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Edited Transcript of OCN earnings conference call or presentation 6-Aug-19 12:30pm GMT

Q2 2019 Ocwen Financial Corp Earnings Call

WEST PALM BEACH Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Ocwen Financial Corp earnings conference call or presentation Tuesday, August 6, 2019 at 12:30:00pm 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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Welcome to the Ocwen Financial Corporation second quarter earnings call. (Operator Instructions) And the conference is being recorded. (Operator Instructions) I would now like to turn the conference over to Hugo Arias, Managing Director, Investor Relations and Treasury. Please go ahead, sir.

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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 Second Quarter 2019 Earnings Call. Please note that our second 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, Jim 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 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 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 notables and pretax loss, excluding 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 these 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 second 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 plans to achieve profitability. I will also discuss the actions we are taking to address evolving market conditions and to reposition Ocwen to deliver value creation for our shareholders. Our CFO, June Campbell will follow with a review of our second 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.

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. Our team is executing well, committed to delivering on the objectives of our key initiatives and are energized by our accomplishments to date and the opportunities ahead. We completed the [boarding] of approximately 1 million legacy Ocwen loans to the Black Knight MSP platform as well as the merger of Ocwen Loan Servicing and PHH mortgage. We are tracking ahead of expectations for our cost reengineering initiative and have realized annualized run rate expense savings, excluding net MSR valuation adjustments and notable items, of $246 million in the second quarter of 2019 as compared to the second quarter of 2018 for the combined Ocwen and PHH. We closed on MSR acquisitions with approximately $11 billion in UPB through the second quarter and are rebuilding our MSR acquisition pipeline after a lull in market activity. We commenced originations through our correspondent forward-lending channel and launched EquityIQ, our proprietary reverse mortgage product. We closed and committed a $300 million MSR financing facility in July and booked an initial amount of $144 million. The facility provides us with the initial borrowing capacity to support our near-term MSR acquisition objectives.

Since July 1, we have repurchased approximately $29.4 million of our second lien notes, which we expect to result in a $3.7 million pretax gain in the third quarter and approximately $2.5 million in annualized interest expense savings. And lastly, we believe we are meeting all requirements of the conditional approvals for the PHH acquisition and continue working to improve our regulatory relationships. As detailed on Slide 21, our actions to date have reduced the annualized pretax loss, excluding notables and amortization of NRZ lump sum cash payments, by approximately $92 million from the combined Ocwen and PHH level of $322 million in the second quarter of 2018.

Now please turn to Slide 5.

Since the start of the year, we have seen significant changes in market conditions, including the 10-year treasury yield has dropped by approximately 75 basis points, driving faster runoff in our interest rate-sensitive MSR portfolio, and, along with other valuation assumptions, an unfavorable net fair value change of approximately $54 million. We experienced subservicing terminations of approximately $23 billion in UPB by legacy PHH clients due to the change in relationship resulting from our merger. Unlevered investment returns for larger MSR bulk acquisitions have drifted below our minimum target of 9%. And we are seeing returns for smaller to mid-sized portfolios at the low end of our target returns.

We chose not to close a sizable bulk MSR acquisition, we had been awarded as the reduction in interest rates resulted in investment returns that no longer met our minimum requirements. We are seeing increased forward lending refinancing opportunity, higher forward lending margins, increased reverse lending opportunity, lower funding costs and increased opportunities to exercise call rights. We are taking decisive action to address evolving market conditions, including continuously aligning our cost structure to enable us to operate profitably at the MSO investment returns available in the market; making changes to people, processes and technology to improve our recapture performance; building a balanced approach to MSR sourcing to limit our dependency on the large bulk market and provide a macro hedge to help offset the effective interest rates on our servicing portfolio; maintaining strict collateral quality standards on new MSR investments to limit the potential for future loss events; accessing more cost-effective capital for MSR investment through structured financing alternatives and evaluating an MSR capital vehicle; and deploying capital opportunistically to enhance returns through early debt retirement and potential servicer early call rights transactions. Based on current market conditions, we believe enough opportunities exist to source MSR volume that meets our return requirements through the combination of smaller MSR acquisitions, flow arrangements, correspondent lending and portfolio retention to replenish our servicing portfolio, excluding the UPB impact of subservicing client terminations. However, given the low volume of large bulk MSR acquisitions with attractive return profiles, we now expect more gradual ramp-up of MSR acquisition activity to achieve our portfolio replenishment objectives.

To allow for the necessary adjustments to offset the impact of the current market environment, we have decided to extend the upper end of our time range for return to profitability on a pretax basis, excluding notable items and the impact of the amortization of NRZ lump sum payments by 3 months. As a result, we believe we can return to profitability in the next 7 to 13 months, assuming there are no adverse changes to current market and industry conditions or legal and regulatory matters.

I will now address our objectives for the company and provide a detailed update on each of the initiatives to transform and strengthen our business. Please turn to Slide 6.

During the first half of 2019, we acquired MSR with a total UPB of approximately $11 billion. Following a lull in market activity in the second quarter, we are rebuilding our MSR acquisition pipeline. In the second quarter, we also completed the build-out of our forward correspondent lending platform and commenced originations. We have achieved our initial timeline, costs, compliance and risk management goals. We've concentrated on building an efficient, scalable platform that will deliver a consistent quality service experience for our clients. We are excited about the potential of this new channel and expect to ramp up volume in a disciplined manner, consistent with our return and customer service objectives. We expect this platform will provide a significant amount of our portfolio replenishment beginning in 2020.

We also launched EquityIQ, our proprietary reverse mortgage product. We believe this product will offer meaningful value to borrowers through higher overall LTVs compared to existing proprietary offerings, eliminating FHA and mortgage insurance to drive lower costs so borrowers can realize more proceeds for their use and loan amounts up to $4 million, which allows borrowers with higher home values an opportunity to access equity above FHA limits. Considering the expectation for consistently low interest rates over the foreseeable future, we are taking several actions to improve customer experience and recapture rates in our portfolio retention platform. We have completed the integration of the legacy Ocwen and PHH operations, hired an entirely new leadership team, implemented new operating, sales and pricing systems, changed our telephony platform and implemented new portfolio segmentation and targeting strategies. We're evaluating sales, underwriting and operating processes and the performance management framework for our frontline and management talent. We are committed to making portfolio recapture a core competency.

We have seen and bid on several modest-sized RFPs for subservicing mainly from banks and others who have been self-servicing and concluded that servicing aging portfolios is more complicated and expensive than anticipated. Lead time for these opportunities tend to be longer. We continue to target unlevered returns on MSR acquisitions of at least 9%, and we intend to remain disciplined in our capital allocation decisions to ensure we achieve an appropriate level of risk-adjusted returns. Based on our recent experience in the bulk MSR market, we believe certain market participants are willing to accept lower returns, assume substantially higher-than-market-average recapture rates, and assume collateral and legacy operating risks. We also believe that the market for Ginnie Mae MSRs continues to misprice the potential credit risk associated with this asset class. We expect to have greater bidding success and the potential to achieve our target returns with MSR portfolios into, one, the $3 billion UPB range, which likely means a more gradual ramp-up of MSR acquisitions. We expect that the returns for smaller to midsized servicing portfolios will persist at the lower end of our investment requirements. We are anticipating a higher rate of ordinary portfolio run-off due to the reduction in market interest rates, particularly relating to the 45% of our portfolio that is interest rate-sensitive. The remainder of our portfolio is more credit-sensitive in nature and less sensitive to changes in interest rates.

We continued to experience legacy PHH subservicing client terminations resulting from clients taking the view that our merger resulted in a significant change in the historical subservicing relationship. Although these subservicing client terminations have a substantial impact on servicing UPB, they only have a modest impact on future servicing margins. While there are material differences in the capital requirements and economics for owned servicing versus subservicing, we estimate that the contribution margin for owned servicing is at least 4x that of subservicing, assuming a stable delinquency environment and owned MSR returns of at least 9%. Therefore, we believe the loss margin from our subservicing client terminations and the run-off of our energy portfolios can be largely offset through investing roughly 1/4 of the loss subservicing UPB in relatively more profitable owned MSRs, volume-driven expense reductions and/or other investment actions. We also believe there are sufficient opportunities for us to replenish the portfolio, excluding the UPB impact of subservicing client terminations through our flow MSR channels, complemented by bulk MSR acquisition. In the long term, we are targeting approximately 50% of our total servicing portfolio in owned servicing, excluding any potential impact on mix from the implementation of the MSR capital vehicle. This shift in servicing composition is expected to have a positive impact on our future profitability while providing the additional benefit of revenue diversification.

We are taking a balanced approach to MSR sourcing, including correspondent lending, flow MSR purchase agreements and portfolio recapture to complement bulk acquisitions. We believe these actions are necessary to enable a more sustainable source of MSRs to meet our return and replenishment requirements and to have a natural offset to the runoff and earnings impact of interest rate changes on our servicing portfolio. In addition, we intend to evaluate M&A opportunities for origination channel growth if they become available as a potential way to enhance and complement our organic growth initiatives in the lending channel.

Lastly, due to the decline in interest rates, we are seeing attractive alternative investment opportunities such as exercising call rights on loans and our private loan servicing portfolio, which we intend to pursue. As of June 30, we control call rights to approximately $21 billion of mortgage collateral, of which, approximately $8 billion is currently callable. Based on various factors, especially interest rates and delinquency rates in the underlying deals, we believe that less than 20% of the callable population currently has sufficient economic value to execute.

Please turn to Slide 7. On July 1, we closed a $300 million committed MSR funding facility that provides borrowing capacity against agency MSRs at a 60% advance rate. At closing, we borrowed an initial amount of $144 million under the facility collateralized by existing Fannie Mae and Freddie Mac MSRs. We expect to have the ability to borrow up to an additional $80 million under the facility against Ginnie Mae MSRs at the same 60% advance rate, subject to the receipt of an acknowledgment agreement. As a result of closing this facility, our liquidity position has been strengthened, and we have enhanced our near-term financial flexibility. We believe our stronger liquidity position should be a positive factor in our eventual efforts to refinance our senior secured term loan due December 2020. As previously indicated, we view the closing of the MSR facility as an initial step in a more diversified funding strategy for owned MSRs. The facility is expected to provide the primary funding vehicle until we can achieve a sufficiently large owned MSR portfolio to transition to term ABS issuance, complemented by a bank-funded variable funding note. We believe this approach should provide us with certain benefits, including longer tenor, higher advance rates, lower funding costs and diversification of funding source. The timing of this next phase of our owned MSR financing strategy will be dependent on the growth in our owned MSR portfolio.

As part of our disciplined approach to capital allocation, we repurchased $29.4 million of our 8 3/8% second lien notes due in 2022 during the early part of July. We believe this was a prudent use of capital due to the level and certainty of available returns as well as the positive impact on our leverage and debt service costs. We are continuously evaluating opportunities to lower our cost of capital and optimize our capital structure. We are currently evaluating alternatives for MSR capital vehicles that could provide us with the ability to grow our servicing UPB with significantly lower capital requirement compared to MSR acquisitions. We're excited about the prospect of having a new source to fund our growth and support our financial objectives. The next phase of our agency MSR financing strategy and the MSR capital vehicle will be an area of focus over the next 6 to 12 months.

Please turn to Slide 8.

We completed the systems conversion from real servicing to MSP in early June. In total, approximately 1 million loans were transferred to MSP as part of our multi-phased process. We are now in a strong position to realize significant cost and operational benefits during the second half of 2019 and into 2020.

We also completed the merger of our 2 primary licensed legal entities on June 1. We now have a more simplified legal entity structure that should facilitate the elimination of duplicative licensing and regulatory activities and other legal entity-related support costs. Throughout the integration, we remain focused on operating excellence and compliance as key components of our strategy as well as the foundation for minimizing liquidity needs of the business and preserving long-run asset and franchise value. We have and continue to monitor multiple dimensions of our operating performance to ensure our integration activities and general operations are performing as expected.

Please turn to Slide 9. We are highly focused on executing actions to achieve a competitive cost structure that allows us to operate profitably at market MSR return levels and our portfolio composition profile. Our cost reduction initiatives consist of 3 categories of actions:

integration-related cost reengineering, including merger synergies, with annual expense savings target of at least $340 million relative to our second quarter 2018 baseline that we previously outlined based on certain lending volume and assuming an MSR UPB of at least $260 billion; ongoing expense reductions based on expectations for lending volumes and the size of our MSR portfolio.

Continuous cost reengineering based on innovation, digitization and other technology-enabled productivity enhancements. Our team is demonstrating strong execution, and we are now running ahead of our expectations for cost reductions at this stage of our efforts. At this time, we continue to target at least $300 million of annualized run rate cost reengineering savings by the fourth quarter and at least an additional $40 million by the second quarter of 2020. These cost savings exclude net MSR evaluation adjustments and notable items and are measured against our baseline second quarter 2018 annualized total adjusted expenses for the combined Ocwen and PHH. We are in the process of carefully evaluating our progress to make any upward adjustments to our cost reduction target.

Our targeted cost reengineering expense savings are based on certain assumptions of lending volume and MSR portfolio size. Therefore, we would expect our cost reengineering efforts to be complemented by volume-driven cost adjustments if actual volumes differ materially from our original expectations.

We estimate incurring approximately $65 million of upfront costs to execute our reengineering actions in 2019. Through the end of the second quarter, we have incurred $32 million of this amount, with $24 million resulting from employee-related expense.

Based on what we are learning as we execute our cost reengineering actions, we believe we have meaningful opportunities for additional benefits from reengineering and process innovation. We're commencing our second phase of business reengineering, focused on continuous improvement in speed, cost, compliance and customer experience. Every function is engaged in this initiative with committed resources who are supported by centers of excellence in lean process design, strategic sourcing, global operations optimization and automation.

Our global team is experienced, engaged, energized and committed to our long-term success. We believe our global operations are a distinct competitive advantage in achieving our cost, operating and technology objectives. We believe further automation opportunities exist by optimizing the capabilities of our new core operating system and through the application of robotics, optical character recognition, machine learning and digital workforce. Now that we have completed loan boarding and are fully operating in the MSP environment, we can apply lean process design to simplify business processes and strategically refine our vendor usage.

Please turn to Slide 10.

Our fifth initiative is to fulfill regulatory commitments and resolve remaining legacy matters. We continue to proactively engage our regulators on a consistent and frequent basis and track our progress as it relates to regulatory commitments. The completion of the servicing systems conversion to MSP was another positive step in meeting our regulatory commitments. This was one of the requirements under most of our settlements of the April 2017 regulatory matters and a requirement from the states of New York and Massachusetts for the removal of the remaining restrictions on servicing portfolio growth for loans in their respective states. The next step and final step with respect to New York is to demonstrate to the satisfaction of the New York Department of Financial Services that all loans serviced on the real servicing system have been successfully migrated to the MSP system and that we have developed a satisfactory compliance, risk management and internal control infrastructure to onboard sizable portfolios of MSRs. With respect to Massachusetts, the MSR growth restrictions will be lifted when we complete the second phase of a 3-phase data integrity audit, which will be conducted by an independent third party. Although the restrictions in New York and Massachusetts have not been a constraint to date on our ability to acquire MSRs at our minimum investment return target, we are working with the respective state regulators to satisfy their requirements.

We continue to believe we have meritorious defenses in the CFPB and Florida matters, and we are vigorously defending ourselves. We have no updates currently with respect to these matters.

I will now 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 second quarter results as compared to the prior quarter. As previously noted, our second quarter investor presentation includes more details on our results and is available on our website.

Please turn to Slide 12. Our second quarter 2019 reported net loss of $90 million compares unfavorably to the net loss of $44 million in the first quarter of 2019. Our second quarter was impacted by $41 million of pretax unfavorable net fair value changes driven by changes in interest rates and valuation assumptions and $10 million of pretax severance, retention and other reengineering costs. As a reminder, our first quarter results included the $31 million pretax recovery of amounts previously expensed from a service provider. The positive pretax earnings impact from the amortization of the lump sum cash payments received from NRZ in 2017 and 2018 was $31 million in the second quarter and $16 million in the prior quarter. The amortization of these lump sum cash payments will have an $88 million positive impact to our pretax income over future quarters through April of 2020.

Revenue of $274 million decreased by $30 million from the prior quarter. Servicing revenue of $243 million decreased $17 million primarily due to continued portfolio runoff. Offsetting this, servicing fees remitted to NRZ were down $13 million compared to the prior quarter and were recorded in interest expense. Revenues net of fees remitted to NRZ was down $4 million partially due to timing of loan modification processing associated with the final MSP loan boarding in June. To the extent we are unable to replenish our volume due to unfavorable market conditions, we intend to offset negative revenue trends through higher cost reductions.

Lending revenue of $29 million declined $12 million from the prior quarter due to the $12 million favorable financing cost assumption update to our reverse mortgage portfolio in the first quarter. The second quarter included $8 million of favorable valuation on the reverse mortgage portfolio due to a decrease in interest rates, compared to $5 million of favorable valuation in the first quarter. Non-MSR expenses of $184 million were $13 million higher than the prior quarter primarily due to the $31 million recovery of amounts previously expensed from the service provider in the first quarter. This was offset by progress in our savings initiatives and lower severance, retention and other reengineering expenses.

With respect to the $147 million unfavorable MSR valuation adjustments in the second quarter, a 45 basis point decline in the 10-year swap rate and valuation assumption updates drove a $95 million reduction in the value of our forward MSRs. You may recall, the PHH portfolio is primarily comprised of agency MSRs, which are more sensitive to changes in interest rates. The remaining $52 million resulted from portfolio runoff. A portion of the $95 million unfavorable MSR valuation adjustment resulting from interest rate changes and valuation assumption updates was offset by $46 million of favorable NRZ financing liability valuation change, which was recorded in interest expense, and the previously noted $8 million of favorable fair value change on the reverse mortgage portfolio. We have provided additional information related to the MSR valuation impacts on Slide 26.

I would now like to provide comments on our Servicing and Lending segment results. As outlined on Slide 13, our Servicing segment recorded a $59 million pretax loss compared to a $58 million pretax loss in the prior quarter. The business was impacted by continued portfolio runoff, unfavorable MSR fair value changes and timing of loan modification processing associated with the final MSP loan boarding. The servicing business remains focused on providing sustainable loan modification solutions to qualifying borrowers in need. We completed approximately 5,300 modifications in the quarter, 16% of which resulted in some type of debt forgiveness, totaling $24 million.

As of June 30, the total UPB of our servicing portfolio stood at $229 billion, which is down from $251 billion at March 31. This reduction was driven by a termination of a legacy PHH subservicing client relationship representing approximately $21 billion of UPB and certain smaller terminations, all of which totaled approximately $5 million in annual revenue. We currently expect an additional subservicing client termination in the third quarter representing $6 billion of UPB but having no anticipated material adverse impact on our financial results. These legacy PHH subservicing terminations are the result of clients taking the view that our merger resulted in a significant change to their historical subservicing relationship. Excluding the impact of the second quarter subservicing client terminations, our total portfolio UPB would have been close to flat quarter-over-quarter, while our owned MSR portfolio UPB increased by almost $5 billion over the prior quarter. Sustained profitability in the business will largely be driven by our ability to successfully execute the integration, reengineer our operating costs and pursue opportunities to replenish portfolio runoff, excluding the impact of subservicing terminations.

Please turn to Slide 14.

Our forward lending business recorded a pretax loss of $4 million, which was slightly favorable to the prior quarter due to cost reductions. Revenue was $1 million unfavorable to prior quarter driven by lower volumes. We reentered the forward correspondent channel in the second quarter and expect to ramp up in a disciplined manner. We are focused on improving portfolio retention and pull-through rates.

Our reverse lending business recorded pretax income of $12 million, which included $8 million of favorable net fair value changes related to interest rate changes. Unrecognized value related to future draw commitments on loans purchased or originated prior to January 1, 2019, is estimated to be $60 million on a present value basis and will be recognized over time as future draws are securitized or sold.

We also launched our proprietary reverse lending product in the quarter as part of our initiatives to grow our lending volume and achieve a more balanced revenue mix.

In our reverse business, over 85% of our portfolio consists of loans originated after March 2014, which conform to the new initial disbursement limits and more stringent underwriting criteria for HECM mortgages. In addition, 84% of our portfolio is LIBOR-based ARMs with lower initial disbursement levels than the traditional fully-drawn fixed rate HECMs. We had only $22 million of HECM buyouts on our balance sheet as of June 30, and our current projected peak outstanding for HECM buyouts is approximately $175 million in August of 2025. We maintain adequate levels of funding for HECM buyouts and can typically fund up to 360 days with advanced rates of 89% to 98% depending on the active or inactive status and whether the property resides in a judicial versus nonjudicial state.

As you can see on Slide 15, we ended the quarter with available liquidity of $311 million. This included $288 million of unrestricted cash and $24 million of available liquidity on our servicing advance facilities. We view available liquidity as cash on hand plus available borrowing capacity on advance facilities and warehouse lines that can be drawn based on eligible collateral. At quarter-end, the available liquidity came from our committed servicing advance facilities as we were fully-funded on our warehouse lines. Our liquidity was $107 million lower than prior quarter driven by $51 million in cash used for MSR acquisitions and $56 million of other cash uses, which includes at least $25 million of working capital use that we expect to reverse in the third quarter.

We ended the quarter with corporate debt outstanding of $789 million. Excluding the $98 million in PHH unsecured notes maturing in September, our corporate debt-to-book equity ratio would have been 1.6x.

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 16. 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. Our team is executing well, committed to delivering on the objectives of our key initiatives, and we're energized by our accomplishments to date and the opportunities ahead.

We're taking decisive actions to address evolving market conditions by strengthening our portfolio recapture capability, diversifying our MSR sources, taking incremental cost reduction actions, reducing our cost of capital, and exercising discipline and prudent allocation of capital. We expect continued dynamic industry and business conditions while operating with a largely predetermined revenue structure in a highly competitive rules-based environment. As a result, we believe sustainability, profitability and competitiveness will be driven by advantages in cost structure, operational execution, reputation with customers and regulators, recapture performance and ancillary income-generation capabilities. [Chasing sides] for economies of scale to gain a competitive advantage will lead to subpar returns and will be fraught with challenges if built off an underperforming operating platform, loans of poor collateral quality and/or poor legacy servicing practices. We believe Ocwen is well positioned to lead in each of the capabilities critical for long-term success.

We've replatformed our operating systems to establish a technology foundation for future automation and technical innovation. Select technology [pallets] are being implemented in the areas of robotics, optical character recognition, machine learning and digital workforce. We have global operations that provide us access to a highly skilled, energized and experienced talent pool who are committed to creating positive outcomes for consumers, investors and communities. We've commenced our second phase of business reengineering focused on continuous improvement in speed, cost, compliance and customer experience. The strength of our operational execution have earned optimum servicing a HUD Tier 1 servicer rating for Ginnie Mae servicing, and we expect to achieve a Tier 1 rating for PHH mortgage in 2020.

Our operational execution has enabled lower unrecoverable advances, and allowance for unrecoverable advances was just under 2% of our total servicing advances as of June 30. We are highly focused on preserving the collateral value of newly acquired MSRs through rigorous diligence to validate compliance servicing practices and complete loan files.

We have a profitable, high-quality reverse mortgage business with a lower credit risk profile compared to other industry participants. We have incurred limited buyout activity to date and our projected peak outstanding balance of buyouts is expected to be at manageable levels.

Ultimately, our vision for Ocwen is to be a leading mortgage servicer with a core competency in loss mitigation that creates positive outcomes for homeowners, communities and investors. Our objectives include: roughly a 50-50 balance of owned servicing and subservicing, excluding the potential impact of an MSR capital vehicle; diversified origination channels and product capability to republish and grow our portfolio, anchored by strong portfolio retention performance; a lower cost capital structure, utilizing cost-efficient structured financing solutions and an MSR capital vehicle to create synthetic subservicing; industry top quartile cost structure enabled through our offshore platform, automation, lean scalable processes and operating execution; strong customer satisfaction, demonstrated by high Net Promoter Scores and low levels of consumer complaints; and diversified revenue sources through compliant ancillary income sources. I want to thank the Ocwen Board of Directors, all our associates and our key vendor partners 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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Certainly. We will now begin the question-and-answer session. (Operator Instructions) 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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Actually. First on the subservicing portfolio that was moved. Are there any other portfolios that you think are at risk of being moved? You noted the $6 billion in the third quarter, but just anything else that we need to think about?

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

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The $6 billion portfolio is the only thing that we're aware of.

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

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Okay. And in terms of -- so this was really a client that was acting based on -- I mean, obviously, the transfer has kind of been in the works for a while. So is there something incremental that caused it? Or was this, I guess, in line -- sort of in line with expectations? Like how would you characterize what happened?

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

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Yes, Bose. I'd say it was in line with expectations. On a previous earnings call, I had said that we would expect subservicing runoff to exceed subservicing replenishment. So we did have advanced notice of this client termination. At the end of the first quarter, we had a large $20 billion servicing acquisition award, which would have merely offset the UPB and more than offset the revenues. But again, the revenue impact here of the subservicing termination is about $5 million, relatively small.

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

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Okay. Okay. Great. And then, actually can you just remind me what happens when after the amortization of the NRZ cash goes away, is that -- I mean, is the impact largely one of optics? Or is there anything -- is there an operating impact that we should think about?

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

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There's no operating impact, Bose. The amortization of lump sum payment is purely an accounting event. The cash has already been received, and we're amortizing that cash balance over the original term of the contract. Once the amortization stops, the economics in our P&L will look like a traditional subservicing arrangement.

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

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Okay. Great. And then actually, the $31 million impact that you mentioned, the non-MSR expenses, the change related to the previously expensed numbers. Can you just go over what happened there, just from an accounting standpoint?

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

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I think you're referring to a notable item we reported in the first quarter related to a settlement with a service provider, which was a positive $31 million. That did not recur in the second quarter.

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

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The -- so let me just make sure. I thought -- no, actually, I was looking at the -- okay. So that was in the first quarter, you're right. Yes. Thanks for clarifying that.

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Operator [11]

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

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Glen A. Messina, Ocwen Financial Corporation - CEO, President & Director [12]

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Thank you, operator. To all those who joined the call, thank you very much for being with us and for your support of Ocwen, and look forward to talking to you next quarter.

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Operator [13]

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