John V. Britti - Chief Financial Officer and Executive Vice President
William Charles Erbey - Executive Chairman and Chairman of Executive Committee
Michelle D. Esterman - CFO and Principal Accounting Officer, Altisource Portfolio Solutions
William B. Shepro - CEO, President, Altisource Portfolio Solutions
Seth Carter - VP, Consumer Analytics, Altisource Portfolio Solutions
Leon G. Cooperman - Omega Advisors, Inc.
Ocwen Financial Corporation (OCN) Analyst and Investor Day December 3, 2013 10:00 AM ET
John V. Britti
Okay, let's go ahead and get started. If you could try to find a seat, I'd appreciate it. Give people a few minutes to carefully take their cups of coffee to their chair.
Good morning. I'm John Britti, the CFO of Ocwen. Welcome to Palm Beach. Before I get started, there are a few things I want to do. First of all, I want to thank ICR who helped put on this event. If you see them at by the tag table, please say hello and thank them. Secondly, I want to point out that this is being webcast, and the slide presentations that will be presented by each company will be available on their websites. So we're not handing them out. There won't be any paper copies.
As a reminder, the presentations and discussions during this event may contain certain forward-looking statements pursuant to the Safe Harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to future period or by use of forward-looking terminology. They may involve risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements.
This presentation may also contain references to non-GAAP performance measures. We believe these non-GAAP performance measures may provide additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures should be viewed in addition to and not as an alternative to each company's reported results under principles generally accepted in the United States.
For an elaboration of the factors and risks associated with each company, please refer to the company's filings with the Securities and Exchange Commission, including 10-Ks and 10-Qs.
It's now my pleasure to introduce Bill Erbey, Executive Chairman of Ocwen Financial. Bill?
William Charles Erbey
Thank you. Good morning. John, you took my notes.
Well, good morning, and thank you for all attending this. We're really overwhelmed with the response. We've actually had to turn people away for the conference, so we certainly didn't anticipate that. As John said, this is going to be webcast, and I can assure the people that are listening that there is -- I can assure people that are actually tuning in that they are not missing anything. As you could see, when you checked in, there were no goodie bags. That's keeping with our corporate culture and particularly, there's no golf outing. For those people who know me, the 3 things I like least in the world is: one, happy to go golfing; two is giving presentations in front of a large crowd such as this; and three, having a proctology exam.
What I'd like to do now is really introduce all the members of the senior management team, starting with Ocwen.
At the back, first, is Ron Faris, he's the CEO. You obviously met John Britti, he's the Chief Financial Officer. There's also David Applegate in the back, as well. Andrew Wein is the Senior Vice President and Deputy General Counsel. I should say David Applegate is Executive Vice President in-charge of lending. Sorry, David. And then Steve Grundleger, our Senior Vice President, RMBS and Rating Agency Relations.
With respect to Altisource Residential and Altisource Asset Management, Ashish Pandey is the CEO at the back. Ken Najour is the Chief Financial Officer, and Salah Saabneh is the Executive Vice President, Corporate Development. He knows mostly all things in tax.
Altisource Portfolio Solutions. Bill Shepro is the CEO; Michelle Esterman, the Chief Financial Officer; Seth Carter, Vice President of Consumer Analytics; Joe Davila is the President of Mortgage Services; Eric Koning, who is the President of Hubzu; and Mark Hynes, the President of Technology Services. And last but certainly not least is Home Loan Servicing Solution, John Van Vlack is CEO; and James Wilder, who is Chief Financial Officer.
Great. Thank you. These are the guys that really get it done. So if you look at the results and everything, they do an outstanding job. And I'm very happy to have them, pleased to have them on the team.
So as we -- but one thing I would like to do is have a little glossary of terms. There is an article in recently, and I thought the reporter did a good job, but he referred to our names as boring and overlapping.
He did give us some credit that with respect to the name Ocwen, he said it was boring and clever at the same time. And I guess, to give credit to my wife who worked for us, 5 years. She was -- I'm sure that the -- she was the chief naming officer.
So after she retired, I guess, we've got bland and overlapping names. But we referred to Ocwen Financial Corporation as Ocwen; Altisource Portfolio Solutions as Altisource; Home Loan Servicing Solutions as HLSS; Altisource Residential was resi; and AAMC rather, outsourced that management as AAMC. So hopefully, that will be helpful as we go along here today.
One of the things that I'm continually asked about is to really describe what's our strategy; how do all these companies fit together; and most importantly, why on earth do we have 5 companies in the first place.
I'd like to stress, first of all, that these companies are not affiliates, that they are independent companies. They have independent boards, and they have management teams.
They do, however, have a very common investment philosophy, that is, really, there are 3 elements of that. First of all, we want to leverage our core operating principles to create a sustainable competitive advantage. We want to identify secular trends, and last, we want to identify markets that are aligned with secular trends and our core operating principles.
I'll start off first here is by going through what our core operating principles are.
The core operating principles, when you really come right down, are pretty simple. When we look at what are the key drivers for our business both in terms of our income statement and our balance sheet, and we continuously try to improve our competitive ability in each of those areas.
The first is to capture adjacent revenue, and the best example of that was really Altisource or Altisource Portfolio Solutions, where they would have captured substantial amount of third-party revenue generated by Ocwen servicing business. At the time we had it initially, we didn't feel that we would give any really true value in terms of stock, the value of the stock. So what we did is we thought since we had such high-quality capital like cash flows, we would spin that out and create shareholder value. And I think that's proven to be true.
The second one is to improve quality and reduce our operating expenses. We're probably best known for this. We do not believe that quality and cost are in conflict. As a matter of fact, we think there's some stability. We look at all the time the variability, what are standard deviations, what are defects in our processes, and our ability to reduce those costs actually reduce our expenses. So high quality and low cost we think are very, very consistent.
The next is lower cost of capital or companies where possible capital light, and we see a couple examples of where we have done that. Certainly, AMC is capital light, Altisource is capital light and Ocwen is well on its way of becoming a capital light vehicle. However, our companies are capital-intensive, that being HLSS and resi, we really try to employ an accretion model. We think we have a pretty good track record of our stock trading strong with an absolute deal from that to pricing, and we try to do 2 things there. First of all, we're very focused on what we think the visible demand is for the stock, so we try to issue with less stock then we think there is actually demand for the products. And also, we've taken to managing the allocation process in our deals.
One of the things that I've been an investor for 27 years, who I really respect, and one of the deals, basically, is there is a harsh word, he basically called me stupid, so we tried to figure out what to do about that. And what we've done is we really, we in fact take over from the bankers the allocation of the shares. So those people who are allocated shares in prior deals who in fact hold those shares and increase our position, we give them a large allocation on the subsequent stock offering, and those investors who get shares and sell their shares or don't add to them, they get a little to no allocation within the next process, so we try to encourage the support by our shareholders.
You'll hear a little bit later in some of the acquisitions we're pursuing and our business strategy where we're very much focused on the opportunity of being able to acquire a business and figure out how we can do for that business to be capital light. We think that creates a significant valuation arbitrage and shareholder value if we're able to accomplish that.
Next, we try to employ efficient tax structures. For many companies, obviously, taxes can be one of their largest expenses. We work very hard to try to minimize those within the boundary of the law.
And last, it's very much a philosophy. We think we want to assume operational risk, but we want to be selective about credit risk. And we want to take little to no interest rate prepayment or refinancing risk.
We think we're pretty good at operations. We think we have a competitive advantage in assessing certain types of credit risks, particularly for the consumer. And we try to stay away at all possible interest rate prepayment and refinancing risk.
Overall, as you've heard in all of our conference calls, basically, we're maniacally focused on cash flow and much less so on reported earnings.
In terms of the accretion model, I think one of the important things that we talked about, particularly with respect to resi and also with HLSS is really accretion. It's basically me to the concept of how we attempt to lower our cost of capital and give ourselves a competitive advantage in those markets.
Accretion is very powerful for those companies that have the following characteristics: the target asset class is very large and offers returns well in excess of what we expect to be the dividend clearing yield; and there is stable cash flows with very, very long durations.
Here is a very simple example of the power of accretion with, hypothetical, that's supposed we thought we could make a 10% return on equity in the business we're in. And that's a dividend clearing yield, wherein it's 5%.
Over time, we will expect this company to trade at twice the book value. If one were then to issue a comparable amount of equity, in this example, $100 at a price of $2 per share, we'd only have to issue 50 shares resulting in a return on equity of 13.3%. So we've actually raised our return on equity through that process by 33%.
This process can continue in subsequent cycles, and generally, we'll asymptotically approach 4x or 5x book value. And you'll see examples of that pretty much in MLPs with the successful MLP models.
One important benefit, really, of this is that it lowers our cost of capital and makes us significantly more competitive in bidding for assets. Ultimately, it creates a sustainable barrier to entry into the industry. It's very hard to compete if you're competing against with so many of the 2x book value and you're coming in the book. That's not -- in a capital intensive industry, that's not going to work very well for the other player.
In terms of why do we create all these strategic allies, we clearly do not take treating new companies lightly. It's -- there's a very real cost. It's a meaningful cost in terms of expenses and corporate overhead, but it also takes a significant amount of management's time. So when you have 20 Qs, 20 Ks, 20 earnings releases and 20 earnings calls and then 20 board meetings, it's a considerable -- it really consumes an awful lot of available bandwidth. We do it because we think we can create substantial shareholder value.
First of all, I think the pros are -- there's a very good transparency in the cash flows to meet the needs of very specific investors. We can capture revenue that we might not otherwise be able to retain for a number of reasons. We can provide focused management incentives. I mean, I think it's not in terms of economic benefit. Our management teams, really, can take real ownership in their company. And finally, we actually can create low taxes that process.
One of the things I'd like to stress again is that the strategic allies are not affiliates, that each company has its own separate Board of Directors, a majority of whom are independent, and we have robust related party transaction approval process. Any related party transaction between the companies, I actually refuse myself from that position and we make all of our -- reportedly, we make contracts in all of the companies publicly available to you on our website.
Turning now to secular trends. I think we really are focused on 3 secular trends that impact, not only the business, but just the economy in general. The first is that large banks are narrowing their focus to their core customers. They really are becoming very focused in their marketing campaigns. There's a significant reduction in the population that can actually qualify as a prime borrower. And government plans are reducing its exposure to mortgage credit risk, and our goal really is to leverage the competitive advantage of our strategic allies to create opportunities with respect to these trends.
Trend #1. Banks are definitely shifting their focus to their core customers for a number of reputational regulatory issues, which all of us see every day in the press. Ocwen, as well as the other specialty services that have really benefited from this significantly, and we think we will continue to benefit into the foreseeable future. From the perspective, more than one -- more than $500 billion of servicing was transferred last year to the specialty servicers, and we expect another $1 trillion of servicing over the next several years that we transferred to the specialty servicers.
And we see that this is not through just simply for the mortgage space, but there are a number of other personal loan products, such as auto and student loans where, again, they want to focus back on their core customers.
With respect to trend #2, really, it's the decline of the prime market, the decline of the U.S. consumer. The credit that we provide to U.S. consumers is restricted due to much tighter underwriting standards and the decline in the creditworthiness of the U.S. borrower. You can see that just in the decline of the average FICO scores out there. This was going to be further exacerbated by the qualified mortgage rules, which are expected to severely limit mortgage availability. I think on balance, these rules were well-meaning and well-founded. I think some elements will cause a continual restriction, a further restriction to supply of credit to borrowers.
Core logic, just did a study, and they say that in 2021 when the GSE exemption ends, it's estimated that only 25% of homebuyers in America will be able to qualify for mortgage, and obviously, this will result in a significant demand for both nonprime credit, as well as single-family home rentals.
Home ownership continued to decline, as you can see on the chart. It's declined about 60 basis points a year, which really relates to demographics. Each cohorts moves with population. This trend is expected to continue for the foreseeable future. I think that this tighter underwriting standards has created a significant demand supply in-balance and it's clearly a supply problem with respect to mortgages. It's not a demand problem. I use the analogy, why didn't more than 1 million men date Marilyn Monroe. Simply, there was not a lack of demand, it was a lack of supply.
And so I think you see that in the mortgage market. It isn't that people don't want to get a home mortgage and not a home and they simply cannot qualify and that's restricting the supply. All of our companies are focused on this equilibrium, and we think we're well positioned to capitalize upon this opportunity.
And last is the government is reducing its exposure to the mortgage domain. There's been a general bipartisan support for reducing government exposure in the mortgage market.
And while this trajectory will be uneven, it won't be smooth, obviously, to the extent, housing is weak and the economy is weak, you're going to see a slowing of that trend to the extent that the family picks up and housing picks up. I think you'll see for more rapid action in terms of the government having a smaller role in the mortgage market. And we think that on balance, this trend reduced government involvement is very positive for our business model.
Now I'd like to review the vision and strategy for the strategic allies from the newest to the oldest in light of the secular trends and our core operating principles.
In terms of Altisource residential, we think there's a huge secular trend in supporting this business and the declining ability of Americans to qualify for mortgage. The single-family rental market is a $3 trillion market with a T. Almost half of the households in America that rent a home, rent a single-family home and the growing the capital in that space is growing about $60 billion every single year.
We think there really are 3 things that matter in this market, and we believe we have an advantage in all 3. The first is purchasing the property less expensively than the competition. We have a 17% cost advantage by sourcing single-family rental properties, be in nonperforming loans, and that really relies on the competitive advantage that Ocwen has in servicing those, helping us acquiring servicing in nonperforming loans.
Second, we need to operate less expensively in our competition, and we have a 15-year contract with Altisource that enables us to operate at 40% below industry -- 40% of industry cost and we don't have to worry about scale because Altisource is already scale in that market.
And last but not least is our ability to do accretive stock offerings where we issue stock at a multiple book value. At 150% of book value, we're essentially spending $67 to purchase assets, and this gives us the ability to not only increase ROE and dividends, but it also offers a gives us the ability to offer higher prices for nonperforming loans and our competitors. In other words, we think resi will be the winner in this very large space.
From the Altisource Asset Management, as I just spoke about, we think resi is a huge opportunity for Altisource Asset Management. We can't create other vehicles under AAMC and become a multistrategy asset manager, and we're realigning our core operating infrastructure of the strategic allies to develop a competitive advantage. And given the stock markets success of AAMC, quite a few people are bringing investment ideas to us. And most of these we rejected since we do not align or utilize the core operating infrastructure of our strategic allies to drive a sustainable, competitive advantage. We're simply not going to do just need 2 products out there. We're going to make one where we really like with resi be a dominant player in this space. In the near term, we're going to remain very, very focused on making resi successful.
Home Loan Servicing Solutions. Today, HLSS is focused on financing Ocwen's non-agency servicing assets. In order to create more shareholder value, we're focused on increasing return on equity and lowering the required market clearing dividend yield. And one of the ways to do this is to focus on accretion. Accretion models, as I said before, relies will rely on 3 conditions: the target asset class that's very large, stable; cash flows with long duration; and they offer yields well and returns well in excess of the anticipated dividend clearing yield.
As John Van Vlack will cover a little bit later in the conference, I'm excited we're identifying new asset classes with low credit and valuation risk and longer duration that will create enhanced shareholder value for HLSS shareholders.
Altisource Portfolio Solution. As we've spoken about in our previous earnings calls, Altisource is well on its way to becoming the a premier real estate and mortgage marketplace, offering both content and distribution to the marketplace and to marketplace participants. The acquisition of Equator is a critical step in the evolution of our business model. To just use a media analogy, Altisource has content and Equator has distribution. Of the 4 largest banks and the 2 GSEs, Equator is integrated with 5 of those institutions that their primary channel for accepting asset management services. And we're looking for significant synergies with Equator, enabling us to expand our mortgage services to a number of very success significant participants within this mortgage space. However, even without those synergies, the equator acquisition was very accretive.
We're particularly excited about our Hubzu home sale marketplace where people can buy and sell homes. Unlike Trio, it's not a listing site, it's a transaction site. And just to give you perspective on earnings, is that Hubzu makes more earnings and net income in a quarter than Trio and Zila make all year. And with all of our companies, I'm frequently asked, what are we going to do about growth. Altisource has grown its revenue 37% per year since inception, and its earnings per share have grown at 72% per year since inception.
And all this flagship company is the Ocwen Financial Corporation, and we think there are 4 areas there where we can continue to grow shareholder value. First, there's still a significant amount of servicing to be transferred from the banks to the specialty services. As they said before, we think there's $1 trillion still out there to be acquired. And even at the rate, however, we're generating excess cash flow, we can double or triple our portfolio and still have excess cash to invest in other areas.
The second thing we want to look at it is we intend to develop a meaningful origination businesses that will focus on the competitive advantages with the strategic allies bring to the table.
First, we will focus on lenders. One is our primary origination network, the Lenders One cooperative represents approximately 12% of all mortgages originating in the United States. And we believe that, in combination with the strategic allies, we can provide the members competitive pricing for their mortgages when One considers the profit associated with this services such as title and appraisal. Ocwen retains its servicing and distributes the prepay risk to other investors.
Importantly, the strategic allies can help the Lenders One members expand into non-agency product or even nonprime product with the attendant higher margins both for the members as well as the strategic allies. And it's not our intention, however, to retain this long term on our balance sheet. We utilize the direct channel that we have. It's embryonic to retain servicing from Ocwen's 3 million borrowers. And over time, we would hope to be able to leverage the dialogue engine and the underwriting engines we utilize in servicing to increase the quality and reduce the cost of originating the loan. Very much falling after the great company in the origination space, quick and which is very technology-driven.
The third one is we're looking to expand into adjacent markets, particularly insurance and consumer lending, and the key is to leverage our core operating principles to become -- to drive a greater competitive advantage. In insurance, we're very much focused on 2 segments which are more operationally intensive with lower levels of risk exposure, those being Title I warranty. The 4 segments in the insurance industry, they're pretty much operational and basically don't have catastrophic risk. It's personal auto, it's homeowner's insurance, title and warranty. Given the competition in private auto -- in consumer auto and homeowners, with people like Progressive and Geico and et cetera, we eliminated those 2, these last 2? Spaces are very interesting and they're extremely operational -- operationally intensive.
And we're also interested in the consumer lending space, given the growing demand for subprime borrowing. At the same time, banks are withdrawing from the segment. We recognize we need to be extremely surgical in this space, given that the segment experiences stress of an economic downturn, so we think we are developing a very unique way of approaching the consumer lending market. We also need to stay away in those segments where there's heavy bank competition since they have a lower cost of capital than we have. And overall, for both insurance and consumer, we're trying to bring us strategies that will reduce the capital intensity of those businesses. We think that will create quite a significant value arbitrage and create shareholder value if we can come out with a unique solution for this space. And at last, the number four, last but not least, we've initiated our share repurchase program, which John Britti will cover in more detail tomorrow.
In summary, our strategy is a simple one. We identify secular trends, and leverage our core operating principles to create a sustainable competitive advantage. The most important trends for our business are: large banks are narrowing their focus to their customers, there's a reduction on the population that can qualify as a prime borrower and the government plans to reduce its exposure to mortgage credit risk. And our core operating principles are: we want to capture adjacent revenue, improve quality and lower operating expense through technology and global resources, we want to lower our cost of capital and become as capital light as we possibly can, while lower our corporate effective tax rate. And most importantly, we're going to assume operational risk, selective credit risk and little to no interest rate prepayment risk. And overall, we remain very focused on cash flow as opposed to reported earnings. And with that, with time remaining, I'm happy to try to answer any questions that you might have. I'd ask you to keep your questions to the strategy. You'll have a chance with all the other management teams to ask questions, specifically about their business models. Thank you.
First, let me thank you for hosting this meeting though. When you talk about consumer lending, given your taste in the past for large scalable platforms, are you sort of thinking in terms of a credit card like model where you can do a lot of mailings and -- or are you talking about something more face-to-face and branch-based and specific?
William Charles Erbey
The question was -- I'm supposed to repeat this for the webcast. The question is, where are we focused on the consumer space? Is it more like the large, scalable credit card or more like branch? And my answer is neither. We won't go in the credit card unless it's a very specific area in credit card. Again, you're going up against very well-developed competitors with large amounts of technology, very low cost of capital, extremely difficult market, unless you do it very, very selectively in terms of that, and that's not something that we -- or at least looking at today, nor do we really like branches. We don't like bricks and mortar. We don't think we can add a lot of economies of scale to that and gain a competitive advantage. We'll be looking more at the other segments in the consumer space. I'm not going to say what those are, and we'll be doing it, we think, with a fairly unique way of trying to approach that market. That will be more like in the areas of auto and things like that. Yes, this gentleman keeps trying to...
William Charles Erbey
That's right. You can do it, sorry go ahead.
William Charles Erbey
Sure. I mean, the question was really -- we don't seem to get a lot of credit for cash flow, and particularly that shows like in Ocwen, and the second year earnings actually grew up to 153% of what they were in the prior year, et cetera. We're very much aware of that. I think I can't go into it, but I think we have a strategy to try to deal with that. One of the promise we have is -- it sounds like a strange problem, but we actually generate so much cash in advance of earnings that it's very difficult to -- for us to pursue a capital-light strategy because it puts us in the position of always looking to deploy all that extra capital. If you were to take Ocwen today and we could actually go full capital light. We're pretty close to it. John Britti, and I think, Ron, will cover that later on with regard to that, you're looking at a business that has high triple digit kind of returns on equity. So we really need -- we're focused on how we're going to solve that problem, and at the same time, get most of the exposure -- remaining exposure we have on our books. So there will be a closer -- when we're not carrying as many assets on our books that could be marked, we may -- it may actually alleviate some of that problem and enable us to go and to expand into more capital light kind of programs and buy back more shares than we have today. I've been reluctant to buy back more shares than we have reported earnings because it reduces your tangible net worth, reduces your future leverage and it reduces the amount of firepower you have to do a meaningful acquisition. So -- but you hit on an issue that we're very focused on, but we're not fully prepared today to tell you how we're going to solve that. Thank you.
Regarding the strategic acquisitions that you described, are you more likely to acquire the capabilities, whether it be in title insurance or consumer lending? Or is that something you could see developing organically?
William Charles Erbey
We're looking at both out of the -- sorry, I'll repeat it. Are we looking at doing more acquisitions or developing organically in the consumer space and the insurance space? And the answer is we're looking at both. In title, we generate an enormous amount of title revenue. We certainly could look at areas like that, doing that organically, and over time look for a larger acquisition in that space. In the consumer space, we're looking at both -- we have made a number of offers on companies in both those spaces. When I call us cheap, we didn't -- they elected not to trade with regard to that, so we are actively out there looking at acquisition opportunities. My biggest concern right now in the market is when you look at many of the consumer base stocks, consumer-lending type stocks, they benefited manically [ph] from a decline in interest rate. In other words, their top line revenue is pretty much capped when you're getting up in the 20% yields. It's hard to imagine you can get much more than that even if interest rates go up, so you see this increasing gap, and that's been embedded in the current stock prices today. So when rates -- if rates should rise, that would be a significant de-leveraging of earnings in that space, so we're fairly cautious in terms of how we enter that, and we are looking at both -- we have been on companies, but we have been one and we've also -- are looking at an organic solution to that problem at this point of the cycle.
I have a simpler question actually on M&A criteria, just -- and less about this space, but more about the actual companies themselves. Do you have a specific criteria or characteristics that you look at for specific companies that you're more attracted to, be it a technology focused or management and how you sort of rank order those?
William Charles Erbey
The question is, what kind of characteristics do we look for companies we try to acquire. We look for companies that are almost, in some cases, just the mere opposite. They pay very high taxes, they haven't deployed technology effectively, and they don't really know how to manage their capital structure. It gives you -- I mean, people don't give you companies and you have to figure out ways, in my view, and that position how you can create true value, particularly given were stock prices are today. So we like opportunities to make them more cash -- tax efficient, we make them more operationally efficient with the technologies that we have. And also basically, one of the things I alluded to was, if you can figure out how to create an arbitrage from how to make a business less capital intensive, you create tremendous shareholder value. I mean, if you look at Ocwen, I mean, one of the big drivers of Ocwen has been the ability for the industry and ourselves to figure out how to create it, how to make it less capital intensive. So you can create a business with very, very high returns on equity by doing that and create a lot of value. So those are the criteria we look at. They have a lot of labor, a huge amount of headcount and operating expenses. We got a mic.
How long do you expect it would take before the ancillary businesses that you laid out become a material contributor to earnings? Is this like a 3-year, 5-year project, sooner?
William Charles Erbey
The question is, how long do we think it will take before ancillary products might be -- have a meaningful impact on the earnings of the company. I mean, it's really hard to forecast. We're working to look at that. We have the resources to acquire them, but we're not -- everybody thinks we're really aggressive and do lots of things, but I think many of these things take years. This has been in development for well over 1 year, 1.5 years looking at it. So we're going to get there. We have a lot of earnings in our businesses. We don't have to be -- we have a lot of levers to pull here and a lot of business potentially in the marketplace coming in, so we don't have to get -- be fanatic about doing something immediately, but we're certainly working very, very hard looking at a whole lot of activities. And as I said, we bid on some. I mean, you could see us do a meaningful acquisition at any time.
Bill, today you're the Chairman of 5 public companies, and to complete or succeed with some of these goals you've laid out, do you see a sixth or seventh public company? Or can you accomplish what you want to do over the next couple of years under these 5?
William Charles Erbey
The question is, will there be more than 5 public companies. There may be. Probably, I won't be Chairman of too many more because there just aren't enough hours in the day. There are a number -- particularly as we pursue some of the other asset management kind of businesses that we're looking at, you could see that certainly under AAMC, other silos there that could really add to the earnings strength of AAMC. And again, as I stated before, there will be ones where we have -- we think we have a sustainable competitive advantage. I mean, we got -- and do a lot of deals and do a lot of me too kind of products out there, but I don't think we'll create really real value for the shareholders doing that. And to the extent we have some of the strategy -- embryonic strategy under Ocwen looking at how we could be an -- have some asset management vehicles that would fit in with Ocwen's strength in that area that may in fact be -- being public companies at that particular point in time. We have to get you tennis shoes.
Can you comment on the regulatory environment? It's clear that a lot of the things that you're doing you're benefiting from the regulations impacting the banks and things like that, but what about the regulatory environment as it pertains to your companies and how is that changing and what kind of impact will that have on these companies?
William Charles Erbey
The question is, what -- the change in regulatory impact, our companies are benefiting from that, but what meaning does it have for our companies. Certainly, looking at regulations and being compliant, this is the top of the list. I think in some cases, we got a significant impact on what our economy looks like from the following reason. The costs are so higher to be compliant. That's going to force most smaller businesses out of business, and you see that even in our -- we look yesterday at a board meeting, talked about vendor management. I mean, we're just not going to deal with people who do not have a big balance sheet. If you get sued because of an action they have, I want them to kneel down and start writing checks. So it's going to really constrain the amount of players that you have as vendors. It's going to significantly constrain the smaller specialty servicers because, in some cases, we have more people in compliance than they have employees. So it's going to seriously narrow the field of competition in many of these highly-regulated industries. We think on balance, that's actually positive for us since we have scale. We can put the hundreds of people to do that and actually absorb those costs effectively within our business model. We have one director, who is the chairman of the large manufacturing company, they make batteries, and he has been putting out very -- mission that -- that company stayed in, I don't if you remember 20, 30 years ago, if you were a battery manufacturer, you were like a bank today, you were really a bad guy. They stayed in it, became dominant in that space and they have a very, very profitable business model as a result of that. But going through that process, you wake up everyday and think about like what can go wrong today, and are you on top of that?
Just a quick question on Slide 11. You put out a slide saying present value of 20-year, adjusted cash flow from ops, it's different from the November 14 presentation.
William Charles Erbey
It's the other -- on one of the other slide decks, right, for Ocwen?
William Charles Erbey
Right, John, do you want to -- the question was...
Sorry, just a quick question. There's a change in the present value versus...
William Charles Erbey
It's the cash flows for Ocwen.
John V. Britti
Yes. I think -- actually, we'll cover that in more detail tomorrow, but it has changed. It changed in -- mainly in response to 2 issues that I think people brought up about our cash flow slides, One was, they want -- the timing of those cash flows was a question that a lot of investors raised, and the other was, that we only took it out 10 years and yet there's substantial cash flows beyond 10 years that we took it out 20 years, and we also tried to give a sense of what the present value is in the presentation. But we will cover that in more detail tomorrow.
William Charles Erbey
We use the 10% -- what we do is we use a 10% discount rate, John, right, on the cash flows?
John V. Britti
Right, that's correct.
William Charles Erbey
And then we took them out 20 years. so it's the net present value at 10% of those cash flows.
I guess my question was talking about the nonprime borrower, the subprime borrower. And I guess I've read that you said you believe that, that area of consumer finance will come back. Could you describe a little bit how you intend to participate in that or help it? Because obviously, I guess a lot of people, the 75% you say won't qualify for a mortgage going forward. How do you see that evolving in the United States?
William Charles Erbey
Yes, the question is, how do we see the nonprime market evolving. And nonprime lending is sort of like crabgrass. I've been around long enough time to see it go -- get hit by -- round up or whatever it is and come back to the cracks. I think you have to be very -- we're going to be very careful how we're going to approach that business because, going forward, the penalties for not being a QM-type product are fairly significant. They could be upwards of $1 million dollars of loan per day, that adds up pretty fast. We have a balance sheet, and we're not going be taking those kinds of exposures in the non-QM space. We do think we've been spending a lot of time, almost every other week, we have a meeting on it, on how to create QM-exempt products that meet the needs of those borrowers because we're not, again, as I said, we're not going to put ourselves at exposure to have that kind of issue. The follow-on issue really becomes the capital market's health and being able to support that because we're not going to put the product on our balance sheet. And recently, you've seen some pretty interesting things happen, even with the increase in GCs, it's not altogether -- you can almost do a non-agency deal, an RMBS transaction that's capital efficient compared to going to the agencies. So the market is becoming, it's healing itself, and they're accepting more and more new asset classes out there. So we haven't think that will be a very interesting market. Something has to give. I do not think politically you want 75% of the Americans to be renters. I just don't think that on either side of the aisle that's something that's going to be politically palatable. So we want to be positioned to deal with that because I think we're probably one of the best positioned firms in the industry to take advantage of that long-term trends.
I had 2 questions about the potential move into title. First, are you thinking about doing that as an agent or an underwriter? And then the second question is, at least with the larger publicly-traded guys trading kind of the mid to high-teens multiples in core earnings, is that going to -- if you look at acquisitions, I'm going to force you to some of the smaller nonpublic companies?
William Charles Erbey
Well, we are a significant agent already because of the business that we do, both in terms of Ocwen as well as through the lenders with networks so we can continue to grow that. We will look to be an underwriter. We'll do it a little differently than people are doing it today because, again, those industry -- those companies don't create returns that will be consistent with what we're able to generate in our core servicing business, so we have to be a little more creative as to how we enter that space. But -- so we will be an underwriter. And as long as you underwrite -- in title, if you do a good job, I mean you shouldn't have any losses. It's purely an operational cost business -- operational cost, and that is really a question of, then, how do you do that as capital efficiently as you possibly can and I think we had some little ways of looking at that and structures that will make that business extremely capital efficient step for us. I've worn you out. Well, thank you very much. I appreciate it. Have a great day.
John V. Britti
I think we're going to get started. So thanks for joining us and good morning. Just wanted to let you know that before the Investor Day started, Ron Faris, John [ph], Ashish Pandey, and I got together and we arm wrestled and I drew the short straw and had to follow Bill Erbey. So we're really happy to be here and give us the -- we're happier here and -- in giving us the opportunity to present Altisource and the other strategic allies, and what we're doing in terms of positioning ourselves for growth. We appreciate all of your support and interest in Altisource and the other strategic allies.
And looking at the attendee list today, I noticed that there are several of you here are very, very familiar with the Altisource story, and there are others that are very new to the story. And so I apologize to those that are more familiar with Altisource, but today, I'm going to go through a little bit of the history of Altisource and our relationship with the strategic allies, what our competitive advantages are and our strategy, an overview of our 3 operating segments and a summary of our key investment highlights. And Michelle Esterman, who's of our Chief Operating Officer will walk you through our financial highlights, as well as the 2 scenarios that we've discussed during our earnings calls.
And then this afternoon, during the breakout session, we've brought 4 executives with us. We brought the head of our Mortgage Services segment, Joe Davila, the head of Hubzu Eric Koenig. We brought with us Mark Hynes who is the head of our Technology Services segment, and we also brought Seth Carter. Seth runs our Consumer Analytics business. So they'll be participating during the breakout sessions to go a little bit more deeper into some of our operating businesses.
So for those of you that don't know, by way of background, Altisource spun out from Ocwen Financial Corporation in August of 2009. And the reason why we separated or spun off from Ocwen was because Altisource had fundamentally different business characteristics. Altisource is a capital-light business, we're fee-based. And Ocwen, as a loan servicer, was acquiring MSRs and servicing advances. The separation from Ocwen made it easier for Altisource to provide services to Ocwen and to others, and it also helped us lower our global effective tax rate, which, for 2013, has been at 6%, and that was done through our location of the headquarters in Luxembourg, which is where Michelle and I and the other executives here live.
As part of the separation from Ocwen, we signed an 8-year services agreement with Ocwen to be the provider of all the services that Ocwen would typically outsource to providers, the service providers. We subsequently extended that service agreement to 2025.
Today, Ocwen is Altisource's largest client, comprising approximately 65% of our revenue. Then if you fast-forward to December of 2012, we created, capitalized and spun off 2 companies, Altisource Residential Corporation, which I'll also refer to as Resi; and Altisource Asset Management Corporation, which I'll refer to as well, as AAMC.
As Bill Erbey described earlier, Resi is focused on acquiring and managing single-family rental properties by buying portfolios of sub and non-performing loans throughout the United States. And Altisource Asset Management Company is the external manager of Resi. We created Resi to capture the growing demand for single-family rentals, that Bill discussed earlier, and we created Altisource Asset Management Company to manage asset management vehicles for large and scalable asset classes.
We believe that with Altisource Portfolio Solution's lower-cost operating model, through our centralized global resources, we can provide Resi with a very meaningful operating cost advantage in its marketplace. However, in order to provide our shareholders with the benefit of that low-cost operating model and still maintain Altisource's capital-light strategy, we separated Altisource Residential from Altisource in December of 2012.
And because of our low-cost model and our capital-light model, along with our high margins, Altisource is very unique and that the faster we grow our revenue, the faster our net free cash flow grows, and we'll talk a bit more with you about that in a few minutes.
Our model has served our shareholders very well with our share price growing at a compounded annual rate of 82%, excluding Resi and AAMC. And with our competitive advantages, that I'll talk about in a minute, and our growth initiatives, we believe we are very well positioned to continue our growth.
Altisource has 4 competitive advantages. One is our global -- and they revolve, really, around 2 themes. One is our operating cost advantages and the second is operating efficiency advantages. With respect to our cost advantages, the vast majority of our work force is located in lower-cost geographies. We also have a very low global effective tax rate; 2013, at 6%. And our relationships with Ocwen, Resi and Lenders One, which is the management company that we own at the for-profit mortgage cooperative, sorry, is -- we have very low sales and marketing cost because of our long-term agreements and our relationships with those companies. These relationships also provide us with very strong cash flows and a foundation to build new businesses and attract other customers.
In terms of operating efficiencies, we believe our next-generation technology positions us very well to improve Altisource and our customers' margins.
So now let me talk to you a little bit about our vision and our strategy. Altisource has historically been defined, essentially, as the default service provider for loan servicers, principally, Ocwen. And Ocwen provided the foundation on which we built our business and remains a very important strategic priority for Altisource.
But over the last 4 years, our vision has evolved to become the premier real estate and mortgage marketplace, offering both content and distribution to the marketplace participants.
So what do I mean by content? By content, we're talking about Altisource providing the services purchased in the real estate and mortgage marketplace. And by distribution, we're talking about Altisource facilitating the ordering, buying, paying for and documentation of transactions associated with the marketplace.
In the real estate market, we're focused on 3 submarkets: home sales, home rentals and home maintenance. In the mortgage market, we're focused on 2 to submarkets: mortgage origination and mortgage servicing. And we believe our value proposition is that we provide very easy, efficient and transparent marketplaces to transact business.
If you think about what Altisource has done over the last 4 years, we believe our vision is a very logical evolution of what we've been doing. Since our separation from Ocwen, we've developed or acquired business process management solutions, affinity relationships, like Ocwen and Altisource Residential Equator, a large vendor network and the technology to order, deliver and pay for services associated with the mortgage and real estate marketplace.
So let me provide a little bit more granularity around what we mean by real estate marketplace and what we're doing to support these 2 marketplaces. So in real estate, with respect to home sales, we're connecting home sellers with home buyers and we're providing -- Altisource is providing all the related services associated with that transaction. So for example, think about brokerage, real estate brokerage, or online sales, or title -- as a title agent, for example. With respect to home renters, we're bringing together landlords and tenants, essentially. And we're providing, at Altisource, all the services associated with that transaction. And with respect to home maintenance, we're bringing together homeowners and their real estate agents with the renters. And again, Altisource Portfolio Solutions will look to provide all the services associated with that home maintenance, with those home maintenance activities. And at the heart of the marketplace is our technology that allows us to very easily order services, manage vendors, present and pay invoices and manage all the documents associated with those transactions.
Turning to the mortgage marketplace, again, there's 2 submarkets we're focused on. One is mortgage originators. And there, we're putting together, essentially, borrowers, lenders and the investors that buy those loans from the investors, and Altisource is looking to provide all the services associated with those transactions. So again, as an example, we're looking at providing title and escrow associated with an origination, valuation, quality control, verification of income, verification of employment, flood certifications, I could go on, there's 15 to 20 services associated with that.
With respect to mortgage servicing, we're putting together mortgage servicers, like an Ocwen, with their service providers. In many cases, that service provider is Altisource. And also, we're connecting Ocwen with its borrowers through our technology, our real servicing technology. And many of the services that we've built that are typical of what a servicer outsources are the services we're providing, the contents we're providing. So think about, again, title, foreclosure, trustee business, insurance services, property valuation, property inspection and preservation, et cetera, all of the services that a loan servicer would typically outsource.
So supporting our content is our distribution technology. And over the last -- this predates to -- prior to the spinoff, we acquired, and in some cases, developed and, subsequently, patented distribution technology, which we're now in the process of redeveloping onto our next-generation software platform. And these technologies make it very easy to order, process and pay for the services associated with a marketplace. We also believe that this distribution and enabling technology will make Altisource and our clients more efficient and effective in the services that they provide or require.
So let me give you one example. In our next-generation REALTrans technology trends which is our vendor order -- our vendor management system, we have designed what we call price discovery. So we're going to have all different ways in which a user of all that technology, and that user could be an Altisource, when we go to order services from a distributed network of vendors, that technology will allow us to reduce the cost of those outside goods and services through 7 different methodologies. I won't go into all of them. But for example, if you give 50 units a month to a vendor, maybe the unit price goes from $50 to $40. Or we'll do a reverse auction, where the person who comes in with the lowest bid in the first one hour gets the transaction. And of course, all of that benefit, when Altisource is the service provider, and we have to order services from a network of vendors, to then give that service back to our client, in this case, let's say it's Ocwen, that reduction in outside goods and servicers drops right to Altisource's bottom line. And Joe Davila and Mark Hynes will talk a little bit more about what we're doing in mortgage services and our technology group to help drive our margins. But this distribution and enabling technology is a big piece of that.
So why do we like the real estate and mortgage markets and why are we so focused on these 2 marketplaces? One is they're very large. I mean, if you total up the revenue opportunity available, just in these 2 marketplaces, it's north of $90 billion. So let me walk you through that.
So in home sales, there is expected to be roughly 5 million homes sold in the United States over the last -- over a 12-month period, for about $1.3 trillion. If we were to capture just a 1% real estate commission, you're looking at over $13 billion of real estate commissions in that space.
In the home rental space, there's over 20 million homes that are rented. And if you apply the same revenue that we generate from Altisource Residential, on an ongoing basis, for providing property management and leasing services to that market, you have a $24 billion marketplace.
In terms of home maintenance, there's over 70 million, or 76 million owner occupied homes. They spend, on average, close to $400 per year on home maintenance work. If you total that up, that equates to roughly a $30 billion revenue opportunity.
And then in the mortgage market, in the origination market, there's almost 7 million loans expected to be originated in 2013 for about $1.6 trillion. And if you estimate that about 1.5% of the origination amount is spent on services, that translates into a $24 billion market. So again, these are very, very large markets for us. And we believe we have a very strong competitive advantage with our relationships with Ocwen, Altisource Residential, Lenders One and Equator to capture our fair share of those markets.
So with that strategy as a background, let me spend a few minutes on our 3 operating businesses, our 3 public segments. We have 3 segments: mortgage services, financial services and technology services. So think about mortgage services is basically providing all of the services that a loan servicer, a loan originator or a homeowner would typically -- or home investor would typically outsource. Financial services does 2 things, it provides customer relationship management, or customer care, as well as accounts receivable management. And technology services does 2 things as well, it provides infrastructure to Ocwen, to Altisource and to the other strategic allies, so infrastructure services like network, telephony, et cetera. It also -- the second piece to that business is our a REALSuite of technologies which are basically our business process management solutions to support the marketplace, I'll talk more about that in a few minutes. The technology services segment also includes the Equator acquisition, that Bill Erbey mentioned. We closed on the Equator transaction a few weeks ago.
So let me drill into mortgage services in a little bit more detail. The mortgage services segment provides all the services the loan servicer, a loan originator or a homeowner would typically outsource. So what does a homeowner outsource? That could include all the real estate services associated with the renovation, management, leasing and sale of a home.
You can see that this segment has experienced very significant growth over the last 5 years and it's been primarily from 3 sources: first, Ocwen's servicing portfolio growth; second, our development and rollout of new services; and third, the rollout of our origination-related services to the members of Lenders One and, more recently, Ocwen's loan origination business. And what's interesting, the origination business, which we really got into with our February 2010 acquisition of Lenders One, I think the revenue in that business, Michelle, has grown by, what? By close to 50%, since we acquired Lenders One. So it gets a little bit masked by the massive growth we've had in our other mortgage-related businesses as a result of Ocwen's growth, but we've done very well developing and growing the origination-related business.
So today, we provide services to support Ocwen's $435 billion loan servicing portfolio. As you can see, on the lower left, we've done it at very attractive operating margins. We are very focused, as Bill described during his remarks, around operating efficiencies. You'll see in 2013, our operating margins have come down a little bit. That's a result of our acquisition of the fee-based businesses associated with Ocwen's acquisition of the Homeward transaction as well as Ocwen's acquisition of the ResCap transaction. If you were to normalized our intangibles for prior years, our operating margins, for 2013, would've been north of 40%, or about 40%.
We are very focused on improving the operating margins in this business, continuing to improve the margins, particularly on our default-related services. We believe our operating margins could be significantly higher than they are, and we've targeted, as a goal, to get our operating margins in our default-related businesses, up to 47% by the end of the first quarter of next year. Joe Davila, who's the president of our Mortgages Services business will talk more about the initiative that we have in place to achieve that goal during the breakout session.
Our financial services segment provides asset recovery management and customer relationship management services. We've been very focused on transitioning this business from being a low growth, declining revenue growth and a low-margin business, into a modestly growing business and a much higher margin business. We're doing these 2 ways: one, by expanding our customer relationship management business, which is probably around 15%, or roughly a 15% margin business; and we're also focused on developing inside of accounts receivable management business, the mortgage charge-off space. We were able to accelerate that with our acquisition of -- which Ocwen's acquisition of the ResCap servicing. Altisource acquired ResCap's charged off second mortgage business that was providing those services on the ResCap portfolios. And then, in April of this past year, we signed an agreement with Ocwen to expand those services, not only for the ResCap portfolios, but also for some of the legacy Ocwen portfolios.
And then, as you can see from the graph, on the top right, and the graph on the lower left, we've done a very good job growing our revenue in this business and expanding our margins. And we believe we have room for us to continue to grow.
Our technology services segment provides 2 services: business process management and transaction solutions to the real estate mortgage marketplace. So think about that as a REALSuite of services. Mark Hynes will discuss those more a little bit later this afternoon. And we also provide infrastructure services. Again, those are the network, the telephony, the server management, et cetera.
The growth in our technology services segment has been primarily from Ocwen's servicing portfolio of growth. And you can see, on the lower left, our margins on this -- in this business have declined, and that's been intentional. Our infrastructure business is going to be, from now, for the foreseeable future, really, is the facilitation business to support Altisource, Ocwen and other strategic allies, in managing their infrastructure and helping them keep their cost down. So that's a mid- to high-single-digit margin business. Our REALSuite of technologies -- today our margins are very constrained in that business because we're developing -- we're very, very focused on developing our technologies, redeveloping our technologies into next generation software, to support both Altisource and Ocwen and the other allies' growth. So we expect the margins in this technology services business to remain constrained for the next couple of years, probably in the single digits, but longer term, the REALSuite technology business should be a 40-plus percent margin.
And if you think about LPS and their technology data and analytics business, which is their MSP software, they run that business at north of 40% margins and they do almost all the work from the United States. We do a lot of our development work around the globe. We don't capitalize our development expenses. So longer term, 3 or 4 years out, when we're done investing in these technologies, I would expect the margins in the REALSuite business, inside of technology services, to be north of 40%.
Let me spend a few minutes now going over our 5 key investment highlights, and then, Michelle will give you a quick overview of our financials and our 2 revenue scenarios that we presented in the past. So our 5 investment highlights include: our strong recurring cash flows, our strong revenue growth visibility, our next-generation technology, our successful service development track record and our seasoned management team.
So with respect to strong recurring cash flows, you can see from the left-hand side of this slide, our operating cash flow has grown at a cumulative annual rate of 42% per year since 2008. And our net operating cash for the last 12 months was $154 million. We expect our operating cash to continue to grow, as Ocwen onboards the remaining ResCap loans onto our REALServicing platform, as well as from other growth initiatives that I'll discuss with you in a minute.
As you can see on the right-hand side of this slide, because our business model requires a very low level of capital investment, our free cash flow conversion is very high.
Another investment highlight is our strong revenue growth visibility as a result of our client relationships. We have a services agreement with Ocwen, where we are the exclusive provider of the majority of services outsourced by Ocwen through August of 2025. Ocwen has $435 billion servicing portfolio and very strong growth prospects. We have a 15-year services agreement with Altisource Residential that we signed last year, where we're the exclusive provider of renovation management, lease management and property management services, and Altisource Residential has been very successful in raising equity and growing its business. So we think their growth as prospects are also very good.
We also have access to the members of Lenders One Mortgage Cooperative. As I mentioned before, Altisource owns the for-profit management company of the Lenders One Cooperative. The members of Lenders One, last year, originated were -- about 12.5% of the U.S. mortgages that were originated, and we have very good and strong access to the members of Lenders One. And with our competitive advantages around cost and the ability to provide the services at lower than market prices, we believe we're going to be very successful in continuing to grow our origination-related business leveraging that relationship with Lenders One and also the relationship we have with Ocwen and it's growing origination-related business.
And then, finally, through the Equator acquisition, we have relationships with 4 of the 5 loan servicers. We now have very good relationships with the major loan servicers in the United States. We also have a relationship now with the largest GSE in the United States. They all use the Equator to process their real estate assets.
We also have access to, now, 450,000 real estate agents that are registered users of the Equator system. So we believe these long-term relationships with Equator, with Altisource Residential, with Ocwen, provide us very long-term growth prospects, profitable growth prospects.
Our next key investment highlight is our next-generation technology. We think our existing technology is very good, but our next-generation technology truly takes us to the next level. Most of what Altisource does revolves around managing a distributor network of vendors, processing the work, running the heuristics on the data that we receive, taking that information then turning around and providing it back to our clients, then we have to pay the vendors that gave us that raw material and we have to get paid. We have very exciting next-generation technology that makes it very easy to manage all of those processes. Again, this is a major investment for Altisource, but we believe it's going to make Altisource much more efficient and effective. It's going to lower -- increase our operating margins, improve -- or make it easier for us to comply with the ever-changing regulatory environment, and it's also going to allow us to do the same thing for Ocwen, as Ocwen is more successful, as we can help Ocwen lower its cost to run its business, presumably, that will allow them to be more successful in acquiring more assets, which, in turn, benefits Altisource.
Our fourth key investment highlight is our history of successfully developing, launching and expanding our service offerings. We built Altisource from a handful of service offerings that we were providing before the 2009 spinoff from Ocwen. Since the separation, we have rolled out very successfully. We've developed and rolled out new services. Our first focus was all the default-related services that a loan servicer would outsource. With the exception of what I term is a little bit of leakage, particularly around short sales and in our auction space, where we weren't fully licensed, we basically rolled out all of the services that a loan servicer would outsource.
We're now turning our attention to the origination-related services and the home rental related services. As a testament to the management's ability to build and roll out new services, you'll see, on this slide, that only 20% of our revenue, for the 12 months ended as of this September, was from the services that we provided prior to the separation from Ocwen.
Our fifth key investment highlight is our seasoned management team. This management team brings extensive business and industry experience to support the stability of Altisource and our continued growth. I think you'll see not only at Altisource but all -- at all the strategic allies, we understand how critical it is to have the right management teams in place. And to support our operations and our growth, we spend a tremendous amount of time attracting and developing strong leaders, and you'll get a chance to meet some of those leaders this afternoon during the breakout session.
And now I'd like to turn it over to Michelle to give you an overview of our financial performance.
Michelle D. Esterman
Thank you, Bill. As you can see, our service revenue has grown from $160.4 million in 2008 to $591.4 million for the last 12 months ended September 30, 2013. This growth has been primarily driven by 2 factors, first would be Ocwen's growth and second is the development and rollout of our services.
Likewise, as you can see on the right-hand side of this slide, we've leveraged both our scale and technology to generate operating efficiencies, driving our EBITDA margins from 17.3% in 2008 to 31% for this 12 months ending September 30, 2013.
As a fee-based business with attractive margins, we convert a significant amount of our revenue to cash. For the 12 months ended September 30, 2013, we converted 26% of our service revenue to $154 million of operating cash flow. As you can see on the graph from the right-hand side, our diluted earnings per share has grown at a cumulative rate of 72% since 2008.
Next, I will discuss 2 scenarios that, we think, will help you better understand Altisource's long-term growth prospects.
So many of you have seen this before, but for those of you that have not, we have put together 2 graphs, 2 scenarios, that provide a reasonable path to revenue growth for Altisource. There's only one difference between the 2 slides and that's the assumed volume of non-GSE, or private label servicing rights, that Ocwen will acquire.
Under scenario one, we have assumed that Ocwen does not acquire any more non-GSE servicing rights. And under scenario 2, we assume purchases of $100 billion per year for 2014, '15 and '16 of non-GSE. In both scenarios we assume that the loan delinquency rates decline at the same rate based on Moody's CreditForecast.com. Additionally, we have not assumed that any of the cash generated from these activities is reinvested in our business. Each of these scenarios generate meaningful service revenue growth and substantial operating cash flow for Altisource.
As you can see in each of these scenarios, with the significant growth of the non-GSE loans within Ocwen servicing portfolio, we anticipate that we will experience substantial revenue growth in 2014, as many of these have been boarded through '13 and into '14. What's interesting is under each scenario, the run rate for our default related services remains long. In addition, the slope of the decline of the default-related services from the high watermark is reduced as a result of the growth of our new or default-related services.
Ocwen has publicly stated that their probability weighted pipeline of servicing acquisitions is $400 billion. With Ocwen's competitive advantages as a premier servicer of high-touch loans, we believe Ocwen will continue to experience very strong servicing portfolio growth as the shift in servicing from banks to nonbank servicers continues. We believe we've presented reasonable and attainable targets for each of our growth initiatives, and we believe it's possible to perform better than what we've shown here.
As a result of this successful development and rollout of our services, our affinity relationships, our ability to evolve, we've returned significant value to our shareholders. I'd like to leave you with this graphical depiction of our stock performance since we separated from Ocwen. Altisource stock price has increased by 13x since our separation from Ocwen. If you include the current prices of RESI and AAMC, our combined stock has grown by 20x since separation. Leveraging the same maniacal focus and discipline that we use to achieve this success, we're also executing our -- on our evolving vision to become a premier provider of real estate and mortgage marketplaces. Our relationship with Ocwen, Lenders One and RESI, along with our unique operating model and technology, position us well for continued growth and strong cash flow generation.
At this time we'd like to open up the floor for questions.
How coupled or decoupled do you think in the future you'll be from Ocwen in terms of real business mix and revenue growth?
William B. Shepro
Yes, I mean, Ocwen is absolutely our strategic -- our top priority and strategic focus. That's allowed -- that's helped us generate all the cash we have in order to allow us to get into some of these new businesses that we're focused on, that allowed us to help capitalize Altisource Residential and AMAC (sic) [AAMC]. So Ocwen is going to continue to be a very important focus. Our other businesses are growing at a very attractive rate, but when Ocwen has been -- as successful as Ocwen's been with its growth, and we anticipate them to continue to be successful in acquiring servicing, they're going to, for the foreseeable future, be a very meaningful client for us. But what we are doing at the same time is positioning ourselves to diversify our revenue stream through the acquisition of Lenders One, the acquisition of Equator and the creation -- the establishment of Altisource Residential. And what we like about those businesses is it -- we can leverage our competitive advantages to help make those companies more successful, and we can remain very capital-light. But at the same time, we have long-term service agreements with these other companies -- with exception of Lenders One, with these other companies in order to develop and grow our businesses as those businesses grow.
Two questions. The first one, in the real estate marketplace, that home maintenance opportunity, how big is that and how close are we to sort of seeing a revenue from that?
William B. Shepro
So the question is, how big is the home maintenance opportunity and how close are we seeing -- or how close is Altisource in seeing revenue from that opportunity? Well, our initial focus and, really, our sole focus today is on supporting Altisource Residential and its growth. And I think, today, Altisource Residential is something like 6,000 loans, and they've been -- how many of those are going to be rentals roughly now? And approximately half of those, as they expect, will turn into rental properties. And as Altisource Residential continues to raise equity and debt to support its growth, we'll benefit from it. But as I discussed earlier, it's a very large market. There's something like 79 million homeowners that require services, everything from mowing the yard to ordering, getting power and ordering cable and telephones, et cetera. So there's a lot of work associated with owning a home, and we've developed a lot of those processes with our property inspection and preservation business to support the REO we've managed. Over the last 3 years, we've managed more than 90,000 homes. So we've developed the capability to provide all those services to manage vacant and occupied homes, so we think we can leverage that capability to just first support Altisource Residential. And then as our enabling technology is -- next-generation technology is fully developed, we'll look to expand that to other spaces.
Okay. And then just a follow-up. The 5-year plan, what category do you think it's going to be the most challenging to sort of execute on and see that revenue growth from?
William B. Shepro
Well, with the way we looked at that 5-year plan was we said, look -- sorry, the question was that what part of the 5-year plan that Michelle presented will be the most challenging? I mean, the way we put that together is we said, let's assume we hit singles or doubles across our growth initiatives and then Ocwen neither acquires no server -- no private label servicing or $400 billion over the next several years. So I think what we've presented is a very fair depiction of what we think could happen. Now we're not going to -- it won't happen exactly the way we described it. Some quarters, we may do more; some quarters, we may do less. But we think, and sort of to give you some guide posts in terms of what we think we can do, what we presented was, let's say, single or double across our initiatives. So we think it's achievable.
As Bill talked earlier about acquiring or building insurance business, how does that work with Altisource? I assume you did it under management for their title to that?
William B. Shepro
Yes. What Altisource does today is we're a title agent, and we're licensed virtually across the United States. And we're doing that work related to Ocwen's foreclosures, as well as the sale of Ocwen's REO assets. We also provide title insurance as an agent for the trustees, the insured title policies that are required in about 15 states. And we're now developing a title business leveraging our relationship with the Lenders One members. So we have no intention to be a capital provider. We want to remain capital-light, so we would be -- continue to be the agent and provide most of the services. But we will not be the capital provider.
Leon G. Cooperman - Omega Advisors, Inc.
I've asked you this question before, but I'll ask it again. I've been a major beneficiary of your tremendous hard work, you and Bill, because I've noticed since the beginning. You went through these slides just showing the enormous appreciation, which is gratifying, yet you're continuing to, I think, buy back stock. And I assume buying back stock is a statement that you think the market is mispricing the prospects of the company. So twofold question: one, kind of what do you think you have here, what do you think it's worth to justify these purchases; and second, how would you see, roughly speaking, the employment of your free cash flow in 2014 rate?
William B. Shepro
So the question that Leon Cooperman asked is why do we think it makes sense to continue to buy back stock and why do we plan on using our free cash flow for going into 2014. I will tell you this. I had a, I think, lunch with Leon a couple years back, and I think he taught me the 101 of when you should institute the stock buyback programs, and that was very educational for me. And so we really focus on where do we think the prospects are for our growth. If we use our cash to buy back stock, are we going to increase the risk of Altisource as a service provider? And I guess -- and that's our 2 primary prospects. So from our perspective, we generate a lot of free cash flow, and we believe the share buyback program that we have in place will not increase the risk of the company. And we also believe, and somewhat based on these scenarios that we've provided to you, that we have very strong opportunities to grow. And we think about our business is what should have -- we're targeting to develop Altisource in a business that can grow revenue roughly 15% a year and earnings more than that. And if you have a company that's in a fee-based business, that generates a lot of free cash that can grow its revenue 15% a year and its earnings faster than that, what should you trade for? And we believe after, of course, discussions with our board that the share buyback program makes sense. And just for everyone's benefit, what we're -- we have 2 restrictions around share buybacks. One is we can't buy back under Luxembourg law. You can't buy any more than your Luxembourg earnings, so that equates to roughly 90% of our post-tax earnings. The second restriction is under our debt agreement, where we have some baskets that limit share buybacks. And the limiting factor is going to be that Luxembourg law, not our debt agreement.
Leon G. Cooperman - Omega Advisors, Inc.
That would be [indiscernible]
William B. Shepro
Correct. And then to answer your second question.
Michelle D. Esterman
William B. Shepro
Net income, not free cash flow, is available, yes. To answer your second question, what are we going to do with our cash, obviously, we believe it makes sense right now to continue with the share buyback program. We also will spend probably $35 million to $45 million next year on capital. And then we're very disciplined. We look at potential acquisitions, both strategic and bolt-on, that are in line with our core capabilities. And that doesn't mean we're going to be very disciplined in our analysis of companies, but when we find something like Equator, which we think fits very nicely with our mortgage and real estate marketplace. And not only it's attractive for its own business and the customer it brings but all the revenue synergies, which I know is somewhat cliché, but we truly believe there are revenue synergies with Equator, it's a very attractive acquisition. So we'll look for other acquisitions like that.
Just one back on the title business. When and if Ocwen enters the business, do you anticipate your business to be competitive with theirs? And if not, how are the strategies different so that they won't be?
William B. Shepro
The question is whether or not Altisource Portfolio Solutions' title business would be competitive with Ocwen's title business. So the answer is absolutely not. Altisource is a very low-cost capable service provider, and we're licensed to provide all the core title activities. So we would certainly envision that we would work with them to help whatever Ocwen does. And again, I'm not that familiar with what their specific strategy is. But we would work very closely with Ocwen to reduce their operating costs to run the title business, and we certainly would continually as the title agent on the business or at least, as the service provider, generating the same types of income we're generating today.
On the $100 billion per year of acquisition potential using [indiscernible], is there a way to think about the revenue potential of $100 billion of kind of low delinquency loan versus $100 billion kind of more intense loans, more of a share repurchase? As reality plays more, it's likely to decline, but I assume they haven't been impacting you.
William B. Shepro
So I think I heard the question as being is there a to determine what the revenue generation possibilities are in $100 billion of private label loans versus...?
Yes, whatever way you want to think about it. So maybe GSE versus private label.
William B. Shepro
Or maybe sort of, I mean, very high delinquent portfolios versus sort of more moderate delinquent portfolios it might look like, the origination.
William B. Shepro
Yes, so we've actually -- and you'll see this. I think there's, either in investor presentation, where we put together and are trying to make it very, very easy for you to model, the revenue we would generate off of Ocwen's acquisition of the private label security portfolio or GSE portfolio. And a lot depends on the delinquency assumptions. They have to understand what the level of delinquency is of the portfolio at the time they buy the servicing rights and what you expect those delinquencies to decline to over time because Ocwen's very good at what it does, and it's very good at getting loans re-performing and through the foreclosure process. And then what we do is tell you roughly how much revenue we generate -- service revenue we generate per delinquent private label securities loan or delinquent GSE loan. And then you know our margins today are roughly 40%. We're targeting to grow them to 47%. So it's very easy for you to figure out what that could generate in terms of income for us. And then you would model the CPR and the decline in delinquencies to figure out how that revenue will taper off over time.
You guys -- your business generates tremendous cash flow, and I'm just wondering, when you laid out your growth targets, do you think -- do you have any acquisitions planned in that to achieve that? And would any acquisitions accelerate or enhance your ability to grow versus your forecast? And then the second part of the question is, you have some businesses right now that you're in growth mode and you're ramping them up, but would it make sense to spin some of those out in the future?
William B. Shepro
So the first question was whether or not we've built in any acquisitions into our 2 scenarios. The answer is we do not. That basically assumes organic growth, again, hitting a single or double on our growth initiatives. And then the second question, Jason [ph] was?
William B. Shepro
Oh sorry, yes, thank you. The second question was do we have any plans to spin off any of the Altisource businesses. And look, what I would say with respect to spinoffs is, yes, we've done spinoffs, and we don't take that lightly. When we do a spinoff, we really analyze whether or not it makes business sense to conduct this business -- to conduct a spinoff. And so as we think about Altisource today and the mortgage and real estate marketplace that I described in our revolving vision, at least as our current thinking is we believe these businesses belong together, and we'll create more shareholder value by keeping these businesses together because, at the end of the day, if you want to be in the real estate mortgage marketplace and then support all those transactions, it doesn't necessarily make sense, for example, to take Hubzu and spin it out. But what's unique about us is we're in a talent board, to get talent, just how do you incentivize a management team to join Altisource in these incubated businesses that may or may not be spun? And so we've created a very unique equity appreciation rights plan for our senior leadership team and for our management team and many of the executives in those businesses so that they can participate in the value of those companies we create, whether we keep them inside or separate them.
What's the path to glory for Hubzu?
William B. Shepro
So the question was, what's the path to glory at Hubzu? Where's our -- look, what we've built, leveraging the relationship with Ocwen, has been is a -- the ability to sell homes online not only to investors but to individual consumers. The Holy Grail in our view, though, is to be able to grow beyond just the distressed business and to do it on the non-distressed side. And as Bill mentioned, Hubzu makes more money in a quarter than Zillow or Trulia makes. So the real Holy Grail was to develop the non-distressed sales market. We've rolled out what we're calling as our direct-to-broker program this summer. We've had some very good success. I think if you were to look on the site today, you'd see that 40% of the homes on Hubzu are non-distressed through our broker relationships that we created. Again, we're being very diligent in terms of how we roll it out. We want to make sure we get it right. We're getting feedback from our customers, both the buyers and the sellers, and incorporating those changes. But our focus of growth is really twofold: developing the direct-to-broker, that's the Holy Grail because now you're really focused on the non-distressed and the 5.6 million home sales a year; and the second focus is developing the institutional business, and we do work historically for Ocwen. We signed, I think, 3 or 4 contracts now with others, including Altisource Residential, a couple of larger asset management companies, and we're in very detailed conversations with a couple other larger banks to provide REO sales and short sale work for the banks. So we see tremendous opportunity for Hubzu. The Holy Grail, though, is to get the non-distressed piece of that business humming.
I think we're out of time, but I -- we appreciate again everyone's support, and thanks for coming.
Okay. I think we'll get started in just about a minute or so. So if there's anybody still moving about, I don't want to rush you. Actually, I guess, I can. It seems rushing but -- I think we're good. Okay. Great. All right.
So good afternoon. Thank you, all, for coming today. My name is Seth Carter. I'm the Chief Scientist for Altisource. I'm going to be speaking with you today about a number of the innovations that we're developing in our consumer analytics practice as they relate to a number of our strategic partner firms. It's sort of fitting, I appreciate John and those who are making the schedule for putting me during lunch. Well, believe it or not, I really am. Lunch is one of the first uses of -- free lunch is one of the first uses of social psychology to persuade people and behavior. It is my background. So the notion goes, you feed somebody a free launch, you listen to your sales pitch during lunch, and they misattribute the emotion of a full belly to thinking they like what you're saying. So -- or that you like lunch, 1 of the 2, which I think is equally applicable in my case. There -- the reason I bring this up as an example is, in fact, there are a number of different examples like this. For instance, if you squint while you are taking a test or looking at figures, you'll think that it's harder to figure it out than it actually is. Most people would say you squint because you're thinking. You can actually make people squint, and they'll perform more poorly on tests as well. So when you're looking through my numbers and data, feel free to squint, it makes me feel smarter than I really am. It works out nicely too. They've even shown in these types of studies that paying more money for a drink whenever you go to exercise, say, you buy a Gatorade, you pay more money for the Gatorade, you end up burning more calories for the -- when you have an expensive Gatorade than a cheap one. So I'm not advocating against Costco here, I'm just saying keep that in mind.
The point being that all of these different mechanisms that are going on, going behind the scenes, you are influenced by them without even realizing that you're being influenced by any of these mechanisms. And it's very pertinent to the type of conversation that I want to have today about some of the innovative practices that we're putting in place here. My background is in consumer psychology. I have a PhD in Social Psychology and also some training in analytics. And we've build our team around this idea that when people are trying to make decisions that would otherwise be thought of as rational act or decisions, that people actually deploy far many more biases in those decisions than you would otherwise predict. And in fact, if you ask people about their use of how they made a decision, everyone comes up with a reason because we all like to believe we're rational. But as it turns out, most of the decisions that we make are, in fact, very often counter to a rational decision. And that carries over not just in terms of test taking and things that you do while exercising or these very small life decisions, but it carries over to the much broader decision of even your personal finances.
And so one of the real areas of focus for my teams, and you'll see this as we talk about some of the different things that we're doing, it really has to do with how do we understand the consumer psychology of our borrowers in a way that actually allows us to help them achieve long resolution faster because it's been our experience that most of the biases that exist actually exist in a way that prolongs timelines to resolution, which means that it ties up more investor money longer. And so we can actually generate better operating efficiencies and cash flows by leveraging this information to work with customers sooner. And so those are some of the types of things I'll be speaking with you about today.
One other point I should make is that even though a lot of the research that's been done in behavioral economics, consumer psychology, marketing, et cetera, is done with laboratory-based settings, so college students in a lab, basically, in very limited settings, imagine you're doing this choice, what would happen if these features affected you, those types of studies actually still grasp on fairly well to practice. There's an ability you have to develop to be able to do that, but the concepts themselves are universal. So with the right methodologies, which we believe we developed a number of, you're actually able to go in and apply some of that research in a very systematic way with your customer interactions. So those are the sort of things that I'll be talking to you a little bit about today.
Again, I can go back, we're making forward-looking statements here as well, so the same disclaimers before applies.
So I want to talk first about the approach of consumer psychology, and I'll -- is the microphone echoing to you all? You're okay? I can hear a ringing. I just want to make sure that's another psychological bias. If somebody's got poor quality of microphone, you will dislike what they tell you no matter how. So you may dislike what I say, but at least it won't be for the microphone, right, so that will be good.
So I'm going to talk first about the approach of consumer analytics and how we really work this -- our method for working this into the business. I'll do this with a case study, something that we worked on recently. And then I'm going to move into talking a little bit about the organizational structure that enables us -- that's not me, I promise. You all heard the feedback starting. See that's -- can you hear me okay now? I'm going to move away from the mic a little bit. Okay.
So we're going to talk a little bit about the organizational structure that allows us to carry this out. This is a very unique organization within a group like ours to have us in the place that we are within the organization, so I'm going to talk a little bit about that. And then I want to talk a little bit about the methodologies and the product suite that we developed to enable us to utilize psychology and analytics across the practice. And then finally, talk about some of the differentiating features and some examples of some past research and how it's worked in the organization.
So with that in mind, let's talk a little bit about the approach or I could just turn off the projector. There we go.
So we deploy what I term a hybrid approach. A hybrid here, a number of different organizations that you probably know about. So the first piece of the hybrid approach is really what you think of in terms of a think tank organization. So we have PhD-level researchers who are going out and every month updating our research knowledge base with regard to consumer psychology and analytics and how those techniques could be used. We have some proprietary methodologies for doing that. I'll give you a little description of those in a moment, but those are the types of things we're using there. We're also sort of an operating consulting firm. We go in and work with the operational leadership and all our partner companies to basically determine when we can utilize psychology and analytics and which better ways to drive business outcomes. And then, finally, we're sort of a research firm as well. We go in and develop the research methodologies that will allow us, whenever we make a change in the operation, to be able to say with assurance whether or not that change is really driving the impact that we believe it does because, of course, whenever you do this type of research, there's a lot of noise that can be introduced in these broader settings, so how do we eliminate that to figure out cause and effect? So we're sort of a hybrid approach in that regard.
I can kind of walk you through an example. Over the last few years, an example you probably heard a little bit about, this is our Shared Appreciation Modification, the SAM, the SAM product that we have. So the SAM product really came together when Bill and Ron and others were talking about the idea of strategic default and how current modification models that were present didn't address strategic default very well. But at the time, you had some other models there. They were focused on affordability, which is really a DTI-driven phenomenon. I mean, really, if you don't have the money to pay, then you're unable to pay. But there was another segment -- growing segment at the time of people who are not paying their loans, the strategic defaulters. These are people who are underwater, who maybe have the ability to pay but they didn't have the willingness to pay. And the point was we've got to have an option there because they're going to string you to foreclosure just like anybody else and everyone is going to lose. And so we started thinking about ways to build the model that would provide better NPV for the investor, but that would work around the loan-to-value ratio of the property. And so we developed the SAM. I'm giving you a very quick rundown of the terms, the basics here. Right now, the principal is down, then potentially 95%, over time, with the share to the investor, 25% of the appreciation of the value of the home up to the original write-down. And the other factor that goes somewhat unnoticed in this one is that we also built in an escalator here with a customer. So as you can imagine, one of the biggest concerns of doing this cycle program is that somebody takes it and then they immediately turn around and sell the property at the lower value and come out ahead, which creates a moral hazard.
So we actually deployed our research psychology team to go in and say, "What kinds of theories can you find that would actually keep somebody in this program longer?" And so we developed the program, the payment structure for the customer, in a way that uses something known as adaptation level phenomenon. It's the idea best described, perhaps, by your current TV. How many of you went from a 27-inch TV to an HDTV at some point? Yes. You remember the change, right? It was -- you don't remember? Well, we'll assume you do. But think, from a 27-inch to an HDTV, and you've got a very nice HDTV, it felt different, and you like it for a while. But now when you go to Costco, your TV isn't as sharp as the one there anymore, and now you want another. That's adaptation at play. The idea is that, we judge our current happiness by what just happened against what we just had in the past. But once what just happened in the past becomes part of your phenomenological background of your experience, you don't remember that change anymore so you devalue it. With regard to mortgage principal reductions, it's very similar. You make a reduction one time, it's going to matter for a while with that customer. But then when other bills pile on, and it just becomes part of the background, that customer is not going to think about the fact that they got the large write-off, it's going to become a problem again, which actually could potentially drive re-default. And so the way that we structure that program is to actually place the payment plan structure over 3 years. So that the reduction in principal happens over 3 years time. Now there's another facet of this, and that's what we wanted to increase additional ability to adopt the program, right? Now if you're underwater on a number of other bills and you're struggling to make your payments, it's very easy. And you wouldn't believe this, but there are people who go through these programs. Go through applying for them and then they never make their first payment. And so, we said, how do we address that? And so we found some research in something known as artificial goal pursuit. Now this one you can probably get. If you remember the -- anybody remember the SUBWAY sandwiches, a free Sub Card. You would basically get the 2 stamps whenever you first got the card. And then you needed to get 6 sandwiches more, right? Why didn't they just give the card out and say, here, you need to get 6 stamps to get your sandwich. It made you feel like you were already working toward that goal. Your frequent flyer programs do the same thing, right? This is artificial goal pursuit. So what we do in this program is we give the customer their first month or their first year's worth of principal reduction upfront, to give them some sense of momentum within the program and then we carry it out over time. And as you've probably seen some of the recent press on the program, the program is doing quite well. Performs very well compared to other modification programs. It performs well because of the features of the model, but also in the features of the structure of the model and then in the testing that we did to bring it forward. And that's really what our analytics and consumer psychology innovation is all about. It's about working within our business teams to figure out better ways to structure programs and to be innovative in a way that generates customer value as well as investor value. And it does so in a way that is traditionally more cost effective. So we start by identifying business problems. We develop interventions that use research, as I just mentioned. We deliver these by our technology platform. So I should note here in that same example, we had to make changes to our underwriting platform and models to do that. But because we can control those in-house, it was a lot easier to do than if we had to use third-party product.
And then finally, the results of these interventions. We package those. We test those. And find better ways to deploy them across in the future. So it's sort of an iterative process here to develop these pieces, but that's an example of the types of things that we're doing.
So in order to carry out those types of programs -- and I'll describe a few more of these in case studies in a moment, if that's okay. In order to carry these out, we had to structure a team that looks a little bit different than teams you would normally find in a firm like Altisource or Ocwen. This is our general organization overview. It's a very abstract schematic here in terms of the organization. But I'm going to use it to kind of tell you the story of how we developed our strategy here.
So we started building this team about 5.5 years ago. And Bill and -- Ron and Bill were very prescient to see in the coming, call it, decade, there's going to be a much bigger emphasis placed on big data and on behavioral economics and these other components that are used in decision architecture. And so we started building a team even at that time before these became popularized terms that could do those sorts of things. We have a research science team. This is a group that's primarily PhDs in psychology, economics and marketing. And then an analytics team that goes with that, with PhDs in applied math and in econometrics and different modeling components and disciplines. And so we've grouped those folks together as part of our research science team. Now they're not solely our think tank component, as I mentioned earlier, but they're certainly doing a number of those pieces. I'll describe that in a moment. After we put that in place, we begin realizing that in order to deliver the types of innovations that we wanted to deliver, we needed standardized platforms across the organization. So for instance, if I want to write a script for a call center agent to use, if all I've got is a pad of paper for those call center agents to flip through their scripts and utilize, it's not going to get utilized well, which increases noise, which means that my program is less effective. I use that as an example because there are still major servicers that use that method today, all right?
So we built a platform from scratch. And it was a platform that we built, our CMS platform, that allows us to do a number of different things. And I'll talk about a little bit on the -- I've got a platform view here. But the point was, that we wanted to be able to run test and control methodologies, so A/B style test, within the scripts that we deliver. And we wanted to be able to very quickly iterate on those and use the best script possible with different customer segments.
We also wanted to be able to hook our data sources into our scripting delivery mechanism so that we could utilize different models to deliver scripts at different times to different customers. And we wanted to be able to link the script in the workflow component together. And we wanted to be able to do all this without having a huge technology infrastructure. A lot of scripting platforms that are out there require very large engineering footprints to even be able to make changes. So I want to make a change to a script. I'd have to submit a ticket, which gets converted to coding and text and things. So we had to build a back end for our system that allowed us within our team to be able to make these changes.
So we did that. We also built a modeling platform at the time. We've since iterated on that one already. We had built a modeling platform for loss mitigation that did optimization. It handled optimization in a much more robust way than any other platform out there. But then we actually have now taken and split the models themselves from the workflow platforms, which means that we can change workflow through our underwriting group without having to change the inherent model, which means that we can make different model changes faster and with less risk. And it also allows us to open up our modeling platform to other businesses. I know we've done some work for cash, for relocation models and other things within Joe Davila's group as well because of that.
So the point is, we got here. We started building the infrastructure and the products to deliver these pieces. And then we realized something that most everyone probably should have already realized. This is my fault. Academics like me aren't the guys you want on your consulting and client strategy teams because we will overly complicate anything, right? And so we had to build out a consulting group that make sure that it understands what the end vision is for the business solution so that we can hold all the academics accountable to deliver the right solution at the right time. We don't want to spend 6 years to deliver something that we could have delivered in 6 months just as effectively, right? So we built out that practice as well. And so we have finally reached a point now within this division, where we feel like we've got a full functioning -- it's fully realizing our vision at this point. And we've got a lot of opportunity to move forward with a number of different programs that will help our current partners and will help us look to the future. So that's just a little bit on the development of the group over the past few years.
In terms of our research specializations -- and I won't go through all of this text, I promise, but it's there if you want it. Our major research specializations breakdown in one of a few areas. Within predictive analytics, we do have a number of folks with expertise in linear and nonlinear optimization. So most of your optimization models for things like a loss mitigation model, the loan resolution model we use. Those are being programmed through optimization theory. We have econometricians who are developing predictive statistical models. So things like our best time to call and contact strategy models are being developed there. And then we have a computational science team that actually uses their knowledge of both the math and computers to build those platforms in the most efficient way possible. I should say that we export and create most of our platforms into a Java architecture, which allows it to be modularized. So that we can either bolt it on or scale it with other platforms.
Within consumer psychology, we have a number of different dimensions here as well. One is in persuasion and influence. So this is the idea that you get someone to comply with a request. And I don't mean compliance here in a legal sense. Certainly, that's important. But here, when we say compliance, it's in the psychological sense. We can't direct or force somebody to obey what we ask them to do. I guess, foreclosure and going through that process eventually does, but that's not what we're about. We also are past the point of just very subtle social pressure, which is conformity. What we're really operating in is the space known as compliance. It's getting someone to go along with your wishes. This is pretty similar to what you would find in any sales situation. We view our loss mitigation process in that way. It's almost a consultative sale.
And then finally, we use methodologies -- I'm sorry, we use behavioral economics. So again, I supply this term somewhat loosely. It's been utilized in a number of different context over the last few years. But the central idea here is that traditional economic models, when trying to predict human behavior, looked at the human as a rational actor. These rational actor models though fail to take into account many of the factors that drove us into the housing crisis to begin with, which is that the way humans view their interactions is certainly far less rational than one might believe. At the time, there was a prevailing notion that with larger decisions people wouldn't be as irrational, but it's turned out that, that's false. Now we find these techniques or these methods are really affecting decisions across the board. So we have people that have specialty in that area as well.
And then finally, especially in consumer behavior, generally. So this was sort of -- it's sort of a catch-all to make up for a lot of the different other areas of consumer behavior that we're looking at. So I'm going to pause there. And I'll say, as I'm pausing, that at the end of this, we'll have time for general questions and then I've got a -- there's a Q&A right after this in one of the in-depth Q&As to follow up with any real specific questions you have. I can give you more examples.
So as I mentioned, we had to utilize a product suite here that would help us deliver our vision. It's a fairly complex vision slide. I think it's indicative of that. But our idea overall, I think, is pretty pure. And that is that, we should be able through the use of research and technology, be able to create a more abstract vision of customer interaction and apply that so that we can deliver more cost-effective interactions that actually accomplish more with the customer in any given time. So the customer ends up happier. Your investor is happier because you're spending less time to service the loan, if there are problems. And you're able to generate something that is truly a win-win for everyone. There are 3 real major technology platform components here. And I'm going to try to use the laser pointer to highlight the -- so you've got REALAnalytics, REALUnderwriting and REALContact. And I realize if I'm using the laser pointer, it's going to be difficult for people to hear me at least on the simulcast. So I will stand here and sort of lean over as I do this, or I'll just advance the slide. Either one, there we go.
So REALAnalytics really is our optimization platform. So if you think about the LRM platform that Ocwen's used. Some of you may be familiar with. That's our loan resolution platform once customers go delinquent. That's an optimization platform that we've built. It does feature flexible objectives. So what that means is that, if you want to change the value function in the optimization or you want to change specific investor terms. So the investor terms operate like constraints on the model, we have the capability to do that, right. That's all programmable within the model and it's changeable. Then we have a whole host of other models. A few of these handle our workaround underwriting. So we can create the NPV models, the re-default prediction models, as well as the selling occupied properties, cash for remodels that I mentioned that Joe Davila's team is using. And then we also are developing a whole suite of contact center strategy model. So the idea is to become more efficient and effective at how we contact customers, even being able to predict when we should call someone based on their past behaviors and not just based on what's happened in the past for that particular account.
We also are working on a whole platform here that we call our modelytics [ph] platform. It's a strategy platform for models. The idea is to utilize advanced simulation and back testing and customized waterfalls to be able to take a particular strategy of any sort. And utilizing the rich data that we have and our customer behavior already, to be able to do portfolio and loan level analysis of what happens if you change strategy A from strategy B. We think this is going to be a really powerful tool. It does some things that are not out there in the market right now, and we think it's taking a good bit of development to get there. But we believe this is something that should be very interesting moving forward to help us generate the most investor value possible.
We also worked on a REALUnderwriting platform. Again, I won't spend a whole lot of time on this one. Except to say that we are -- you heard a little bit, I believe in Mark's presentation or you will about the REALUnderwriting platform. We've been working very directly with that to ensure that the workflow component of the underwriting process fits hand-in-hand with the modeling component.
And then finally, we have our REALContact product suite. This delivers our -- a couple of different things around the psychology. So the first is that we are able to deliver optimized psychology at the right time within a conversation. And I'll explain how we do this in a moment. But for now, just know that what we're really trying to do is in those places where psychology could be most effective, specific techniques, let's say, classes of techniques. That our agents as they're on the telephone with customers are directed to use the script that leverages that psychology content at the right time with the customer and in the right way. And in doing so, we should see more lift. And we do, in fact, see more lift in conversion rates and customer satisfaction and a whole host of other outcome variables. It depends on the project, which outcome variable you use, but I'll give some examples that will give you some clarity there soon. We also have this, what we term conversation dynamics, which is on the right-hand corner there at the bottom. This is really about the fact that most scripting engines that are out there, if you take an approach like ours, which is to script as much of the conversation as possible, that those engines then feel robotic to customers on the other end. I'm sure you've all had a call center experience where somebody you can tell is reading from a script to you, and there's nothing more infuriating because you're just waiting for the person to stop reading so you can ask your question. What we're trying to do with this is to develop methodologies that allow us to respond to those types of dynamics, okay? So I'll give you a few examples of that a little bit later in the day, but just know that with the advent of data tracking where it is, it allows us going forward, as a future view here, to be able to change these conversations dynamically based on data and have a more effective interaction with customers to eliminate a lot of that belief that the situation or the script is scripted. See what -- asking of why, if there is that risk of the customer believing something is robotic, why would you script to begin with? Well, there's a very good reason. One, you can utilize the psychology where you need to use it. And two, you minimize compliance issues. I can't think of how frightened I would be if I worked in a firm where we didn't have these types of scripted interactions to minimize compliance. I've seen other servicers, as I've heard from folks who come in, that literally we use paper and pencil, notebooks, that have all their policies and procedures in them, and that's how they service loans.
Now that's probably fine if there's one set of policies and procedures that works across the board, but if you spend much time in dealing with these loans, you know that every state does it a different way, and that every program's got different types of recommendations, and that every investor wants to do something a little bit different, and that's their prerogative.
So how do you actually take all that into account and still have a conversation with the customer? There's concept of cognitive load. It's the idea that if you're trying to process information and listen to someone at the same time, it becomes very difficult to do both very well. That's why they tell you not to listen to loud music while you're studying, right? It's the same idea with our agents on the phone. If the information isn't right at their fingertips when they need it in the right way, then they can't listen to customer as well. And so our platform is designed to deliver that information just that way, right? and so that's a little bit on our scripting platform. As you can tell, I get a little bit excited about that. It's a soapbox issue, but I think what were doing is so far ahead that I get excited about it.
We also are doing what we term campaign optimization and dialer management. Again, these go hand-in-hand. It's not just good enough to have a best time to contact model during the week. You got to be able to say, overall, what is my contact strategy been for this customer? How many letters? How many e-mails? How many times have I called within the month? Not just times within a day. So we're trying to link together the call strategies in a much more robust way, which provides, again, a better experience for the customer. It's going to generate more lift from the customer, but it's also a much more effective way to handle it.
And then finally, we have our platform here that operates with our appointment contact model. So we'll talk a little bit about the appointment model in a few minutes but just know that whenever we rolled that out, we had to build a platform to help us with it, and our in-house team built that.
Now I'm going to pause before I go to the next section. I'm going to grab some water. And I'm going to ask, John, if you -- what is my time check, John, in terms of how much time I have? Anybody here would tell you...
John V. Britti
You're just doing fine.
I'm fine? Okay. Anybody here will tell you, as a former professor, I'll talk about this stuff until people just leave the classroom. So I don't want to bore anyone, but I do need more.
John V. Britti
If you need more time, we could take a look at what's left over.
That's true. That's true. We've got a Q&A, but I'm not going to do that. That's -- now, I'll end up finishing ahead of time. See that's how it goes. Okay. So I'm kind of giving you the structural overview of what the systems look like that allow us to deliver this content. What I haven't done is given you a sense of kind of the theoretical basis of this content. What actually -- what do we mean when we say we're going to create scripts for instance, that change the consumer psychology of a borrower. So keep in mind, where we're really operating here are primarily in the communication points of a call center, the letter campaigns, the scripts that we're using to interact with customers. We're also building some programs like the SAM program. So we do have -- and the appointment model. We have some area of expertise there. And then we're also building the model. So I guess I should say, some of the things we're doing sort of permeate throughout, but I want to spend a little bit of time talking about why we even think consumer psychology as a concept is actually viable in this type of environment. So I've got a slide up on the deck here. It's a funnel slide. And it represents or at least it's supposed to represent how borrowers or customers choose options. So in your traditional loss mitigation scenario, you've got a number of different cash flow and collateral-based options that you can give to someone. You can put them on our forbearance plan. You can give them a HAMP modification. You can give them a SAM mod. You can give them a mod that doesn't do either one of those. You can do balloon payments. And then you can go to the collateral side. You can do short sale, deed in lieu, et cetera. The point being, you've got a lot of options at your hands to offer that customer. And the customer at some point, even if it's not explicit, it will be soon, but even if it not, somebody is explicit to make that choice, the customer has to, at some point, decide what option works best for them. And we believe that people make these choices based around 4 primary factors. The first is simply their ability to pay. So if you want to stay in the house and you have an ability to pay, that's a pretty easy one. You make your monthly payment. If you want to stay in the house and you don't want to -- you don't have the ability to pay, then something like of forbearance or maybe a modification seems to make sense. If there's willingness to pay as well, that's the second factor. It doesn't matter if you're able to pay, if you're unwilling to pay, then you're going to string it along to a foreclosure because you don't care. That hurts the investor because your money is tied up all the way through that process. So we've got options that we can talk to customers about that would get them out of that property sooner than just simply going down the traditional pathways without actually thinking about when to introduce collateral-based options into the mix.
The third I would argue -- and by the way, ability and willingness are just traditional operational additives, anytime you go to anywhere that's collecting data or trying to sell through loss mitigation, these are the 2 you're going to find. I would add there's a third, which is comprehension of communication so no matter how willing or able one is to pay, if you don't understand the message that's being sent to you, you're not going to pay. And this normally happens through 2 mechanisms. One, if your different channels of communication or different instances of communication don't match each other. So for instance you're not using scripting. So one agent says one thing and another agent says another creates confusion. You're going to end up with a status quo bias there, which means you're not going to take action and, therefore, the problem is going to continue.
The other would be, if the person on the phone is consistently using operational jargon instead of actually describing the situation as it matters to you, as a customer. In that case, you're still going to end up with a lot of interaction because people are confused about what to do, extends your timelines. So you got to add clarity of communication or comprehension of communication to your funnel.
The fourth piece though is the part -- I mean, we certainly worked on those pieces. I think our scripting does that, but the fourth piece is the one where we really bring in the psychology. And that's the actual funnel itself. If the premise holds that these psychological biases are all around us and we're unaware of them, and research has shown that it does, then we have to believe that when customers are listening to information being given to them in a call center environment to do loss mitigation or if the customer is just trying to make a decision about how to resolve the debt. That these same principles that potentially got them into the debt to start with. These principles of consumer psychology are still applying in how they're seeing the situation today and how they see they're going to get out of it. The bad news is, all of us are potentially going to experience these biases. But the key is, you may not be able to know every behavior that the bias is going to cause. But you can know and fairly accurately predict which biases will happen when and how to mitigate them. And that's really the role of the consumer psychology group is to figure out what the biases are that may exist in a given situation and how do we mitigate those biases. And if we can create communications that do that, we strip away this whole layer of inaction that's caused by people not understanding or people having an issue with the interpretation of the event on a psychological level. So I'll give you a few examples of what I mean by these biases, and I'll show you how -- some of these are hypothetical and then a few aren't. And I'll walk you through these just to give you a sense of how these might play out in the operations settings of a company like -- of companies that we've -- these are things that we've done for Ocwen and Altisource.
Well, actually before I do that, I forgot I had this one in here that it's probably important to talk about. These biases are created sort of across-the-board for all of us by our experiences with the world. All of us rely on what we term behavioral norms. These are sort of cognitive shortcuts that keep us from having to think too deeply about something. Unfortunately, even if none of us want to admit it, we're pretty much all cognitive misers. We don't really like to engage our minds to think critically unless we have to. So I'll give you an example. Remember the first time you walked into Starbucks? You probably don't. They're ubiquitous now. But does anybody still remember the anxiety they felt when trying to order at that place? They make up words. Latte isn't even technically a word the way they use it. It's based on -- none of their sizes are even real words. What's a Venti or a Trenta? You all know you can -- not on the menu. Trenta is on the menu. You can go one beyond Venti, if you just ask them for it. You ask for a Trenta. If you needed extra caffeine, well I'm just saying. I walked into a Starbucks the first time and I said, "I'd like a large coffee." And they just kind of looked at me and gave me that condescending look to say, "You're an idiot." And so eventually, I had to adapt my schema around coffee. So that I began ordering a Venti. Now I can walk in and order a Venti, 4 pump, half caff, soy latte with no whip. I don't order that. I'm just making that up. But you get my point. You've got a schema for Starbucks now. You don't have to think about your order anymore. You can walk in and, just like that, make your order. These norms that guide our behavior result -- they're basically from schemas. And they become automatic over time. You think about them initially, but then you don't have to think about them anymore, and they just guide your behavior without your knowing it. Such that, in fact, when you go to a non-Starbucks now, if you've gone to a Starbucks a lot, you have a harder time ordering there.
And so my point behind this example is simply to say that first of all, we rely on behavioral norms. The reason we do so is because we don't think about situations that much. If we had to process everything that we came about, everything we saw everyday, we would be on overload and we couldn't make any decisions. So our brains have become very adept at taking past experience, figuring out what works and then deploying that schema. So these behaviors become automatic overtime. We don't think about them. Research has identified hundreds of these different norms that guide compliance situations. Our job in consumer psychology is to figure out what they are and what they're doing in that situation and how do we de-bias them. So we don't have to predict everybody's behavior that's coming up. All we have to predict is, when that norm is going to take effect because the other things about norms and biases is that you can often predict what triggers them.
I give you one more example from the research. This is a number of years ago. Does anyone remember when you're in college still having to copy your articles out of the library? You go to the copy machine. Now what happened at the end of the semester when everybody's papers were due and there were 3 coffee machines in the library? Huge, huge lines, right? And so there were some researchers that wanted to understand the automatic nature of these norms. So they went to the university library at the end of the semester. They created 3 conditions. They had a research confederate walk up to the second person in line and say, "Can I cut in front of you?" As you can imagine that didn't work out real well, right?
They had another person walk up and said to the second person, "Can I cut in front of you? I've got a paper due tomorrow, and I'm really stressed." Now believe it or not, maybe people were nicer then, I don't know, about 90% actually said, "Yes, you can cut in line." But then they had a third condition, somebody walked up and said, "Can I cut in front of you because I need to make some coffees?" 89% still let them cut. The reason was the word "because". We have ingrained in our minds a norm that says when somebody gives you a reason for something, you tune out the reason, as long as they gave one, that's all that matters. It's a short cut that helps us deal with all the things we -- you probably experienced that when in your own lives when somebody comes up to you and says, "I need an extension because..." -- you really don't care why they need it, for the most part, you just want them to stop asking, right?
And so that's really what we're talking about here. That's a norm that has been enacted automatically, right? I'm not giving you tips by the way to get your deadlines extended. By the way, Bill knows that one, so I can never use it with him, but you get my point. The idea is that people have these quick word responses, they call it. I walk in. I know when to enact a norm. I press the signal that activates that norm and all of a sudden, the script takes off for that norm. And I can't control it. Well, it turns out, in our customer situations, it's the exact same way. And these norms actually guide people not taking action as much as we're actually going in and doing anything to put the norms in place. Normally, we're just de-biasing the norms that are already there.
Here's an example of that. Example, the norm of social proof. It's the idea that when we're unfamiliar with the situation or worried about how we should act, we look to other people to define what we should do for us. Now this is especially salient in 2 places: One, when you haven't been in the situation before; and two, when there's a high emotional component to the situation. Now you can imagine for Ocwen, for instance, with regard to loss mitigation, but the social proof norm is quite apt because people are generally at least even if they have, have been there before. Generally, most of them haven't. They don't understand the industry. I mean, heck, the industry can barely keep up with itself. All the different things that change. So they're already on edge. And then you add in the emotional component of potentially losing your house on top of that. It's very ripe for a social proof. Unfortunately though, in many call centers best practices and procedures, this is a hypothetical example, but I think it's pretty close to what goes on in many places. You'll see a script for the agent like this one. "Mr. and Mrs. Borrower, I understand your concern. I talk to hundreds of people every week who are in similar situation to yours." Now that seems fine on the surface, but as it turns out with the increased media coverage of delinquencies, that's made people believe from a social proof standpoint that more people are actually behind on their payments than really are. And then when I come in and say, "Hey, I talk to all these people every week who are behind on their payments." What does it tell you? Yes, that's true. The social proof is about to take action. I'll be behind just like everybody else.
Well, you can make that script a little better, by saying something like this: This year alone, our probers have helped over 77,000 people in similar situations to yours to resolve their delinquencies. So here I changed -- I've done 2 things, I've added the number, but let's put that aside for a moment. The thing that I've really changed here is I've changed the reference group. Now instead of saying, you're part of the group that's just behind, I'm saying you're part of the group that's getting help. It's a very subtle shift of language. On its own, it has a very small effect size, and in fact if you don't use it correctly, it doesn't help you at all. But if you know when to use it, and know when to use similar techniques and when to layer those together, you can create these aggregate effect sizes that are quite large on the portfolio. So we know that there's too much statistical noise to be able to leverage 1 technique at a time, and say it had a huge impact. But if you're able to build these up together, you can have a pretty sizable impact on outcomes. We can take this, just to give you an example of how that works, we'll add another technique to this, the availability heuristic. That's the idea that decisions are often influenced by how easily vivid examples come to mind. So you take that 77,000, for instance. I don't have any context for that number. But if I could say, well that's equal to a quarter the size of Pittsburgh, Pennsylvania, then that actually has a little bit more heft with the customer, because I can't see 77,000, but I know Pittsburgh's at least large enough to have an NFL team. It's got to be a pretty big city, that if I've never been there, it gives my argument a little bit more weight. So those -- that's only 1 small example. When we're building our scripts in our letter campaigns, we're layering literally hundreds of these together in ways that makes sense, and then we're measuring the effect size of the outcome there. But in order to do that, we had to build quite a large practice and storage mechanism for all these techniques, which I'll talk about in a few.
We also extend our research, not just into call-center scripts, but also into the letter campaigns and the other correspondents campaigns that the strategic allies use here at Ocwen, Altisource companies. We've had real success with taking these larger models in psychology and economics. In this case, one noticed temporal construal theory, and applying those across entire interaction sets with customers.
So the example I'm going to give you came from a non-HAMP population, 90-plus day delinquent group of Ocwen borrowers, and we were using at the time, a standard operational letter set, which consists of an initial demand letter at Day 90, a specific offer at some point before foreclosure, and then a final demand right before foreclosure. And then there were some repeat of those letters within that, but that was your letter set. And we said well, there's a lot of research out there in construal level theory now that says that people actually, when they make a decision about a future event, different types of information are going to work better in the distant future versus near future, can we match those particular types of information to and disclosure of those pieces of information to the time of event. So the discrete event we chose of course was foreclosure, and in order to set this up from a research standpoint, we took loans, who we matched them on a -- their timeline, because by state obviously, your timelines for foreclosure are going to vary. We randomized within those sets, then for FICO, for a percentage of principal still left, and a few other variables. My point is, we got to control the set. And then we randomly assigned within that set, the standard letter, which is what everybody was getting anyway, and our new letter, which leveraged this temporal construal theory. Basically, the short story version of this, is we used techniques like testimonials and some of the representativeness and scarcity technique, some of the more social influence-related techniques upfront in the letters, and then as the event grew near, we became much more specific with what we were asking for from the customer. And the reason for this is that research shows us that, in a distant future event, people use what's known as superordinate information, or information that has to do with categories and broader information to make decisions but that specific information, this more concrete information actually works better as you get closer to the event. And by rolling out this letter series and -- that what the test showed us was that we got about a 15% lift in resolutions. Now these are people who had not contacted us for 90 days, and who were not resolving loans, extending timelines, and we got a 15% lift in resolution rate using this series versus the other, and you know that again, this was just 1 piece of the pie here, this is not the entire solution. I just wanted to use it as an example of kind of how we're structuring this around correspondence programs.
One of the more better-known examples of some of the work we've done at a model level component is our appointment model. Many of you may have heard a little bit about this, but the idea is utilizing appointments for loss mitigation calls, instead of the prevailing notion of just making outbound calls until you catch somebody, and try to get them to resolve. Now this is one that, within our organization has a long and interesting history, but my favorite anecdote about the start of this one was how it started. One week I was on vacation, at the beach, and I got an e-mail from Bill. Bill, I don't know if you remember this, but it was a 1 set of e-mail, and it said, Seth, what about using appointments with our customers? And that's what kicked off this whole model. And we obviously did a lot more development after that, but it turns out Bill was spot on, because the model became very successful for us. And what we did is, we first looked to see whether or not we should use appointments. I mean that was, we had to figure that out. Nobody was doing that in our industry at the time. And then once we decided that yes, it made sense, we had to decide how to structure it from a psychological standpoint, to make it actually effective. So we looked to other business models and that sort of thing, and then we had to figure how to operationally pull it off, because there's a lot of changes to be made there, and then we have to have a technology platform that allow us to create appointments and manage them the way that we needed to. That again, we were very fortuitous, in that around that time, single point of contact, regulations came out with regard to loss mitigation and the appointment model fit those very well, so we were able to get through those pretty well. But my point here is, we were able to build a model that customers like better, that allowed us to do a better job and it allowed us to do it faster, which really strikes all the things that we want to do. Our rationale at that time was that, if you're making an outbound call, to try to collect money from somebody who's overdue, you're -- and then somebody who's in loss mitigation, your customers generally very unsure of the timelines or the next steps to take. I mean, you can imagine, if you're not in the industry, and somebody's just telling you what you need to do next, but never giving you more information, you can imagine how frightening that is, because you have no idea what's going to happen next. So the borrower then feels very unprepared when the agent calls, because what would happen to these loss mitigation calls that didn't have a component like this, if the agent would call the customer and say, hey, are you ready to talk about your situation today? Well, if I'm sitting on the sofa watching TV, and my kids are running around, I'm not going to be ready to talk, but yet that's the time you called me. All right? Eventually, I'm going to begin to feel, sort of learn helplessness here. If you've ever seen those videos of, like the mice that have been shocked so much, that they finally just curl up in a corner. That's what this feels like, right? Because you don't feel like you have any control all over the situation. People are randomly calling your house, asking for things that you're not ready to provide, and you don't know what's going to come next. Think about what a horrible situation that is for a customer. But what we were able to do with this appointment model, is that we were able to solve a lot of those customer problems, which makes that customer more willing to work with us, and to get things done faster. So the first thing that it does, is on a high level, resolves issues on calls in a lot fewer calls, in a lot fewer outbound calls than you're going to have otherwise, which is more efficient for everyone. Everybody comes to the call prepared, I don't want to say everyone, but most people, when they come because, if I know that my appointment with my agent is at 3:00 on Tuesday, and my agent's call in beforehand and says have documents A, B and C ready, and we'll go over them, I'm going to be a lot more prepared for that call, than if the agent just calls me and says, hey, go see if you can find documents A, B and C, right? But moreover, the customer gains some control of the situation. And there's research across the board and organizations, all the way through healthcare research. The health care research is very interesting, it shows that if you give somebody who's in a retirement home, a plant to take care of, that extends their life by 17 months on average. Simply because they had something to keep control of. What we're really talking about here is giving somebody some sense of control over a situation that feels hopeless. And the model's worked out very well. If you look at the results, they're a little hard to see on the screen. I'm going to bring up my version here, so I don't misread, that we've improved our content rates with the right parties by 34%. We've got 4.4% shorter resolution timelines, our acceptance rates have gone above 4%, our customer satisfaction's up by 28.4%, and 1.4x increase in 1 call resolution status. What that means is, we have a metric that we use that says, how many calls did it take to achieve the answer for that customer, if it's not 1 call, than we didn't do our job, so we've achieved even an increase in that as well. So by many measurements here, the appointment model seems to be working, and it seems to be helping us process these loans faster, which translates to better returns. And customers are happy. So the point is that, just by using a little bit of good sense when it comes to thinking about how to structure processes, from an operational standpoint, and by leveraging some of the research that's out there in psychology and analytics, we can actually drive better results for customers.
Okay, I've got a few other here, other examples here that I wanted to -- actually I'll stop there at the examples. I can go into a few others in more detail in the breakout, if you want. But I do want to give you a sense for, why not everybody is doing this, and why it takes a little bit of forethought to put this together. So when we first started building this group, we have taken sort of a psychologist as an artisan approach, the idea that if you hired some smart people that had some research knowledge, you should just be able to go -- tell them, go look at this and figure it out, and make it better. It turns out, if you get good people and everything's well-defined and everything goes in your favor, and you don't have a lot of these to do, you can do that. The problem is scalability. Your new -- so we operate in a very defined space of psychology. It's actually, when you look at consumer psychology, for instance, there aren't even any graduate programs specifically in consumer psychology at the PhD level. So you're looking for people that have specific research expertise in areas of social psychology, market research, et cetera, and there are less than a couple of dozen of those people new coming on the market every year. So as you can imagine the scale to the degree that we have, that's impossible to do, if you're simply trying to find people, right? So what we had to do is to come up with a framework, we've got a number of those people on staff, but we had to build a framework that allows us to use those psychologists, and to leverage their skills for psychology, and not try to use them as ad hoc project managers, or as operational consultants or anything else. How can we use them as psychologists and still make that part of our overall delivery? So we came up with this framework model, and I'm going to start at the back of the model, Item #6, Optimized Solutions. So Optimized Solutions really are the collection of innovations that go in together to make 1 program. So you can think about the sam [ph] model or appointment model as one optimized solution, right? Within each optimized solution, we define what we call business problem innovations. So these are a series of related business models, related business outcomes, that conform together to create innovations, which then roll into the solution. The models really are the key to this. What we do is whenever we have a new business problem that come about, we'll sit down with an operations team, we map out the workflow for the business, and then we have a proprietary method that we actually apply psychological components, psychological modules which are related techniques and other things that we've already tested, into that framework. So for instance, at an abstract level, let's say we needed to make somebody choose Payment Option A versus Payment Option B, because Payment Option A got things done faster. Well then that would be a choice architecture module that we would plug into that business situation. And then, that would guide the development of scripts and everything that went beyond that. Within each one of these modules, which we keep in our knowledge base that our teams use, we have clusters of technique, these are a lot of different psychological techniques, that when you put them together can create one of these modules. And then we have techniques themselves. We've identified all the major techniques and social influence behavior architecture, et cetera, and we store all those techniques in our research knowledge base. This is maintained at a level where any -- we have alerts going out each month that the new information comes in, that relates to any of these techniques. Our team brings that in. We store it in a way that's modularized, so that we can basically get the best practice guidelines in place for deploying any of these psychological techniques almost immediately, and that informs them the ability to create modules, which inform our workflows. So the point is, we've built a system here that isn't just an artisan level system, because then you get into a lot of issues with, whatever somebody did or training in, that's what they're going to lean to. You get to quality issues, this is actually a platform that allows us to deploy the psychology in a meaningful way. And then later, to test it, because the thing I haven't mentioned here, which is possible, which is what we're just starting right now, is we're actually able to test both at the module and business problem innovation level, and we can also -- so we can test those through the operation, and then we're also creating a virtual lab set up that allows us to actually test how to best deploy techniques and rapidly iterate on those.
So the whole goal behind building all of this out, is to translate a lot of science that goes into our communications with customers across all the channels, and we believe that in the end, that not only creates a better customer experience, but it allows us to process solutions faster and ultimately, generate more value for our investors.
So I thank you, and certainly happy to answer any questions. And I'm available to answer in-depth questions too, later.
[indiscernible] onto the sales side?
Great question. The question is, how easy would it be to build the framework on the sales side. Frankly, I think the same principles apply, so the framework itself actually would be built, right? It's just a matter of building out the modules that you would use to apply it. So it's actually a fairly easy exercise. Our whole process here has been to break these pieces into modules, that we could then mix and match to create different business cases for.
How do you optimize the servicing workforce with the appointment model, it's not clear to me how long, each appointment would go do, some of them might have to log downtime, or overlapping appointment?
Yes, great question. So the question was, how do we actually optimize our staffing model, given the appointment model? In some regards, it actually makes it a little bit easier, because if people are coming into your workflow, using appointments, then you actually at least know when the call's going to come. What you can't predict is how long that call's going to take. What we do have though, are historical averages of how long that call takes. So we'll build the model with some buffer around those averages, and then we also have a kind of buffer level appointment process where, if your appointment agent is still busy, you can get one of our floating agents to take the appointment. It's not single point of contact, but we tell them that up front, and give people the option of rescheduling an appointment. So but for the most part, we've used a larger buffer. The other thing I would say is, because of our low-cost delivery platform, since we're through scripts with agents and all, we have the luxury of being able to schedule the agents for longer appointments than they would generally be needed. And that's an inefficiency we obviously want to work out of the system, but we can fix quality issues very easily by just extending how long we've set up the agents for appointment. There's a question in the back?
Can you give some other examples on how you apply these consumer analytics framework, so the example that's corollary to a bunch [indiscernible] using on sale? Or are there other pieces that you're applying it today, and so you're thinking about utilizing it?
Yes, sure. So -- give me one sec. So the question was, can you give us some examples, outside of the ones that you gave, and the industry that you gave, for how we're deploying or would deploy these technique. I would say this very broadly, that right now, obviously, our focus is on Ocwen and all of our strategic allies. We've got a lot of problems that we can deploy these solutions to within that space. Pretty much any space where there is a complex series of workflows or decisions, that there's often an emotional component, and that there are regulations or components that change rapidly. This system and this method should work pretty well for. Now today, where we've extended it so far, we've utilized this methodology at Nationwide Credit, which is an Altisource subsidiary for third-party -- we've done it in our third-party debt collection. We've rolled out 2 things: The scripting engine, which I talked a little bit about; and something we call our optimal resolution model. So this is actually a mathematical prediction of our propensity to settle debt and things like that, that we can actually use to guide our agents, as they're making settlement or payment plan options, and that's been very successful. Statistically significant improvement, both in terms of promises to pay and reductions in noncompliance issues. But you can think of other spaces where you could use this. Mortgage origination probably has some potential. We've employed a lot of models. We're beginning to work more with Joe's teams over on the asset, or on the collateral-based side. I guess, I would say, we're really, at this point, primarily limited within our own verticals and within others by what direction we want to go and frankly, by how fast we can get these systems built. And I think, I will say I think, we've got a stronger platform to do that than ever, we've got a lot of these places -- its components in place now, and it's really starting to build momentum.
You talked about the psychology of the consumers. What about the psychology of the agents, or is the system built it in a way that it doesn't really matter who agents are?
Thank you. Great question. The question was, you talk a lot about the psychology of consumer, what about the psychology of agent. I would say, yes, we think about both. Now what I've talked about today is around the consumer, and theoretically, if you build the system correctly, there should be no agent interference, right? Think about a web-based self-service platform. You eliminate the agent altogether, that's the purest form of this type of technology. However, there are agent factors. So we do a few things, one is that we do provide, we're working to develop training courses with the agents who are using the system, to train them to -- in delivery, primarily. Because that's your biggest factor in terms of the variance. But also, just in training of navigating the system because it decreases cognitive load, and that sort of thing. Within the Ocwen and Altisource and related companies, we also use a good bit of psychology in our assessments of potential agents upfront. So we utilize the WBT and the PI, we use different measurements that will help us figure out whether or not somebody would generally be successful using this type of system within our group as well. And we use that for our training purposes and that sort of thing.
[indiscernible] do you incentivize them in any way?
Do we incentivize the agents differently? No, for the most part, our incentive structure is based around the operational goals we're trying to achieve. Our belief is that we need to have a set of goals that people need to adhere to, and that's where the incentives are structured. Although I probably -- I don't want to go too far into that structure, because I'm less involved with incentives, maybe, than some of the other folks here. Well if you do want to dig deeper on any of these examples, or hear about the others, I've got a Q&A I guess, coming up in our next session. So feel free to do so then. And I thank you, all, for your time.
Thanks, Seth. So we're going to take a little break. At -- I think you've got until 2:15. We've got starting breakout sessions, which should be on your agenda. I think all of you've got one. If you don't, you can get one at the table, just outside the room. Meisner's [ph] is to our -- is to my left. As you go out the door, you go around, Flagler [ph] 3 is just next door, here. And then pardon my pronunciation but Royal Poinciana [ph], I think, 1 and 2 are downstairs, you can either take the stairs to our right or you could take the elevator. Thanks very much. First one starts at 2:15, and they're 45 minutes each, so please keep moving. Thanks very much.
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