Home Loan Servicing Solutions' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 6.14 | About: Home Loan (HLSS)

Home Loan Servicing Solutions, Ltd (NASDAQ:HLSS)

Q4 2013 Earnings Conference Call

February 6, 2014 11:00 ET

Executives

Jim Lauter - Senior Vice President and Chief Financial Officer

Bill Erbey - Chairman

John Van Vlack - President and Chief Executive Officer

Analysts

Mark DeVries - Barclays

Nick Agarwal - Wells Fargo Securities

Mike Grondahl - Piper Jaffray

Bose George - KBW

Henry Coffey - Sterne Agee

Lee Cooperman - Omega Advisors

Rob Brock - West Family Investments

Christopher Testa - Sidoti & Company

David Haas - Moore Capital

Operator

Good day, ladies and gentlemen and welcome to the HLSS Fourth Quarter 2013 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today’s program is being recorded.

I would now like to introduce your host for today’s program, Mr. Jim Lauter, Senior Vice President and Chief Financial Officer. Please go ahead.

Jim Lauter - Senior Vice President and Chief Financial Officer

Thank you very much. Good morning everyone and thank you for joining us today. My name is Jim Lauter and I am the Chief Financial Officer of Home Loan Servicing Solutions, or HLSS.

Before we begin, I want to remind you that a slide presentation is available to accompany our remarks. To access the slides go to our website at www.hlss.com, select Shareholders, then select Events and Presentations. Click on listen to webcast and register. When done, click on access Event. Click on how you wish to listen to the event. Each viewer will be able to control the progression of the slides during the presentation. To move the slides ahead, please click the gray button at the bottom of the page pointing to the right.

As indicated on Slide 2, our presentation 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 a future period or by use of forward-looking terminology. They may involve risks and uncertainties that could cause the company’s actual results to differ materially from the results discussed in the forward-looking statements.

For an elaboration of the factors that may cause such a difference, please refer to the risk disclosure statement in today’s earnings release as well as the company’s filings with the Securities and Exchange Commission, including our 2013 Form 10-K which will be filed later today. If you would like to receive our news releases, SEC filings and other materials via e-mail, please register on the Shareholders page of our website using the e-mail alerts button.

Our presentation also contains references to non-GAAP performance measures. We believe these non-GAAP performance measures may provide additional meaningful comparisons between our reported results and how we internally manage our business. Non-GAAP performance measures should be viewed in addition to and not as an alternative for the company’s reported results under accounting principles generally accepted in the United States. A reconciliation of each non-GAAP financial measure to the most comparable financial measure or measures calculated and presented in accordance with GAAP can be found in our earnings press release.

As indicated on Slide 3, joining me for today’s presentation are Bill Erbey, Chairman of HLSS and John Van Vlack, President and CEO of HLSS.

Now, I will turn the call over to Bill Erbey. Bill?

Bill Erbey - Chairman

Thank you, Jim. It’s a pleasure to share with you HLSS’ results for the fourth quarter of 2013. Against the backdrop of dividend cuts by many of the mortgage REITs, HLSS posted record earnings in the fourth quarter of $0.56 per share with no change in asset valuation. Relative to its guidance of $0.49 to $0.50 per share, $0.04 of difference was from prepayment speeds and were below HLSS’ benchmark rate and $0.02 was from the capital charge, which exceeded the marginal cost of financing on advances above target. The 12.4% prepayment rates in the fourth quarter is the lowest recorded in this asset class.

HLSS purchased mortgage servicing assets representing $9.9 billion of unpaid principal balance and ended the quarter with a record UPB of $180.4 billion. Keeping pace with the growing in advances, the company also continued to expand its committed fixed rate term financing by issuing a $300 million three-year term note in November and another $800 million in 1-year and 3-year term notes in January. Having demonstrated its ability to purchase, own and finance complex mortgage servicing assets, HLSS is now ready to enter a new stage of development and expand into other mortgage assets, the first of which John will discuss today.

As a step in this process, HLSS recently opened a management office in the Cayman Islands to ensure that we will maintain a single layer of taxation on a variety of mortgage-related assets regardless of the REIT eligibility. On an overall basis including Ocwen’s existing assets HLSS is well positioned for the next few years.

Now, John Van Vlack will cover the company’s fourth quarter results in more detail. John?

John Van Vlack - President and Chief Executive Officer

Thank you, Bill. As we consider second year of operations I think it’s worth highlighting the manner on which we have grown so far with service as backdrop for how our management team will pursue new business opportunities. Since the time of our IPO when we managed $15 billion of UPB servicing assets, through the end of 2013 when we managed more than $180 billion UPB of servicing assets. We have invested in assets with little creditor valuation risk that held these assets in a manner that produces stable earnings. Based with interest rate volatility we focused the tension on securing committed fixed rate term notes and on hedging the remaining interest rate exposure on our borrowing.

Last December we started discussing investing in other asset classes beyond the seasoned non-agency servicing assets we currently own and shared our plans to open the management office in the Cayman Islands. In early January our Cayman management office opened and since then we have been busy working on our first new asset class. We anticipate closing our first purchase of approximately $600 million of FHA-insured Ginnie Mae early buy out loans or EBO loans on around the first quarter of 2014. EBOs are eligible delinquent FHA guaranteed mortgages where they are typically bought out of Ginnie Mae securitizations when the loan coupon exceeds cost of funding. Loans to be first purchased in this first transaction will continue to be serviced by Ocwen. We believe EBO loans share many of the same characteristics as our servicing advances.

The holding period is based on the remaining foreclosure timeline and pre – repayment is guaranteed by FHA. There is a limited creditor valuation risk. HLSS expects to buy the loans at a price slightly above par and as the loan owner will own the average coupon rate which is in the mid-5% range. HLSS plans to finance EBO loans on a bank line as an average advance rate of approximately 90%. HLSS’ earnings will be based on the spread between the low coupon – loan coupon and the costs of funding, less the servicing fee and amortization of the purchased premium over the expected liquidation period. We expect to fund the equity component using the cash we generate in excess of our dividend in the first quarter of 2014 and expect an ROE within the range of our current earnings yield. Ocwen will indemnify HLSS for any servicing related issues, so we will not be taking operating risk.

Slide 5 shows our asset composition at year end including the flow purchased from Ocwen in October. Total assets of $7.3 billion were collateralized by $180 billion of unpaid principal balance of mortgage loans. 91% of the assets are cash or non-agency servicing advances which have virtually no credit risk given their overall collateralization and limited mark to market risk. The remaining 9% were non-agency rights to MSRs, which benefit from the same overall collateralization and continued to experience conservative stable valuations.

Slide 6 provides an update on our advanced financing activities and results. We ended the year with an effective interest rate of 2.26%, which reflects the interest rate reduction that we anticipated at the completion of the rating process on our second advance facility.

Slide 7 is our retained fee curve that depicts the economic split with Ocwen for the assets that we own. We established or retained fee on each asset purchased by calculating how much of the servicing fee HLSS needs to retain in order to cover the interest expense, amortization operating expense and return on invested capital. In order to enhance the alignment of interest between HLSS and Ocwen and to reduce interest rate risk for HLSS, we proposed to amend our agreements with Ocwen to change the capital charge on excess servicing advances from a fixed rate to a variable rate of LIBOR plus 2.75%. While the change to the variable rate gives us some earnings in the near-term we will benefit in future if rates follow the forward LIBOR curve as we match revenue with the floating rates LIBOR liabilities that we incur.

In addition, this amendment also provides that HLSS will continue to earn retained fees on loans in its portfolio that are refinanced by Ocwen if above a threshold of 0.5% annually. This provides some protection against the risk that we still view as small that the government decides to refinance non-agency mortgages.

Regarding expectations for the first quarter and assuming prepayments remained at fourth quarter levels, we expect to earn in the range of $0.53 to $0.54 per share. Assuming prepayments fees return to our benchmark of 13.5% and including the benefit of our EBO purchase, we would expect to earn in the range of $0.50 to $0.51 per share.

Now, I’d like to turn the call over to Jim Lauter who will walk through our third quarter results and cash flow drivers.

Jim Lauter - Senior Vice President and Chief Financial Officer

Thank you, John. Slide 8 shows fourth quarter earnings in our management reporting format. As you will see, results were very much in line with those from the previous quarter as our October flow purchase enabled us to remain fully invested. Servicing revenue was $201.6 million or 45 basis points of average UPB serviced, which was the same as our contractual fee. Sub-servicing fees were $103.1 million or 23 basis points leaving us with retained fees of $98.5 million or 22 basis points from which to pay our interest expense, operating expenses and to provide a return to our shareholders. The incentive portion of the sub-servicing fee was 77% of the total and was reduced by $6.1 million or 1.4 basis points this quarter, because the ratio of advances to UPB exceeded the target set forth in our sub-servicing agreements with Ocwen. This reduction more than offset the increased cost of borrowing to finance the additional advances.

Improvements in housing prices have worked their way through our advancing models and have led to slightly higher than expected principal and interest advances. Interest expense was $35.7 million or 8 basis points of UPB. Amortization remains steady at 5 basis points of UPB or $21.2 million. Operating and other expenses were $1.5 million in the fourth quarter returning to levels similar to those we saw in the second quarter. Our full year effective tax rate was 0.2%. Net income was $40 million or 9 basis points.

Slide 9 is a graphical depiction of cash flow, which starts with net income and then adds back non-cash amortization and changes in other assets. Although servicing advances increased by $104.5 million, we were able to increase our funding efficiency on our second advance financing facility, HSART II, by approximately 10% or $55 million as a result of obtaining a rating on the facility. Cash generated available for distribution exceeded dividends declared of $32 million by 3.2 times. After paying our dividends, we had over $71 million of cash available for reinvestment, which we expect to deploy in the EBO purchase later in this quarter.

I will now hand it over to Bill for one final slide before we take questions. Bill?

Bill Erbey - Chairman

Thank you, Jim. Slides 10 and 11 highlight the stability of HLSS’ assets and earnings over time. Slide 10 shows quarterly book value earnings and dividends per share since the second quarter of 2012. You can see that the book value earnings and dividends per share have all grown nicely since the company’s inception. Slide 11 starts with the stability of HLSS’ asset values shown here as net unrealized gains and loss as a percentage of average equity and contrast that figure with the equivalent measure for a few of the agency mortgage REITs and changes in the 10-year treasury yield. As you can see on this page, the valuation of HLSS’ assets is very stable and not correlated to interest rates.

I’d now like to open the line for questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) Our first question comes from the line of Mark DeVries from Barclays. Your question please.

Mark DeVries - Barclays

Thank you. My first question is around dividend policy, even if we back out kind of the $0.04 benefit you have got from the change in CPRs, the payout ratio is closer to 87%, a little below your longer term target of closer to 90%. First of all, did I hear you imply that one reason why you kind of kept it lower was because you are going to be using some of that cash to finance these loan purchases in the first quarter?

John Van Vlack

This will mark the dividend policy that was really too long to try to stay close to 90%. We would be at the higher earnings this quarter. We get little bit below. I mean, if you look at the guidance that we issued or for first quarter, so you could conclude that the dividend is much more likely to be increased and decreased. So we didn’t specifically hold cash back for making the EBL investment. We have got very robust cash flow in excess of the dividend every quarter, but it’s really just the fact that they were conservative and how we run the business, so any earnings in excess of the dividend are certainly being reinvested profitably for our shareholders and so we will continue to look at that dividend in light of future earnings expectations, but there is nothing on the horizon that was causing us to be cautionary with regard to the dividend. We just decided not to make that change this quarter.

Mark DeVries - Barclays

Okay, that’s helpful. Could you give us a little color on why the advances to UPB ratio is well above that targeted advanced range and kind of what your thoughts are on the trajectory for that over the next several quarters?

John Van Vlack

Yes. So with the recovery in home prices, the stock advanced model that Ocwen runs caused certain loans to begin re-advancing. And so there was a cumulative effect from that. I think there will probably be a little more discussion of that on the Ocwen call, but I think that as far as the trend itself, it essentially has played out in the fourth quarter. And so we would expect the advanced ratio to resume its path or declining as delinquencies declined and so that’s our expectation there.

Mark DeVries - Barclays

Will that – would you expect that to step back down, was that kind of a temporary ramp-up that will give reversed through, we’ll just kind of gradually move back towards the projected line that you have?

John Van Vlack

I would expect it to gradually move back towards the projected line.

Mark DeVries - Barclays

Just finally, I just want to make sure I understand that the change – the impact of the change and the capital storage, I get that over the life if you think about what the forward curve, you said these are the earnings, is it right to think though with LIBOR these rates are at least in the near term we are going to lose about 100 basis points or so on the advances?

John Van Vlack

I think the number is pretty close, yes.

Mark DeVries - Barclays

Okay, got it.

John Van Vlack

We didn’t really view those earnings as sustainable though.

Mark DeVries - Barclays

Yes, okay, and…

John Van Vlack

And we certainly see value in the other element of the amendment with Ocwen which is the agreement to allow us to continue to earn retained fees on loans to refinance. And so I think if I had to do it over at HLSS, I would have made this did the fee on the excess advances, pay a variable fee from the start. I think it’s a better – the better structure for us, less risk for HLSS and better alignment with Ocwen.

Mark DeVries - Barclays

Okay and that being implemented immediately.

John Van Vlack

It was implemented effective on October 1.

Mark DeVries - Barclays

Okay, got it.

John Van Vlack

So it’s baked into Q4.

Mark DeVries - Barclays

Okay, great. Alright, thanks.

Operator

Thank you. Our next question comes from the line of Nick Agarwal from Wells Fargo Securities. Your question please.

Nick Agarwal - Wells Fargo Securities

Good morning, guys. Nice quarter. Hey, John, I didn’t hear your comments fully on the guidance, I heard the 53 to 55 I didn’t hear the rest of your comments, can you just tell me what those were again?

John Van Vlack

Yes, it was probably a little bit confusing. We are offering guidance really. We have a range – the two ranges, the first range is based on continuation of the prepayment speeds that we saw in the fourth quarter. And so with the prepayment speeds stay in the low to mid 12% range than our guidance is that we earned between $0.53 and $0.54 per share and then just for posterity, we said that if the prepayment speeds were to jump back up to the level of the, what we call our benchmark, that 13.5% rate then our earnings will be in the 50% to 51% range.

Nick Agarwal - Wells Fargo Securities

Okay, thanks. And so on the liability side, you continue to see the lower effective interest rate, do you see that there is possibility for further reductions? I think in the past you had mentioned they might have been like go lowered in the 226 or 225?

John Van Vlack

I think we are really targeting tenure increases at this point more than rate reductions and so I think that so that’s on the advanced financing side that we’re very pleased with how we performed there and with the success in matching the maturity of our liabilities balances. But then there is a whole another dimension with the HLSS term loan and so it’s – that would be a little bit premature because we’re under a lot for a year but maybe six weeks before the hard call protection would expire, we could be looking at trying to reprice and really maybe better utilize that term loan regarding our overall cost of capital.

Nick Agarwal - Wells Fargo Securities

Okay, alright, John, well, thanks for the comments and then congrats on the new initiative.

John Van Vlack

Thank you, Nick.

Operator

Thank you. Our next question comes from the line of Mike Grondahl from Piper Jaffray. Your question please.

Mike Grondahl - Piper Jaffray

You said again – hey guys could you repeat what you said again about the 12.4% CPR?

John Van Vlack

In my comment Mike or was John’s I mean it’s below as it has been.

Mike Grondahl - Piper Jaffray

Right. And just what have you attributed to?

John Van Vlack

Well as these portfolios mature you’re seeing obviously lower delinquencies in most of your prepayment, is still involuntary, delinquency driven. And also the – quite frankly overall the pools are getting better as they age.

Mike Grondahl - Piper Jaffray

Got it. Okay. And then the duration of the new Ginnie Mae early buyout loans. What type of durations I think you said that would match the foreclosure timeline, but could you clarify that?

John Van Vlack

Sure. So as the foreclosure is complete then these loans will be – the insurance payments we made and these loans will be settled. So some loans are closer to completing foreclosure as another, we’re in the same way that some servicing advances are closer to completing foreclosure and so those are – life is going to be somewhere between six months and three and a half years with an average life that’s going to be in the range of 1.5 to 2 years.

Mike Grondahl - Piper Jaffray

Great, great, okay. And then in terms of how large is that opportunity out there. You mentioned $600 million in the first quarter. Do you have a goal for this year or I mean or what sort of percent of your earnings or business for this be over the next year or two?

John Van Vlack

Well there certainly will be additional opportunity at Ocwen after completing this first purchase and then there are other services that could benefit from HLSS’s purchasing their EBO loans. We really haven’t – we haven’t got a guidance to offer in terms of how big this could be. So we’re really focused now on our first execution and executing effectively.

Mike Grondahl - Piper Jaffray

Got it. And then just lastly in the past you’ve given a sense for – of the approximate amount of volume is left at Ocwen that sort of fits your parameters. Where is that number today?

John Van Vlack

So based on Ocwen’s current assets I think its $50 billion $60 billion so it’s really a couple of years worth and then Ocwen continues to acquire new portfolios. And so we think we’ve got a lot of visibility and runway ahead of us on the non-agency asset class.

Mike Grondahl - Piper Jaffray

Great. Thanks guys and congratulations on the diversification.

John Van Vlack

Thank you.

Operator

Thank you. Our next question comes from the line of Bose George from KBW. Your question please.

Bose George - KBW

Yes, good morning. Couple of real just follow-ups in earlier questions. The $50 billion to $60 billion number you just gave, does that include the Wells Fargo deal?

John Van Vlack

It does not.

Bose George - KBW

Does not, okay so it’s that plus the $39 billion?

John Van Vlack

Yes.

Bose George - KBW

Okay, great. And then the comment you made earlier about the capital charge. The – did you say that the 4Q number already incorporated them?

John Van Vlack

That’s right, yes. So the 4Q capital charge was calculated at LIBOR plus 2.75.

Bose George - KBW

Okay, great, thanks a lot and nice quarter.

John Van Vlack

Thank you, Bose.

Operator

Thank you. Our next question comes from the line of Henry Coffey from Sterne Agee, your question please.

Henry Coffey - Sterne Agee

Yes, good morning everyone and thanks for taking my questions. I think it’s worth noting John that you moved out of Atlanta in the midst of the worst winter we probably seen in 15 years so.

John Van Vlack

So, I think the credits for having the timing.

Henry Coffey - Sterne Agee

I think somebody show you that or Bill should take your salary down a notch or two, but it’s miserable here. In looking at the deployment of assets into the Ginnie Mae class how long do those assets tend to stay on your balance sheet?

John Van Vlack

So the average duration would be 1.5 to 2 years and so the range would be from six months to about 3.5 years.

Henry Coffey - Sterne Agee

And is that the cure period or you’re buying, I understand that you sort of buying a – you’re buying a non-performing loan or you’re buying a low investment?

John Van Vlack

That’s right, Henry, they are non-performing loans and so the loans that they were focusing on in this initial purchase are loans that are have a lower probability of modification although Ocwen certainly has the right as the servicer to modify these loans, but both of the loans we would anticipate being resolved by going all the way through the foreclosure process.

Henry Coffey - Sterne Agee

So theoretically if you bought a loan and it was in the state of New York at least a day it would take three years and hopefully in the future it will take less. So if it – from the point of view of your own timeline, this is a positive carry asset you want the loans to stay on as long as possible or are you hoping for rapid resolution?

John Van Vlack

So we would – if the loan, stand longer then we would earn the spread between the cost of funding and the coupon on the loan for longer period of time. But you just have to incorporate this into the overall hedging strategy of the HLSS because if the loan sit on too long and the LIBOR forward rate increased.

Henry Coffey - Sterne Agee

Right.

John Van Vlack

You want to have some protection against that.

Henry Coffey - Sterne Agee

So you don’t want the loans to pay down too quickly, you don’t want them to stay around too long.

John Van Vlack

That’s right and you just want to be mindful of the rate curve when you are setting the overall hedging strategy for the business.

Henry Coffey - Sterne Agee

Just two more questions. Looking at the service or advance situation, I know you modeled this going in but ironically if the service or advance goes above your benchmark, you need to make more money on it. It doesn’t sound like this was a credit related issue, it sounds like this was due to the fact that was rising home prices, Ocwen’s assets are more collectable and therefore, they obliged advanced more, kind of a reverse outcome but is that the correct way of understanding it?

John Van Vlack

I think that’s fair.

Henry Coffey - Sterne Agee

It’s not an operational issue, it’s not a credit issue, it’s a function of fact that the underlying assets to servicing are going to perform slightly better than someone would have expected six months ago. And the correction wave on this is two or three quarters or longer?

John Van Vlack

It’s mostly a fourth quarter kind of reset. (Indiscernible) loans that they are re-advanced and so I would say with an advanced ratio that is now in the 3.5% range that we still are highly over collateralized, so I would agree with your view this is not – doesn’t change our credit profile at all.

Henry Coffey - Sterne Agee

And then finally I just feel like let me ask a really stupid question, you are in a lot more money than you are paying out with all the new initiatives you are facing and the new opportunities is the idea to retain some capital for growth or do you think will be an unexpected boost in dividend sometime in the next couple of quarters?

John Van Vlack

So, I mean, we really can’t provide guidance if we were to announce the dividend in advance then we would have to book the liability and it would cause instability in our book value to do that, so we’re going to stay consistent in terms of the timing of this, but there is certainly given the earnings guidance that we are providing and fact that we are not seeing any earnings pressures in the future, then we might conclude that we are much more likely to have a dividend increase than a decrease.

Henry Coffey - Sterne Agee

Well, congratulations on a great quarter and it’s been a heck of a two-year run.

John Van Vlack

Thank you, Henry.

Operator

Thank you. Our next question comes from the line of Lee Cooperman from Omega Advisors. Your question please.

Lee Cooperman - Omega Advisors

Just out of curiosity, it’s two questions. One, if one was to look at the three or four things most important that would influence you to raise your distribution and the three or four things that are most important that might lead to reduction in distribution, what would they be? And secondly, does the significant re-pricing of HLSS in terms of the yield the market requires have any impact on the growth prospects of Ocwen or even HLSS at this point?

John Van Vlack

So I think the way I would answer the first part of your question is that if we see another quarter, where the prepayment speeds continue to be low, then that certainly would bode well for our thinking on the dividend, but we are just one quarter away from the third quarter, where the overall prepayment speed was 13.7%. So, it’s a little bit above our benchmark. And so – and we understood the reason for that, it was seasoning of the assets on the Ocwen portfolio, but as we move further away from that we continue to see the prepayment speeds setting new lows as they did this quarter, then that will be very bullish for the dividend. Certainly, there has been a change in HLSS’ stock price since the – since the start of the year and we are very cognizant of the fact that, that the stock price against the earnings implies a dividend yield or an earnings yield. We think that we are still going to be competitive in terms of bidding for assets from Ocwen. We think that Ocwen’s model for being able to buy non-agency assets is very strong and then that they are going to have – continue to have high returns on those investments, particularly as the delinquencies come down and they recover a substantial part of the investment through the advance reduction and the recovery of the deferred servicing fees. So as those delinquencies come down, the ROEs are still very good and still greatly in excess of HLSS’ cost of capital. And if you look at the overall cost of capital for HLSS, you want to consider the term loan as well. And so there is potential for some movement there leading opportunity to the expiration of the (indiscernible) protection in June.

Lee Cooperman - Omega Advisors

What about the condition that would lead to the distribution being threatened?

John Van Vlack

So, I think I don’t really see anything on the horizon. I suppose if the prepayments were to work in reverse and we were to see an unexpected increase there and we thought that, that was kind of a long-term reduction of earnings that could affect the distribution. So with regard to interest rates, we are going to be going as long as we can in the ABS markets, but if there was a dramatic jump in the interest rates, at some point in the future that could filter into earnings. I think those really are the main things. I mean the business itself is very stable. The asset values are very stable. And so we – so it’s kind of the things that would cause most yield-oriented companies to reduce their dividend I think are very unlikely at HLSS.

Lee Cooperman - Omega Advisors

Thank you very much. Nice quarter.

John Van Vlack

Thank you.

Operator

Thank you. Our next question comes from the line of Stephen Laws from Deutsche Bank. Your question please.

Unidentified Analyst

Hi, good morning guys. It’s actually (indiscernible) dialing in for Stephen. Congrats on a great quarter. Just wanted to ask quickly, will you be filing 8-K to give more detail from these EBL loans kind of like you did with the UPB purchases from offering?

John Van Vlack

Yes. I would imagine that we would at the time that, that loan closes just given the overall materiality for HLSS.

Unidentified Analyst

Great. And then lastly I missed that you are in the coupon rate on these and I missed the number?

John Van Vlack

So the coupon on loans themselves is in the mid 5% range.

Unidentified Analyst

Okay, great. Well, that’s it for me. Thank you very much and congrats on great quarter.

John Van Vlack

Thanks.

Operator

Thank you. Our next question comes from the line of Rob Brock from West Family Investments. Your question please.

Rob Brock - West Family Investments

Good morning and thanks for taking my question. Could you talk a little bit more about the CPRs with the backup in rates, if I guess 40 basis points or so since the beginning of the year, do you think that the CPR will pickup or do you think that the nature of your assets will be mostly involuntary prepayments would mitigate any increase in the CPRs? Thank you.

John Van Vlack

We just don’t see very much change in the voluntary or the total pay off or refine components of the prepayment speed. It just does not demonstrate any sensitivity to rates that’s the point. So it’s really all about the – mostly about the involuntary delinquencies and the rate at which they clear through the foreclosure process.

Rob Brock - West Family Investments

Thank you.

Operator

Thank you. Our next question comes from the line of Christopher Testa from Sidoti & Company, your question please.

Christopher Testa - Sidoti & Company

Hi guys, thanks for taking my question this morning. In terms of the roughly $9 billion or so you are able to add in UPB, how much of that came from the OneWest pool if any?

John Van Vlack

None.

Christopher Testa - Sidoti & Company

None, alright, so I know your last Q you had pegged out maybe $58 billion pipeline, do you still firm that number as the potential?

John Van Vlack

I think the number is very close mainly because Ocwen continued to close additional assets those part of the OneWest in the Greenpoint purchases. So those additional closings that Ocwen have really in effect offset the $9.9 billion that HLSS acquired in Q4.

Christopher Testa - Sidoti & Company

Okay and do you see any upticks in the CPR this quarter from the Wells Fargo acquisition over at Ocwen. And are you looking at assets from that pool as well?

John Van Vlack

Yes, so we wouldn’t be boarding those assets in the immediate future, so I don’t think that would have any effect on our business at HLSS.

Christopher Testa - Sidoti & Company

Okay. And I know that you guys had a question already on the EBO loans pipeline, what would you be comfortable with this happened that is like a percentage of your total assets, how much are you really willing to get into these Ginnie Mae loans?

John Van Vlack

So I don’t think we have really thought about it in terms of a concentration limit. I don’t think that just given the nature and the size of that market. It’s not going to be as big an asset class as the non-agency servicing assets.

Christopher Testa - Sidoti & Company

Okay and in terms of you raising funding I know you guys have issued another $800 million under the servicing advance receivable. But what are the main risks of that market that you see right now? What could cause, funding costs to spike to be less interest in investors in this market?

John Van Vlack

So I think that the – although the funding costs have come down significantly, I think that the servicing advance asset class still has on a rating - by rating basis a higher yield than some of the more liquid asset classes, which would include like auto and credit cards and student loans and so we would see potential still for future tightening, but though that’s a process of really bringing in the new lenders, getting them comfortable with the asset class, so we make some incremental progress on that each quarter. I think if there was overall economic shock that affected housing or the financial markets in general though there are times when the ABS market don’t functioning as well. But target predict a specific event that would cause that happen, but the way that you got against that is by keeping some spare financing capacity on the variable funding notes, also you are not dependant upon rolling any individual ABS notes.

Christopher Testa - Sidoti & Company

Got it. And just final question, is just how much in the downfall the CPR, how much of that was just from the one-time items at Ocwen and how much of that would you consider like a core drift down in a CPR?

John Van Vlack

It’s both. I mean most of the reduction going from 13.7 in Q3 down to the 12.4 in Q4 there was really the absence of those one-time items at Ocwen, but we did hit a new low. And so I will go back on to the comments that Bill Erbey made earlier in the Q&A about how there are fewer loans that are crossing the risk delinquency bucket, in part because of the servicing practices, the fact that the loan modifications are more effective than ever that helps. And I think with the backdrop of some recovery in home prices, the borrowers are maybe a little bit more motivated to prioritize their mortgage payments.

Christopher Testa - Sidoti & Company

Yes, that makes sense. Thank you, guys. I appreciate you taking my questions.

Operator

Thank you. Our next question comes from the line of (indiscernible). Your question please.

Unidentified Analyst

I had one question and then another question. It looks like first question is on following up from Grondahl, I was wondering if you could get a comment on recent pricing in the recent Wells deal that was announced. It looks like they are trying – it looks like the regulars are trying to block this deal. I was wondering if you add any comment on that if you have been able to look at that? And then also I wanted to know if you had a comment on the pricing, because it looks like the Ocwen is trying to use our competitive advantage in terms of the low cost infrastructure to make it uneconomic for competitors to even compete for deals? There is two questions.

John Van Vlack

Yes, I mean, maybe I can comment on the first part of the question, but perhaps not on the second part of the side. I haven’t been involved in any of the discussions with regulators. Just I have a little bit of historical perspective on that just going back to when I was the CFO of Ocwen and there is always the negotiation whenever deals are closing, but with regards to pricing, I think what we are seeing really is a lot of stability there. I haven’t when I look at the deals at Ocwen is done, so I think that they have had a consistent model in terms of their expectation of returns. And Ocwen I think would still expect to be able to reduce delinquencies, reduce advances and to collect some of the deferred servicing fees.

So within a relatively short period of time, so from an ROE perspective, when you get a big chunk of your investment back then that sends the ROE up over time. So, you just have to be careful not to look at the early ROE. I think the Ocwen as I think been very public in terms of sharing their servicing cost and that servicing cost is less, considerably less than the industry average. But I think each deal is negotiation between the buyer and the seller and to the extent that Ocwen can earn its required return and meet the price requirements of the seller, then I think they would continue to do greater deals.

Unidentified Analyst

Okay, thanks very much guys.

Operator

Thank you. Our next question comes from the line of (indiscernible) from Moore Capital. Your question, please.

David Haas - Moore Capital

It’s actually David Haas. I just had a quick question on the EBL loans, which may not be front in center at this point, but just a little more color on what you think the ROE on those purchases might be if you get, it comes out to be 1.5 to 2 year duration of those loans?

John Van Vlack

And it’s going to be indeed the high single-digits.

David Haas - Moore Capital

Got it, okay. Thank you.

Operator

Thank you. Our next question is a follow-up question from the line of Mike Grondahl from Piper Jaffray. Your question please.

Mike Grondahl - Piper Jaffray

Yeah. Just a question for Bill, Bill, I think it was a couple deals ago when you did the Litton transaction that the regulator in New York sort of had you setup a compliance person and kind of a compliance monitor. Can you kind of comment on that situation from a couple of deals ago? Want to remind us what exactly happened?

Bill Erbey

Yes, I will think right now is I just wouldn’t add color on to this, Mike.

Mike Grondahl - Piper Jaffray

Okay, thank you.

Operator

Thank you. Our next question is a follow up from the line of Nick Agarwal from Wells Fargo Securities. Your question, please.

Nick Agarwal - Wells Fargo Securities

My questions have been asked. Thanks.

Operator

Thank you. Our next question is a follow up from the line of Bose George from KBW.

Bose George - KBW

Hey, I didn’t know if you can answer this, but yes, just going back to Casey’s question as well, anything you can say on the regulators, what they are trying to do with stopping the deal, is there something they can do just any color there?

John Van Vlack

I really think that will be more appropriate for new Ocwen call than…

Bose George - KBW

Okay, great. I understand.

Operator

Thank you. Our next question comes from the line of (indiscernible). Your question, please.

Unidentified Analyst

Asked already, thank you.

Operator

Thank you. Our next question is a follow up on the line of Rob Brock from West Family Investments.

Rob Brock - West Family Investments

Yes. My question has also been answered. Thank you.

Operator

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back for any further remarks.

John Van Vlack - President and Chief Executive Officer

No further remarks. Thank you for joining.

Operator

Thank you. And thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

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