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Ocwen Financial (NYSE:OCN)

Q1 2014 Earnings Call

May 01, 2014 11:00 am ET

Executives

John V. Britti - Chief Financial Officer and Executive Vice President

William Charles Erbey - Executive Chairman and Chairman of Executive Committee

Ronald M. Faris - Chief Executive Officer, President, Director, Member of Executive Committee and Member of Compliance Committee

Analysts

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Bradley G. Ball - Evercore Partners Inc., Research Division

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Ocwen Financial First Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to John Britti, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

John V. Britti

Thank you, operator. Good morning, everyone, and thank you for joining us today. My name is John Britti, I'm Executive Vice President and Chief Financial Officer of Ocwen Financial Corporation.

Before we begin, I want to remind you that a slide presentation is available to accompany our remarks. To access the slides, log on to our website at www.ocwen.com, select Shareholder Relations, then, under Events and Presentations, you will see the date and time for Ocwen Financial's First Quarter 2014 Earnings. Click on this link. When done, click on Access Event.

As indicated on Slide 2, our presentation contains forward-looking statements made pursuant to the Safe Harbor provisions of the federal security law. These forward-looking statements may be identified by reference to a future period, or by using forward-looking terminology.

Forward-looking statements by their nature address matters that are, to different degrees, uncertain. 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.

Our presentation also contains references to GAAP financial measures such as normalized results and adjusted cash flow from operations. We believe these non-GAAP financial measures may provide additional meaningful comparisons between current results and results from prior periods. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the company's reported results under accounting principles generally accepted in the United States.

For an elaboration of these factors I just discussed, please refer to today's earnings release as well as the Company’s filings with the Securities and Exchange Commission, including Ocwen’s 2013 Form 10-K and quarterly 10-Qs. Note that we expect to file our first quarter 2014 10-Q by tomorrow.

If you would like to receive our news releases, SEC filings or other materials, please email Linda Ludwig at linda.ludwig@ocwen.com.

Joining me today for the presentation are Bill Erbey, our Chairman; and Ron Faris, President and Chief Executive Officer. Now I will turn it over to Bill Erbey. Bill?

William Charles Erbey

Thank you, John. Good morning, and thank you for joining today's call. Today, I'd like to cover 2 topics in my prepared remarks. First, why we believe the trends in the marketplace are beneficial to Ocwen's competitive position and second, why we believe that demand for our services is as powerful as ever and more importantly, should remain robust well into the future. After my comments, Ron will discuss the consequences of the emerging regulatory environment in more detail and provide an update on our results and operations.

Finally, John will provide additional information on our first quarter financial results and future funding strategies.

Let me begin with an overview of the 3 trends that we believe reinforce Ocwen's competitive position in the marketplace.

First, regulators, legislators, sellers and other stakeholders insist upon near perfection in servicing transfers, and as we will discuss, Ocwen has both unique capabilities and a long history of success in this regard.

Second, it's important to be in sync with the fullest regulatory mandates, and Ocwen is the only non-bank fully subject to the national servicing settlement requirements. Moreover, Ocwen's record of helping homeowners provides an exemplary record of complying with the spirit of emerging consumer protection.

And third, capital and counterparty strength are increasingly important to regulators, legislators and sellers. Ocwen has the strongest balance sheet of any large non-bank servicer.

Starting with the expectation of near-perfect transfers, let me make several observations. Most importantly, Ocwen is unique in the length and consistency of its track record of successful servicing transfers. In an environment where MSR transfers are expected to be flawless and companies selling MSRs are on notice from regulators that they will be held accountable for a transfer's success, our track record is among our biggest competitive advantages.

Our success is demonstrated by the facts. On Slide 4 of our presentation, you will see how we have been effective at reducing the 90-day delinquency rate for large acquired portfolios over the first 12 months following boarding. No other firm can point to such a long and consistent record of taking on large numbers of delinquent loans and rapidly bringing down delinquencies, benefiting borrowers and investors. The ability to rapidly improve portfolios is only possible with tried and tested transfer processes. Ocwen simply has more experience, and that makes it difficult for others to be as effective.

Moreover, Ocwen's success is a direct function of how we operate and in sharp contrast to how other services operate. Ocwen's platform has been built from the ground up to utilize greater automation that provides consistency, and eliminates the errors inherent in human processes through greater automation. Unlike other servicers, Ocwen's platform is not reliant on loss mitigation experts with years of experience to make it work. By using in-depth dialogue engines and automating decision-making, we accomplish 2 things other services have difficulty replicating.

First, we can expand capacity more rapidly without compromising quality. We can take someone with strong empathy and intelligence, and turn them into world-class loss mitigation specialists in 3 months. Our competitors take years to train someone to be an effective resolution specialist.

Second, our system is built upon detailed dialogues, which reduce variability in process and results. As a result, we provide the greatest consistency and accuracy in offering solutions to borrowers that stakeholders demand.

The second trend supporting our position in the market is that we are the only non-bank servicer subject to the most comprehensive servicing standards and monitoring required of the largest banks across our entire servicing platform. Ocwen is deeply committed to adhering to the highest standards of compliance and regulatory oversight, which is why we were the first non-bank servicer to come under the national servicing settlement standards and monitoring. As such, we are subject to virtually identical servicing standards and oversight as the large banks. Perhaps as importantly, Ocwen can point to facts that demonstrate that we are very much in sync with the spirit of the regulations that aim, as we do, to ensure that servicers are helping homeowners. As we have noted in the past, and as Ron will discuss further, we are proud of our ability to lead the industry in pre-foreclosure resolution that are better for investors, communities and families facing financial hardship.

In particular, Ocwen is very effective in modifying loans and perhaps more importantly, finding solutions that work, such that modifying loans are less likely to redefault.

On Slide 5, you can see that Ocwen has a track record of modifying a higher percentage of loans in subprime securities than our peers. The true measure of success, however, is that Ocwen's modified borrowers are more likely to stay current.

On Slide 6, you can see how we stack up against our peers. Some are better than average, but none is better than Ocwen. This data supported by multiple independent analyses that show that Ocwen consistently provides more modifications with lower redefaults than other servicers. For example, a Moody's analysis published in October 2013 cited Ocwen as the best-in-class servicer over the course of the housing crisis as compared to other large servicers. Specifically with regard to HAMP, Ocwen has more HAMP modifications than any other servicer, according to data from the United States Treasury. The bottom line is that we get results, and taken together, you can see why I am enormously proud of our success in helping families to find workable solutions to stabilize their lives.

The last trend I want to discuss is the increasing focus by regulators on capital adequacy and prudential oversights for mortgage servicers. This is a clear area of advantage for Ocwen, given our superior balance sheet and capital position. Ocwen remains the best capitalized large non-bank servicer by a substantial margin. As you can see on Slide 7, we have far more equity and net worth relative to debt compared to our peers. Because of our superior cash flow, we're even stronger on other metrics of balance sheet strength, such as debt service coverage ratio.

Balance sheet strength is becoming more important competitively, as regulators and sellers have begun to scrutinize servicing transfers in the context of counterparty risks. As we look at potential regulation, we are comforted by the fact that Ocwen holds more capital against this MSR book value than its peers and versus the typical bank. We're nearly one-to-one on capital for MSR book value. We also believe our funding strategies are generally more conservative, and is more prudent and safer for others. For example, the major benefit of our OASIS notes is that it's just prepayment risk off our balance sheet, allowing us to match on prime MSRs.

The reason Ocwen has survived several market cycles and capital market meltdowns is that we have always funded ourselves assuming that credit markets will face disruptions from time to time. As I've told my colleagues, I'm not looking to start a new career at my age, and I've seen too many cycles to think that it can't happen again. We're not looking to eke out modestly higher returns to investors at the expense of adding substantial risk to our balance sheet.

While this philosophy of conservatism has driven our funding strategies, we're fortunate that it positions us well, very well, as regulators contemplate the future of the mortgage market and potential capital requirements for servicers.

With our established competitive advantage as the backdrop, I'll now turn to why we continue to believe that the underlying demand drivers for growth in our core business remain robust and will persist well into the future.

With respect to our core servicing business, there is no doubt that near-term pent-up demand for our services is a continuing effect of the mortgage crisis.

As Slide 8 shows, we are still a long way from normal delinquency rates. Rates have come down slowly, but they are still well above historical norms. The real question in the minds of our investors is what happens if the crisis-driven demands abate, even if that takes another 2 or 3 years, as we would expect. In our view, a persistent legacy of the mortgage crisis is a strategic shift in demand factors that should support our business well into the future.

As Jamie Dimon noted at a recent investor conference, he'd prefer never to have to service another seriously delinquent mortgage loan. This comment is indicative of a new paradigm for mortgage servicing at many large and small banks. It's important to go over the reasons for this secular shift in strategy by banks, because many observers incorrectly assume it is largely driven by the new Basel capital regulations. Based on our discussion with banks, this does not appear to be the case.

The major motivations for bank selling a nonperforming servicing are twofold. The first is the desire to focus on their core banking franchise. Banks prefer avoiding the headlines and natural ill will associated with handling loans in distress. Banks have a wide variety of consumer products that they want to sell and performing borrowers represent greater cross sell opportunities. The second is cost. Banks find it very difficult to profitably service nonperforming loans. When Bank of America sold off much of its nonperforming servicing, they primarily noted to their shareholders the math of associated cost savings. These factors are not just driving banks' near-term interest in selling servicing. We believe they have changed bank mortgage strategies, and will sustain demand for our services into the future, even after the industry returns to a more normal level of defaults. As a result, we believe there has been a long-term shift in how mortgage servicing will work. At a minimum, we would expect 2 things:

First, higher risk mortgage products will more likely be serviced by specialists; and second, lower risk loans that do default are more likely -- will likely also be serviced by specialists. We believe this emerging servicing market will be one where Ocwen will compete very effectively. Many industry observers note that the default rates on recently originated products are very low, questioning the need for specialty services in the future. As we have noted in the past, however, this assumes that as a nation and an industry, we are comfortable allowing substantially lower home ownership rates.

I would contend that the decline in homeownership rates is politically, socially and economically unacceptable. Recent press accounts support the notion that both regulators and originators are looking for ways to expand mortgage lending markets. Most observers acknowledge that near 0 risk lending is bad for families seeking the dream of homeownership and for our country's long-term growth. We hope never to see the kind of irresponsible lending that led to the financial and housing crisis. On the other hand, we expect more balanced lending standards and supporting regulations to develop over the next 2 to 3 years.

Finally, outside of persistent demands for our core servicing business, we continue to see opportunities for growth in related and adjacent businesses. We're investing in building our Mortgage Origination business. And as we've noted in the past, we bring sizable advantages to this business. Simply recapturing refinances on our $3 million loan servicing portfolio will yield solid returns, while also providing some hedge against future runoff. Ocwen's preferred vendor relationship with Lenders One is an advantage in accessing the set of lenders that represent more than 1 in 8 new loans originated. Earning even a modest portion of that business would create a significant profitable growth in our corresponding channel.

Moreover, we believe our operational skills, along with some product innovations in the works will build the business -- will build the business across all our lending channels. Beyond originations, we believe the skills that make us successful in servicing are applicable to new business lines. For the most part, we believe we can grow these businesses organically, though they may include acquisitions. We expect to provide further updates on these opportunities on our next earnings call.

I'll now turn the call over to Ron to talk about regulatory effects on our business results and cover operational and segment level performance. Ron?

Ronald M. Faris

Thank you, Bill. This morning, I will cover 2 main topics in my prepared remarks. First, I will provide some thoughts regarding the near-term and longer-term effects the regulatory environment is having on Ocwen and the industry. And second, I will cover some of our operational results for the quarter in more detail and discuss some of our ongoing borrower outreach efforts through community organizations.

Before I get into the effects of the evolving regulatory environment, let me remind you how Ocwen is regulated. Historically, Ocwen has been primarily regulated by each of the 50 states as a licensed mortgage servicer and originator. As a result of Dodd-Frank, we are now also supervised at the federal level by the Consumer Financial Protection Bureau or CFPB. In addition, we are subject to oversight from a host of others, including Freddie Mac, Fannie Mae, their conservator, the FHFA, Ginnie Mae, FHA, VA, private trustees and a broad range of clients from whom we service or subservice loans, including some large national banks.

Overall, we welcome additional consistency, scrutiny and clarity by regulators as we believe that over the longer term it is very good for the industry, because it instills confidence in all stakeholders and allows the market to move forward.

Moreover, we believe that stricter regulation is ultimately a competitive advantage for Ocwen. As Bill mentioned, we are the only large non-bank fully subject to National Mortgage Settlement Standards and Monitoring. We also have the strongest capital position among large nonbanks. We also believe that our competitive strengths in process management and automation are particularly valuable in the context of the evolving regulatory environment. Before I describe why this will play to our strengths, let me first go over the key impact of the evolving environment.

Two major operational impacts of regulation are that it has increased costs and raised the bar on quality. Costs go up because processes now require more time, additional activities and more documentation. For example, the new rules that went into effect in January extends foreclosure processes by generally not allowing foreclosures to be filed until a loan is 120 days delinquent versus the prior industry standard of 90 days. Another example is that most loss mitigation procedures now require additional documentation to show that specific process steps were actually completed.

Ocwen has been focused on process quality as an operating principle for a long time. The emerging compliance structures are driving towards 0 tolerance for errors, which is something we embrace wholeheartedly. Nevertheless, the bar has been raised substantially because of the additional activities and documentation now required under the regulations.

There is no doubt that meeting the new regulatory standards has, at least in the shorter-term, raised everyone's costs, including Ocwen's. Based on data from our MSR valuation firm, MIAC, we estimate that industry average variable costs for servicing nonperforming loans have risen by approximately $50 to $60 per year. We estimate -- we would estimate our own variable costs have gone up by about $30 to $40 per year for nonperforming loans.

In addition, all servicers are adding substantially to their overhead costs, particularly for oversight and reporting. There is no doubt that the impact of all of this has been to erode margins in the short run. Longer-term, we believe this strengthens Ocwen's competitive advantage because the changes increase the importance of scale and efficiency, and we believe that it places a greater premium on operational skills where Ocwen can excel relative to our competitors.

As we have said in the past, we believe that increased regulatory requirements will be especially difficult for servicers that are subscale, and who have already high cost structures. We do not believe that these marginal servicers will be able to compete effectively without substantial investment. In many cases, their platforms are not capable of automating the new requirements efficiently or effectively. Ocwen's platform, on the other hand, is designed in such a way that we can move, that we can more easily automate requirements than others, even if initially, almost everyone's processes, including ours, are more manual than we might like. As a result, we expect that over time our margins and competitive advantage should improve.

Before I move on to operations, let me address the questions we are often asked regarding the New York Department of Financial Services. Our Wells Fargo transaction remains on indefinite hold. Beyond that, it is not appropriate for us to comment further at this time. I can say, however, that we continue to invest in our compliance and operational risk management systems.

Moving on to operational results, let me start with revenue in the quarter. As expected, OneWest and Greenpoint contributed additional revenue, adding servicing fees of about $15.6 million in Q1. Unfortunately, poor weather contributed to weaker REO sales across our PLS portfolio than we would typically experience in the first quarter. Modification volume was also down a bit over last quarter. The slower rate of resolutions dampened revenues because we collect -- we collected less preferred servicing fees. This largely offset the benefit from OneWest and Greenpoint. Note that REO associated deferred servicing fees are very high on average, because the long total timeline to complete foreclosures and REO generates sizable uncollectible -- uncollected servicing fees.

Fortunately, we are seeing REOs rebound strongly in April, up over 60% through midmonth compared to the first half of February. Slide 9 updates our historical modification numbers. Since 2008, we have helped about 490,000 families keep their homes with sensible modifications, including government-sponsored HAMP modifications. In the first quarter of 2014, Ocwen completed 28,456 loan modifications. HAMP modifications accounted for 39% of the total. In the quarter, 49% of modifications included some forgiveness of principal. Our share depreciation modification accounted for 4,153 of the modifications in the first quarter. Environmental factors have slowed our historical ramp-up in modifications on recently boarded portfolios. Typically, we have been able to ramp up modifications within 3 to 4 months of a new acquisition. We now expect this ramp-up to occur in the second half of this year on the OneWest portfolio. As a result, we expect a small decline in modifications again in the current quarter, before ticking up again later this year.

As we discussed in greater detail on our last earnings call, we are proud of our modification performance, and we believe that sensible modifications can provide the best outcomes for investors, communities and most importantly, families facing difficult circumstances. Ocwen has been a leader in HAMP modification, as shown by treasury data. We are a leader, as well in private label securities modifications and redefaults, as Bill covered in his comments. We have also led the industry with innovative programs such as the shared appreciation modification. Third-party studies by a variety of analysts point to Ocwen as a best-in-class loss mitigation servicer. In short, we help more homeowners become current on their mortgages, and by doing so, provide better results for mortgage investors. Modifications are not the only way to provide borrowers with alternatives to foreclosure. Payment plans, forbearance plans, short sales and deed in lieu of foreclosure also provide ways to avoid the cost of foreclosure for both investors and communities.

Working with borrowers can also often result in full debt payoffs and reinstatements.

For the first quarter of 2014, over 78% of all of our delinquency resolutions were resolved without resort to foreclosure. We are proud of our ability to resolve loans without foreclosure, as it is the best for struggling families, for blighted communities and for investors. In addition to modifications, Ocwen had 23,477 other pre-foreclosure resolutions of delinquent loans in the first quarter.

Moving on to our delinquency performance for the first quarter 2014, we continue to see improvement. Ocwen's overall 90-plus delinquency rates fell from 14.5% on December 31, 2013, to 13.8% on March 31, 2014. On the newly boarded OneWest private label portfolio, delinquencies fell 1.2 percentage points from the end of December to the end of March.

Prepayment trends continue to be very positive for our overall portfolio, with decline in both prime and nonprime rates. Constant prepayment rate, or CPR, dropped almost 2 percentage points across all loan types, averaging 11.2% in the first quarter of this year, as compared to 13.1% in the fourth quarter of last year. Overall, CPRs on our portfolio are down over 9 percentage points since the middle of last year, when CPR rates started falling. The CPR on nonprime loans averaged 9.2% for the first quarter, which is down from 11% in the prior quarter.

Slide 10 shows non-prime CPR trends, including a CPR breakdown between voluntary, nonvoluntary and regular amortization. Prime loan CPR declined from 14.5% in the fourth quarter of last year to 12.6% in the first quarter of this year.

Slide 11 shows prime CPR broken down into its components. John will go over valuation in more detail later, but the decline in prepayment rate continues to be the most important story regarding the value of our existing servicing book. On the other hand, the decline in refinances is having the opposite effect on lending operations, which went from a $14.8 million pretax gain in Q4 2013, to a gain of just $0.6 million this quarter. Forward lending posted a pretax gain of $6.9 million, while our Reverse Lending business lost $6.3 million in the quarter.

Homeward lendings funded volume was off by $200 million from the fourth quarter 2013 to $1.1 billion in Q1. Retail volume was roughly flat while wholesale and correspondent volume fell by more than 25% to $462 million. Loss volume for our own direct lending channel remains strong at almost $300 million, which is up 50% quarter-over-quarter. This was offset by lower retail volume through partnerships, where volume fell by $135 million to $381 million.

We earned substantially higher margins on our own direct business and we expect the partnership share of retail to continue following as we provide more -- most remaining HARP leads to our own direct channel. HARP refinances continue to be the major driver of earnings in our Forward Lending business. However, we expect this volume will begin to decline over the next few months as the number of marketable HARP eligible loans decreases.

Our Liberty reverse mortgage subsidiary lost $6.3 million on a pretax GAAP basis in the first quarter. As we have discussed in prior quarters, the shift in business to a variable rate product, with lower upfront funding and larger future draws creates current period losses, but will generate future period gains. These tail earnings arise as existing loans request additional draws, which generate gains on sale with very little expense. We estimate that the present value of future draws against Q1 originations to be $8.1 million. Liberty's market share slipped a bit to 15.1% in Q1, as a product was introduced by competitors that we would not originate. The product essentially exposed the lender to being forced to mark -- make substantial future draws, based on a fixed current interest rate. Not surprisingly, the product was recently disallowed by Ginnie Mae.

Moving on to our integration of recent acquisitions. The final transfers of loans from OneWest and Greenpoint were completed during the first quarter. We also acquired some trailing MSRs from the ResCap estate. We have been subservicing the loans, and we were awaiting the conclusion of negotiations between the estates and the investors to complete the sales. This shifted $2.9 billion from our subservice portfolio to owned MSRs, and added about $120 million in purchased advances.

We are also nearing the end of our integration of the legacy ResCap loans onto Ocwen's servicing platform. We expect to be able to finish our consolidation by the end of the summer. Consolidation will allow us to substantially lower expenses and reduce the operating complexities of running multiple platforms. As we have noted in the past, there are contract termination expenses associated with shutting down the existing platform of about $20 million that we now expect to incur in the third quarter of this year.

Let me move on to talk about some of Ocwen's long-standing work with community housing organizations. We strive to be the best in the business at helping homeowners in distress and thereby serving the interest of investors and communities. One way we do that is by improving the effectiveness of our communications with struggling homeowners. This is absolutely essential to preventing foreclosures. Among the most powerful means we have for doing this is through our support and collaboration with nonprofit consumer advocacy and housing counseling partners all around the country. The efforts of these groups are especially helpful in hard-hit areas and underserved communities. To name just a few, we are grateful for the homeowner outreach assistance from HomeFree-USA, National Association of Neighborhoods, National Community Reinvestment Coalition, National Council of La Raza, Neighborhood Assistance Corporation of America, in empowering and strengthening Ohio's people. We continue to expand our partnerships with nonprofit community groups across the country. Through these partnerships, we are able to enhance our outreach to our customers who are struggling with their mortgage payments. The housing counseling firms we work closest with are highly experienced and effective at helping families through the delinquency resolution process. They are also skilled at educating families on financial literacy and household budgeting, which has resulted in reduced redefault rates.

This month, we are establishing an advisory board with representatives from community groups around the country. We intend to use this board as a means to further strengthen our links to these groups that have done so much to help us be effective. We hope that their role can also ensure Ocwen's mortgage lending and servicing policies and practices will have a positive impact on local communities, particularly those hardest hit by the economic downturn.

Before I turn the call over to John, I want to discuss some organizational changes we are making to build our management team and focus greater energy on initiatives to diversify and grow our business over the long-term.

Over the next 60 days, we anticipate that John Britti will be transitioning his CFO responsibilities to a newly hired Executive Vice President of Finance, Michael Bourque. In addition to his CFO role, John has been leading many of our corporate and business development efforts. He has also been engaged in building out our capital markets capabilities. We believe that these efforts are too important to get only a part of his attention. John will become Chief Investment Officer of Ocwen Financial Corporation upon the transition and Michael's appointment as CFO. Michael Bourque comes to us from GE, where he was CFO of their Distributed Power business. We believe Michael adds substantial additional depth to Ocwen's executive management team. We are thrilled to have him join us in our St. Croix office, and we look forward to him taking on his new role. We also look forward to having John focus greater attention on future business activities for Ocwen.

Now I would like to turn the call over to our current CFO, but future Chief Investment Officer, John Britti.

John V. Britti

Thank you, Ron. Today on the call, I'll cover 4 areas. First, I'll review our normalized and quarter-to-quarter results in more detail. Second, I will go over the impact of HLSS rights to collect servicing fees on our financials and provide some guidance on those related expenses in Q2. Third, and in response to investor requests, we've pulled together additional thoughts on valuation. Lastly, I will talk about our funding and stock repurchase strategy over the next couple of quarters.

First, let's start with a review of our normalized results on Slide 12. Normalized pretax earnings for the first quarter 2014 were $114 million. Approximately 80% of normalization expenses relate to the ResCap platform transition. The lower normalized income quarter-over-quarter was due to a variety of items, including substantially higher overhead and variable costs associated with regulatory mandates, as Ron discussed earlier. There are also several items to note when comparing quarter-to-quarter normalized income.

The first is the swing in MSR value. While we carry 95% of our MSR book value at lower of cost or market, we carry about $7.6 billion of EPB or $110 million of current MSR book value at fair value. This small portfolio generated a fourth quarter 2013 gain of $19.1 million compared to a first quarter 2014 loss of $5.1 million. We use third-party broker marks to value our portfolio and the broker model is very sensitive to interest-rate movements. So the drop in value is a direct function of the 23 basis point drop in 10-year Treasury swaps from the end of December to the end of March. On top of that, we had a $2.4 million reversal of MSR impairment in Q4 2013, with no such changes in Q1 of this year. The net MSR changes for these items totaled $26.6 million.

Next we had a large change in reserves for uncollectible servicing receivables. This expense was $24.3 million versus $5.7 million in the fourth quarter of 2013. The increase was the result of a change in estimate of collectability and certain receivables from the GSEs. We would not expect to incur such high expenses in the future, moreover, we believe we are adequately reserved to cover non-reimbursable amounts as of March 31. Over the past 8 quarters this expense has averaged only about $1.6 million per quarter. The future run rate may be modestly higher as a result of the growth in our GSE portfolio. Nevertheless, such expenses are an ongoing cost of doing business, so we do not normalize any of it.

We also had a large swing in lending results. As Ron noted earlier, the lending segment generated a change of over $14 million quarter to quarter. These 3 items represented a $59.4 million swing from the fourth quarter of 2013 to the first quarter of 2014.

On Slide 13, we show adjusted cash flow from operations relative to earnings. As expected, adjusted cash flow from operations turned positive. We would expect even higher advance reductions in positive cash flow as REO sales and modifications rebound. As with deferred servicing fees, our largest loan level advanced balances are typically associated with REO, because they've been accumulating for a long time. Ocwen's total effective tax rate for the quarter was 14.8%. This rate was affected by some one-time true-ups. Our estimated first quarter run rate for taxes was 12.5%. As we have said in the past, our tax rate varies depending upon our earnings mix and relative mix of operations in the mainland U.S.

Based on our current plans, we would expect our 12.5% run rate is a reasonable estimate going forward in the next few quarters.

Let me next go over the impact of HLSS rates to collect servicing fees and how that works to our financials. We had no additional sales of advances or rights to MSRs to HLSS in the first quarter. To date we have sold rights to receive servicing fees on $170.8 billion of UPB as of March 31, 2014 to HLSS. We have also sold the related advances totaling about $7.1 billion to HLSS. These sales freed up capital that funded growth without issuing new common equity. This has proven to be efficient funding for Ocwen. In the first quarter of 2014, interest expense pertaining to HLSS rights to collect servicing fees was $81.9 million. After considering the advanced financing cost that Ocwen would've borne absent the asset sales to HLSS, the net increase to Ocwen's interest expense is about $36 million, which represents a cost of capital of approximately 6.9% taking into account accelerated tax -- deferred tax benefits.

In the second quarter of 2014, we expect interest expense pertaining to HLSS rights to collect servicing fees of between $76 million and $82 million. With CPRs falling, we've re-examined the assumptions on which we have based our amortization. As we have discussed in the past, nonprime MSRs have been amortized based on an assumed CPR of 18%. The actual effective amortization rate is actually closer to 22%, given that the methodology also front loads amortization. It is also worth noting that Ocwen's interest expense related to HLSS rights to collect servicing fees goes up when CPR falls because, as a financing, we take less amortization of the HLSS liability, which pushes up interest expense. This mismatch has further highlighted our need to consider an amortization method that better reflects the actual CPR rate rather than one that's arbitrarily higher.

So starting the quarter, we have tuned our assumptions to better fit actual prepayments for all nonprime MSRs. Note that we are still the only servicer that has 95% of its servicing MSRs booked at lower of cost or market, so we will still be booking expense every quarter against these assets rather than writing them up on occasion.

Moving on, I will provide some additional perspectives on the value of Ocwen's existing business. Many investors have asked questions regarding our previous disclosures in an effort to value the company in runoff. For reasons discussed by Phil earlier, we think this is an inappropriate way to value the company. Nevertheless, we also understand why investors would like such a view. Building on our previous disclosure, I present some analytics on the next few slides for your consideration. The valuation methodology assumes no new bulk MSR purchases. We do assume our lending business generates value, especially from recaptured loans that runoff from our portfolio. Lastly, we add some value for our subservicing business, we've certainly seen renewals of existing subservicing contracts, but no new large deals.

On Slide 14, we start with the biggest component of the overall runoff analysis by valuing our current MSRs. This chart should look familiar to those who follow the company, as the first 3 bars are similar to what we disclosed in prior quarters. The first bar on the left depicts the book value of our MSRs at lower of cost or market, as they are on the books. The next bar adds the -- a fair value adjustment based on third-party valuations. After that, we add back the impact of Ocwen's lower cost of service. This analysis also adds back some delinquent servicing fees not included in the broker analysis, as there is a very low probability that deferred servicing fees will be uncollectible. The final addition takes into account 2 further value changes. First, we adjusted the discount rate, the estimate of value for the third-party broker model uses an average discount rate of about 10%. MSR buyers appear to use cap rates closer to 8%, so we use that for this analysis. Secondly, we have lowered CPRs, the broker marks assume CPRs of 17% on nonprime MSRs. With current prepayments running at only 9.2% and most of that prepayment being involuntary, it seems very unlikely that long-term prepayments will be 17%.

As more loans cure and foreclosures eventually ebb involuntary prepayments should decline substantially. Note that we've also reduced the value impact of lower CPR to reflect that a portion of the lower payment accrues to HLSS on those MSRs where they hold rights to collect servicing fees. The total value of our MSRs, based on these assumptions is about $4 billion.

The next slide summarizes how we value the Origination business by breaking it into 3 components. The largest piece of value is derived from the recapture opportunity from our existing portfolio. To be conservative, we assume no recapture for nonprime MSRs, we assume the 25% recapture rate on prime loan prepayments, and a 2% pretax margin. Both of these assumptions are below what we're experiencing today on HARP, but reasonable assumptions on go forward basis. For the correspondent channel, we assume that our current market share in the correspondent channel, rose over 3 years from approximately 3/10 of 1%, to 1.2%, assuming we earn about 8% to 9% of Lenders One's business, though that is not the only source of new potential business in the correspondent channel.

Finally, we've added value for the Reverse Mortgage business based on our internal forecast that includes a modest growth in market share. We end up with a total value for this business of about $1.2 billion. Note again that this value attributes nothing for the expansion of our broker channel, or for the business we might acquire outside Lenders One and our prime -- nonprime portfolio. Lastly, we estimate the value of our subservicing contracts. As noted, we assume we don't add new bulk business, but we also assume we maintain our -- the volume of our existing business, which is very conservative. This contributes to just over $200 million to value.

To estimate the value of the company in runoff, on Slide 16, we start with the book value of equity, so we effectively assume repayment of all debt. We had only the estimated incremental value of our MSRs above book value, the value of the origination business and the value of subservicing. The total comes to about $5.3 billion. On a per share basis, this would be very close to our current stock price, but we recognize this approach is far from perfect or definitive, it is for illustrative purposes only and it describes -- incorporates numerous assumptions. Just the same, we think it gives at least some sense of what the company is worth, adding nothing for the franchise value in our core servicing business and nothing for opportunities in adjacent businesses beyond mortgage lending.

Turning to my last topic of funding strategy and buyback. Let me talk a little bit about funding activities in the first quarter. Three things to note: First, we ended up funding out of current cash flow several final closings related to ResCap, OneWest and Greenpoint. In total, we funded about $134 million of MSRs and advances that closed in the quarter; second, we did not close on an upsized term loan when we put the Wells transaction on indefinite hold, as we had planned to use that to increase our liquidity position over and above the requirements to close Wells. With the additional closings and without the new funding, we were somewhat more limited in cash availability than originally planned. As a result, we trimmed back our stock repurchase plan, which is consistent with our guidance that our first priority is funding new investment.

Year-to-date we have repurchased about $25 million of common stock at an average price of approximately $37 per share. Our funding strategy going forward has evolved with the success of OASIS, and our longer-term desire to diversify our funding sources. Because we are substantially underlevered compared to our peers, we expect that even without a large new deal, we will likely increase debt, including OASIS notes, to improve liquidity and for other corporate purposes. Going forward, we anticipate additional stock repurchases at a higher level to catch up with earnings posted in Q4 of last year and Q1 of this year, with the caveat that we reserve the right to purchase more or less shares in any given period.

In conclusion, I will summarize the key points we've made. We believe Ocwen's long-term competitive position in the market is improving, based on our strong track record and capital position and our prospect for sustained business is strong. While the regulatory environment has raised cost for Ocwen and the industry, we believe that we are better positioned than competitors to respond to these higher costs and improve margins over time because of our scale and demonstrated process management and automation capability. Ocwen continues to outperform the industry in loss mitigation, especially rates of modification, pre-foreclosure resolution and redefault. We believe there's solid value in our existing book of business that continues to improve as prepayment rates slow. We expect to add modest additional leverage and continue buying back stock, though we will continue to seek new investments as a primary use for capital, which we expect to cover in more detail in our second -- at our next quarter conference call. Thank you. I'll now open it up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Bose George from KBW.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

First, actually Ron, can you just -- the $30 to $40 increase in servicing costs that you mentioned, is that increase similar on the GSE on the private label side?

Ronald M. Faris

Well it's related to nonperforming loans and it would be similar regardless of what type of loan it is. It's related to nonperforming loans.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. And then, the reserve for uncollectible receivables, was that related to the slowdown in property liquidations, are those the compensatory fees that GSEs are charging? Just curious what that was.

Ronald M. Faris

It was not related to that. We're not going to get into the details of it, but there are -- as you're servicing GSE loans, there are certain expenses that you occur, some of which are recoverable from the GSEs, others depending on the ultimate outcome of the loan, et cetera or not, and so in this quarter we just had a larger amount that we deemed we would not be able to recover, but we're not going to get into any other details on that.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

And then, just one last one, on capital. Bill sort of referred to potential capital rules for the industry and just curious what your thoughts are about how -- what that could look like, and who would be imposing those capital rules?

Ronald M. Faris

We're not going to really comment on that, although we think that we are the best positioned firm, whatever the capital rules might be. Some states already have capital requirements for servicers, some are even fairly substantial. None of them are a problem for us, so we're not going to speculate on where the industry's going to go with that, but we actually see it as more of an advantage than a disadvantage, if that actually occurs.

Operator

The next question comes from Mike Grondahl from Piper Jaffrey.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

In a general sense, how much of that $59 million kind of negative swing would you consider sort of one-time in nature?

John V. Britti

Well its -- I mean, on one hand, you could say all of it, but it is very difficult, for example, with the Origination business, to project out in the future where that's going to be, I mean most originators have been experiencing declines. I don't think we would expect the kinds of declines quarter-over-quarter that we had in the near-term, but it is a little bit difficult to project out that in particular.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Okay. And if we look at your normalized operating expenses of about $325 million in the quarter, how should we think about that number normalized, post the ResCap, Energy and whatnot? And others?

Ronald M. Faris

Well, Mike, I think the normalization is aimed at doing exactly that. I think we -- what we put up for normalized expenses is about 80% of that is aimed at reducing the expenses down to where we think they should be on a run rate basis, once we consolidate it onto a single platform.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Okay. And are there any other synergies you expect to affect those normalized expenses?

Ronald M. Faris

I mean there are -- I think it's difficult to quantify. There are complications that I'm sure result in expenses throughout the organization, simply because we have 2 servicing platforms. We have to maintain compliance and other things, for multiple platforms. So we do expect that, that -- as we move entirely off of the old ResCap platform, we've made our best estimate of where we think the expenses will kind of come out, but it also eliminates a variety of complications within the organization, which we think will probably provide other benefits down the road.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Okay, and then maybe just -- the OASIS deal, I just want to -- those proceeds are not included in the $204 million of adjusted cash flow from operating activities. Is that correct?

John V. Britti

That would show up in investing exit.

Operator

The next question comes from Brad Ball from Evercore.

Bradley G. Ball - Evercore Partners Inc., Research Division

Can you size the impact of the lower deferred servicing fees in the quarter? Can you give us a sense as to how much of the rebound we should expect from increased REO sales that you're talking about in the first half of April?

Ronald M. Faris

Well I think what we said in our prepared comments was that we felt that the benefit that we got from the OneWest and Greenpoint transaction is a little over $15 million in the quarter -- were largely offset by that slowdown, so I would think that would be best and only guidance we're going to give there.

Bradley G. Ball - Evercore Partners Inc., Research Division

And can you give us any indication, has the rebound that you talked about in the first half of April, we've completed the month now, is that rebound continuing? And is it entirely weather-related, or were there other factors that slowed REO sales in the first quarter?

Ronald M. Faris

We don't think there's any other real environmental factors. Obviously, the interest rate environment's a little bit higher than it was -- earlier part of last year, and that's always going to impact home sales, but we think most of that slowdown, based on what we were expecting in the first quarter, was related to the weather. And I think that we haven't seen anything different in the second half of April than what we saw in the first half, so I think our statements are consistent.

Bradley G. Ball - Evercore Partners Inc., Research Division

And do you disclose the amount of REO or the REO unit that you have available-for-sale at quarter end?

William Charles Erbey

I believe our Q has information on it.

Bradley G. Ball - Evercore Partners Inc., Research Division

So that will be in the Q tomorrow?

William Charles Erbey

Yes.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay. And then on HARP, so like, you've been consistent with your comment about HARP likely slowing in coming quarters. Can you tell us how much of your existing book is HARP-eligible?

William Charles Erbey

I don't think we have that data available. It's going down in part because rates go up. I mean the -- because when you think about HARP eligibility, they may be eligible for the program, but the incentive to refinance does shrink as rates rise, but I don't have the number available.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay, and just getting back to Bill's initial commentary. In terms of the broader market opportunity, is there any reason to think that the pipeline that you discussed before the New York DSS halted the Wells Fargo transaction, is there any reason to think that, that pipeline has changed in any way?

Ronald M. Faris

Yes, I think we're not going to really comment on pipeline. I mean, a lot of that is going to be driven by how the -- what the larger banks decides to do. As Bill's comments indicated, we think there's still strong incentives for them to relook at their mortgage servicing books and we think that's an opportunity for us, but we're not going to -- we're not going to provide any other kind of color on the pipeline.

Operator

The final question comes from Kevin Barker from Compass Point.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

In regards to the uncollectible servicing receivables, how much of that would be apples-to-apples to the $182 million of accounts receivable you have on the balance sheet right now?

John V. Britti

So can you just...

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

So if you look at the reserves, the impairment on the reserves on the uncollectible servicing receivables, that it is uncollectible servicing receivables, you have similar assets that are currently on the balance sheet, would you consider the $182 million of the accounts receivable to be similar in structure?

Ronald M. Faris

I mean the $182 million is going to include a whole host of different things, so I would not -- it would not be appropriate to sort of say that, that $182 million is the same kind of receive -- all of it is the same kind of receivable as what the, we increased the reserve on, so that 182 has a lot of different things in there, and that I would not characterize them as all the same. That -- was taken on a smaller piece of that.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

If we were to quantify the percentage of accounts receivable that is related to, sort of, those types of servicing receivables, how big is that? Can you help quantify that, or maybe give some context?

Ronald M. Faris

Don't have those numbers kind of right now, so I don't think we can comment on that right now.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

Okay. And then, looking at the transitional and transaction expenses, I mean they've continued for several quarters now, they've gone down quite a bit this quarter versus last quarter. At what point do you see those finally abating or running off, given that there is no near-term acquisitions given the Wells Fargo portfolios unfolds?

William Charles Erbey

Well, I think the -- as we indicated, we do expect some contract breakage expense in the third quarter, but beyond that, we shouldn't be incurring very much in the way of these expenses beyond the second quarter, or maybe a little bit in the third quarter, but it's largely -- done once we get off the ResCap platform.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

Okay, and then if we look at the -- once you remove the ResCap platform, how much expense do you expect from that? And if you were to put some quantification around how much your pretax margins per EPB would go up from the decline in expenses, related to that transfer or that move?

William Charles Erbey

Well, I mean, that's, that is -- as I mentioned earlier, I think that's the point of the normalization, and most of the normalized expenses relate to that, that why, as we said, that 80% of the normalized expenses relate to the ResCap platform. And so I think that's our best indicator. Now as Ron also mentioned, it's part art, part science. There are complexities that are driven throughout the organization as a result of having 2 platforms, so it's difficult to assess, I think, with perfection, what our run rate would be.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

Okay, and in regards to the acquisitions that you spoke about earlier, are title insurers or possibly originators still, some of the top things on your list of potential acquisitions? Or can you just give some context on what would be your main target for something you're looking at to bring into the Ocwen business?

Ronald M. Faris

We can say definitely we're not looking at originators. In terms of acquiring one, we tend to build that organically with our processes, and the controls in place that more mirror our servicing business. Obviously, we're looking at a number of different opportunities right now. Your difficulty in the title space, even though we very much like that, is that there are just not a lot of meaningful acquisition targets that are available within that space. So probably would not see something in terms of title insurance.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

Okay and then finally, looking at the OASIS deal, do you expect to continue to come to the market with similar type deals, given you have a significant amount of performing HC servicing still on -- in your sourcing portfolio?

Ronald M. Faris

Yes.

John V. Britti

Definitely.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

Okay, could you give a quantification of the size of that type of transaction you're looking at?

John V. Britti

Well, I don't about that -- I do not want to talk about any specific transaction, but I would say that we estimate that we could probably issue as much as another $600 million worth of notes associated with -- OASIS-type notes and maybe more.

Ronald M. Faris

I mean our ultimate objective is to eliminate as much as possible, the prepayment risk associated with our prime portfolio and keeping in mind that some of that embedded gain is not yet reflected on our -- in our -- since we booked things at lower of cost or market. So some of what we're protecting is stuff that's not on the balance sheet today. But our objective is to reduce significantly our prepayment risk.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.

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