a blank, Sam, so I'll come back to you on that, but I know it is in there. So we can follow up on that. And then you had one other part of your question.

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Samuel F. Martini, Omega Advisors, Inc. - Partner & Co-Director of Research [38]

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Yes, just talking about the balance sheet. The loan, it's not often to see loans sort of sitting out there at 101.5 and at L plus 5% is a fancy rate for a loan market that's got record CLO issuance and starved for supply. And it's just not going to change anyone's life to take 100 and 150 basis points of this thing, it's a small facility. I don't know what your thoughts are on the bonds or on the loan on the balance sheet in general or the ABS market, which is incredibly accommodative right now. So just like a high-level picture on how you guys are thinking about the balance sheet for right now. You got a lot of cash, a lot of liquidity, but you're still paying out, paying out of it. LIBOR is 2.5%, so you're paying out 7.5% on a loan, it seems crazy.

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Michael R. Bourque, Ocwen Financial Corporation - Executive VP & CFO [39]

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Yes, so I would say we continue to look at all of our expenses and interest expense, certainly, being a big one. We have been through a lot here in the first quarter, as kind of we talked about this morning. I think positive momentum here for the company. We wanted to get through today and certainly to give a good update or fulsome update to the market. But that's something that we continue to look at. I think the term loan could be more attractive, just given that it doesn't really have some of the prepayment penalties and other things that the second lien notes would have. But we continue to assess our capital structure, both today and then with an eye towards the future, thinking ahead towards integrating PHH into the company. And assuming they've got about $119 million of debt outstanding that we'll assume at the time of the transaction. And so it's all part of the calculus. And so I take your point, it's something that we've been thinking about and hopefully, there'll be more to talk about at some point in the future.

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

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Yes, and I -- just to kind of follow on that, yes, Michael and his team as well as some of our traditional bankers like Barclays are definitely focused on this. And a lot of it is we're looking at not just today's needs, but how we're going to look once we integrate with PHH and what's the optimal capital structure to get us where we want to be on that integration and merger. So it all kind of has to go together. We don't want to do something now that handcuffs us for something that we'd want to do 6 or 9 months later. So all of that is going into the evaluation, but we're definitely focused on it and I think there'll be more to come on that.

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Samuel F. Martini, Omega Advisors, Inc. - Partner & Co-Director of Research [41]

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I just want to echo, on the record, what everyone else has said Ron, and to you and the employees, all the employees, to grit your teeth and grind through what you guys have been through in the last couple years. You don't read this in the papers, but I think all the borrowers, all the millions, 1.2 million today and more than that a year ago and 2 years and 3 years ago are all better off for your service. And servicing might not be glamorous, it might even have been insulting to be that business for the last long period of time, but you really did a great job. And I think your borrowers are better for it, despite all the regulatory morass that you guys were forced to undergo. I really commend you for your grit and for the ability to get up and persevere through all of this and I hope you enjoy some well-earned time off. So thank you for all you've done.

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Operator [42]

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And our next question comes from John Devaney with United Capital Markets.

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John Devaney, [43]

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Ron, so first of all, just want to congratulate you on your retirement. At first, I was a little bit worried about you leaving Ocwen. One of the reasons that I invested in Ocwen in the first place was -- filled my position was because of you. As I think I said before and Sam echoed a minute ago, that by far the RMBS holders in the sub-prime category have very greatly benefited by Ocwen's strategy of doing principal loan months earlier on in 2012 and '13. And it's just math that those Ocwen deals, in fact, have outperformed every other servicer in the market. So the RMBS bondholders have benefited. In fact, I bought so many bonds at $0.05, $0.10 and $0.15 on the dollar, like hundreds and hundreds of millions of [phase] that it actually made me so much money that allowed me to buy pretty much my entire Ocwen stake. So that's kind of what drew me in. Over time, and I can tell you this, Ron, that I've gotten to know you and that you're a straight shooter. And I deal with a lot of people in the bond market and there's a lot of scoundrels out there, and many of them have been caught lying to their customers and have gotten in all kinds of trouble. But I happen to have a very, very good lie detector. And as I told many people out there in the industry, Ron Faris is a total straight shooter. And I really, really appreciate your dedication. I've been in this now for 3 years, and although many colleagues and other people, even some of my family have advised me potentially to give up on this investment, I've decided not to. And much of that has all been because of you, and all of the actions that you've taken over this 3 year period. I mean, you sold over $1 billion of proceeds of Fannie, Freddie, Ginnie and got higher prices than almost anybody in the market, delevered the company and really saved the company. I mean it's just like, the list goes on. You extended a lot of the corporate bonds and corporate loans at a time when many of the equity investors or shorts thought that it just simply couldn't have been possible. Although, that again, is because you had the respect of all those bondholders. You, in a way, had won over both New York and California, got rid of the monitors, which saved the company almost a staggering $80 million of expense a year paying those guys. You've just recently won over 30 states that, for whatever reasons, political or otherwise, enjoined with the CFPB on April 20 OCN bomb day, like I like to think about it just because my huge position went down 3 points in just a matter of hours, which was awful. But and you've done that, as you just stated, with almost no penalty and -- to Ocwen. You've continued to be, by far, the best partner that Nierenberg and NRZ could ever dream of. Your servicing practices, just like it made me a lot of money in the RMBS bonds that I invested in, your servicing practices drive the highest amount of profit for NRZ. These are just facts. Your loss mitigation techniques of loan mods driving delinquency lower, makes the servicing advances that NRZ pays on owning these MSRs lower. And because of that, Ocwen outperformed their brother-sister relationship, [MSM] and anybody else out there by a very wide margin. So anyhow, thank you for all of your dedication. At first, I was a little bit worried and upset hearing that you're leaving, although having spoken to you and others, I'm comfortable going forward that Ocwen is going to be in good hands with (inaudible). Anyway, so that's my retirement speech to you. I really think extremely, extremely highly of you and I would really, really encourage all of the GSEs and state regulators to really see what I've seen over many, many years. I mean I've been trading subprime for 20 years. My firm, United Capital Markets, has its 20 year anniversary coming up this February. So I'm very experienced in subprime, I've been extremely experienced in servicing practices for my entire career and I'm very, very disappointed that some of this against Ocwen, it does seem to have been political. And -- but Ocwen, by far, has benefited its bondholders and also has very -- obviously, very greatly benefited, homeowners that have remained and retained home retention under Ocwen quite a bit better than everyone else. So I'm looking forward to the next chapter at Ocwen. And I'm proud to be an investor and all that. So okay, question number one. Sorry for that lengthy goodbye to you, Ron, but I look forward to talking to you later on into your retirement, even so. Question number one, so in sub servicing, Ron, can you comment a little bit on your ability, you have now won over all 30 states. New York is the one that says you can't buy MSR. But could you potentially add sub servicing contracts -- it just seems to me that because NRZ thinks so highly of you and they have to, it's just math. And with your servicing practices that NRZ should be talking to some very big banks that their cost to service, and I've done some research recently but of like Citibank, Bank of America, Wells Fargo, these guys do not like servicing at-risk borrowers, whether it's FHA or some of the legacy private label securitizations that are out there. Their cost to service is higher than yours. You guys are experts in doing this and they're not. And they don't do as good of a job at it, they don't help as many homeowners. Everybody, regulators, bondholders, NRZ, everybody should want you guys to do more. Now the question is, since NRZ thinks highly of you, is it possible, and because your cost of service is lower than the Citibank, Bank of America, Wells, the real big guys, wouldn't it make sense for potentially you and NRZ to partner together? NRZ goes and buys MSRs and some of the agency, like some FHA stuff that has more of delinquency or legacy private-label, wouldn't it make sense for NRZ to go and buy that staff and then hire you as a sub-servicer and that would be a great first step if you guys growing? And is that allowable under all of the currently regulatory landscape that you're operating under?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [44]

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So John, first all, I think the scenario you laid out does make a lot of sense. I hope, and as I said in my prepared remarks, I hope that we do have opportunities to work with NRZ on new transactions and very much in line with what you described, where they would be more of a capital partner and we would be the servicer, or sub-servicer. But a couple of comments there. First off, what's really important for us right now, is, hopefully, to get to the point where we're able to close the PHH transaction so that we can then complete the migration of our portfolio off of existing servicing platform onto the Black Knight MSP platform that's used by PHH today. And then, hopefully, have the opportunity to add sub-servicing to the PHH platform. PHH is already in the market, as far as we are aware, looking for sub-servicing opportunities and we would want to continue that effort going forward. All of that being said, we're going to be in close communication with all of our regulators to make sure that they're comfortable with whatever our business plan is, make sure that we are meeting whatever requirements we are under, relative to a different agreement that we've signed. And so I think you have to understand that this is a business that the company and the regulators need to be in constant discussion about what they're doing, why they're doing. And with, hopefully, their blessing at the right time, we will be able to move forward what you described and hopefully, other opportunities. But I think first and foremost, we need to be focused on closing the PHH transaction and getting our loans onto their platform so that we have one single platform that can be then used for the future.

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John Devaney, [45]

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And then another question. Could you -- first of all, congratulations on calling RMBS deals. This is a big deal. I mean if you guys did 10 deals and just basically bought $80 million worth of loans with a 9% growth [swack]. I mean, that's a total home run. That's obviously a strategy that NRZ has. Could you discuss, number one, how many of the -- what is the unpaid principal balance of the portfolio that's non-NRZ connected that you own call rights to? It's like $25 billion to $30 billion, maybe? And then give an estimate of how many of those deals are in the money? I think that NRZ has said they're making a couple points on these deals.

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Michael R. Bourque, Ocwen Financial Corporation - Executive VP & CFO [46]

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Yes. So, John, the number of PLS deals or UPB that's not NRZ owned, you can see it on Page 26, it's about $28.5 billion worth of UPB, you're right in the ballpark there.

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [47]

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Yes, and we may not own the call rights on all of that, but a big chunk of it we do. Look, John, we're not going to report out, at this stage, what we think that opportunity is or how much is in the money versus out of the money. But and up until recently, we weren't in a great place to actually execute on some of that. But I think it is a great sign that we've started to execute on that strategy. It's going to be a lot smaller than the NRZ opportunity because they're just much bigger. But it's good that we're able to start doing that. And we're going to continue to scour the portfolio looking for additional opportunities where we can and where we can deploy capital at above where our corporate debt is trading. So but I can't really give you any more details at this stage, sorry.

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John Devaney, [48]

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Okay. And then specifically, about some of the-you stated that you made all this progress with all of the state cease and desist orders but there's more work to do with CFPB in Florida and Massachusetts. I noticed that the docket for the CFPB case in Florida went sealed and restricted on April 10, which means that the whole docket went confidential. Is there settlement talks that are going on or any progress that's being made with the CFPB?

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [49]

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Yes, there is no relevance to that and I would caution you from reading anything into that. That's just part of the normal process as this case progresses. So I wouldn't -- I would caution you from reading anything additional into it.

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John Devaney, [50]

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Okay. Okay, well, that's it. I will -- enjoy your retirement and I very, very much appreciate all of what you've done for Ocwen. And I would really welcome all those others out there to see the same thing that I've seen over many years.

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [51]

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Well, thanks, John. I mean, I'm not quite out the door yet, got a couple months ago here to go. But look, the team here, Michael Bourque, [John Brady], [Scott Anderson], Tim Hayes and the rest of them, have been around for many years and are a solid team. And like I said, I have great respect for Glen and so I'm optimistic about the future and hopefully, it's a fresh start for Ocwen and we can become a big player again in the mortgage and housing industry and help more consumers. But I appreciate all the kind words, John, but it wasn't just me, it was the whole team. But thank you.

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Operator [52]

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That concludes the Ocwen Financial Corporation First Quarter Earnings Call. Thank you all for attending and have a nice day.

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Ronald M. Faris, Ocwen Financial Corporation - President, CEO & Director [53]

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Okay. Thank you, everybody.