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Ocwen Financial Corporation, (NYSE:OCN)

Q3 2010 Earnings Call

November 4, 2010 11:00 am ET

Executives

Bill Erbey – Chairman

Ron Faris – President and Chief Executive Officer

John Van Vlack – Executive Vice President, Chief Financial Officer & Chief Accounting Officer

Analysts

Bob Napoli – Piper Jaffray

Ryan Zacharia – Jacobs Asset Management

Sam Crawford – Stone Harbor Investment Partners

Mike Randall

Bose George – KBW

DeForest Hinman – Walthausen & Company

Jake Blair – Highbridge Capital Management

Rob Schwartzberg – Compass Point

Charles Gregg - Barclays

Operator

Welcome to the Ocwen Q3 2010 Results Conference Call. (Operator instructions.) Today’s conference is being recorded; if you have any objections you may disconnect at this time. I’d now like to turn the call over to John Van Vlack. Sir, you may begin.

John Van Vlack

Thank you. Good morning, everyone, and thank you for joining us today. My name is John Van Vlack and I’m the Executive Vice President and Chief Financial Officer of Ocwen. Before we begin I want to remind you that the slide presentation is available to accompany our remarks. To access the slides, log onto our website at www.ocwen.com, select Shareholder Relations then Calendar of Events, then “Click Here to Listen to Conference Call.” Then under Conference Call Q3 2010 Earnings, select “Click Here to Listen and View Slides.” Each viewer will be able to control the progression of the slides during the presentation. To move the slides ahead please click on the grey button pointing to the right.

As indicated on slide 2, our presentation may contain forward-looking statements that are made pursuant to the safe harbor provisions on the federal securities laws. These forward-looking statements may be identified as a 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 Risks Disclosure statement in today’s earnings release as well as the company’s filings with the Securities and Exchange Commission, including Ocwen’s Form F3, Q2 2010 Form 10Q, and 2009 Form 10K. If you would like to receive our news releases, SEC filings or other materials via email please contact Linda Ludwig at Linda.ludwig@ocwen.com.

As indicated on slide 3, joining be for today’s presentation are Bill Erbey, Chairman of Ocwen, and Ron Faris, President and Chief Executive Officer of Ocwen. Now we will turn the call over to Bill Erbey. Bill?

Bill Erbey

Thank you, John. First, borrowing from Mark Twain I’d like to say that the rumors of my retirement are greatly exaggerated. We promoted Ron in recognition of his leadership and contributions to the company, and I would like to congratulate him. As indicated on our 8K filling, Ron’s promotion has been in the planning stages for awhile now, and I intend to remain a fulltime Executive Chairman of the company, focusing primarily on strategy, key personnel developments, and corporate finance. I remain Ocwen’s largest shareholder and am committed to increasing shareholder value.

We completed our acquisition and integration of HomEq in the Q3 and became the third largest non-prime servicer with more than $76 billion in unpaid principal balances. Since 2001 our servicing portfolio has grown at an annual rate of 15.3%, as shown on slide 4. While still early, the HomEq acquisition is meeting our performance expectations as is the Saxon portfolio as shown on slide 5. Note that in September, shown to the far right of the chart, the HomEq performance is well ahead of Saxon in its first month after acquisition. We expect the HomEq portfolios to continue to ramp over the next four quarters, particularly in terms of ROE as reductions in delinquent loans reduce advances.

Loan modification performance has improved both in terms of acceptance rate and re-default rate. Driven by new technology that went into production in August of last year, the six month re-default rate for loan modifications declined 43%. The re-default rate for all of our mods completed in Q4 of 2009 is 13.5% at six months, while our HAMP default rate for modifications completed six months ago currently stands at 11%. To the best of our knowledge in both of these metrics we lead the industry. We are particularly excited about the HAMP program’s new emphasis on principal reductions, as we believe this will increase offer acceptance rates and decrease re-default rates. We deployed this enhancement in October of this year and have scheduled a very significant release regarding non-HAMP modifications for the end of this month. It is our expectation that these enhancements will further minimize foreclosures, increase cash flows to the securities that we service, and reduce advances.

Given the heightened concern regarding foreclosure timelines, our ability to resolve a loan without foreclosing is a key differentiator for Ocwen. We have seen foreclosure timelines extend throughout the entire housing downturn. This year alone through September foreclosure timelines have lengthened by 29 days. However we have shortened the overall time that a non-performing loan remains in foreclosure by a net 22 days, even with the 29 day foreclosure extension. This has been accomplished through modifications and improvements in other non-foreclosure resolutions. As a result of these efforts, advances on our existing portfolio, without HomEq, have continued to decline. And while no one knows the extent of potential further foreclosure delays, we are cautiously optimistic regarding advances given the technology enhancements that we have and will deploy over the next several weeks.

As will be covered later in the call, operating expenses net of one time charges increased only marginally from the Q2, even with a 40% increase in unpaid principal balances serviced during September as a result of the HomEq acquisition. I would now like to turn the call over to Ron who will review the results of our servicing business in Q3 and several industry-wide issues. After that, John will cover normalizing items in the Q3 and the health of our balance sheet. Ron?

Ron Faris

Thank you, Bill, and thank you for your continued vision, leadership and confidence in me and the rest of the management team. As Bill mentioned, I will cover the highlights of our results for the Q3 as well as recent industry-wide issues. More detailed information is available in our earnings release and our Q3 10Q.

Slide 6 reflects servicing and sub-servicing revenue and expense in basis points per average quarterly UPB for the past five quarters. As seen at the bottom of the chart, servicing revenue increased to 17.4 basis points in Q3 from 15.6 basis points in the Q2, as the Saxon portfolio continues to ramp. Sub-servicing revenue was 10 basis points in the Q3, up from 8.7 basis points in the Q2. To amplify the impact of the revenue improvement, the mix of servicing UPB increased to 65% of the total portfolio in the Q3 versus 58% in Q2. Overall, on a pretax net income basis, we improved to 6.7 basis points which is back in line with Q1 of this year and Q4 of last year, even after an increase in other income expense resulting from increased interest expense related to the financing of the HomEq transaction. John will discuss the company’s strong normalized Q3 results in more detail later in the call.

Our total modifications for Q3 were 15,928 compared to 14,384 in Q2 of 2010. This performance fell near the upper end of our previous Q3 estimate of 14,000 to 16,000. Included in the 15,928 number were 4,241 HAMP modifications in the Q3. To date, approximately 85% of our HAMP modifications remain eligible for the annual success fee of up to $1000 or $83 per month for all HAMP payments received on time. For Q4 we expect total new modifications in a range of 16,000 to 19,000.

Finally, we continue to make progress in reducing advances on our historical portfolio. As shown on slide 7, net advances decreased by $62 million for the quarter and are down $215 million since December 31st, 2009, including declines in advances on the Saxon portfolio since boarding. As Bill already mentioned, we continue to refine our loss mitigation models and approach to keep more borrowers in their homes, further reduce losses to investors, and improve the quality of our servicing portfolio.

Now I would like to address some of the industry issues that have been in the news recently. First, as a normal part of our servicing process, Ocwen has needed to foreclose to resolve certain non-performing loans. Like other servicers, we are thoroughly reviewing our process. Based on this review, we estimate that we have approximately 5500 active foreclosures, or approximately 1% of our total portfolio, that are pre-judgment and where an affidavit of indebtedness has been filed. To the best of our knowledge, the information regarding delinquencies and indebtedness presented to the courts was accurate in all cases.

In order to assist the courts in confirming the accuracy of the affidavits and ensure that proper procedures were followed, in certain instances we are reaffirming that the information in the affidavits is correct. For example, the courts in the state of New York are requiring that attorneys representing servicers in foreclosure actions go back and have the servicer re-verify the accuracy of all information provided to the court. We believe that this type of re-verification will help expedite and restore confidence in the process. We are cooperating with all requests for information from government agencies and to date we have not received any subpoenas relative to our foreclosure process.

Second, in July, 2010, Ocwen along with over 60 other originators and servicers received two subpoenas from the Federal Housing Finance Agency requesting information in connection with private label mortgage securitization transactions where Freddie Mac and Fannie Mae had invested. The transactions include mortgage loans serviced but not originated by Ocwen or its affiliates. Ocwen is cooperating with the agency’s request. The information requested was related to less than 5% of the loans and securitizations Ocwen currently services.

Third, to the best of our knowledge we have not experienced any concerns about foreclosures being contested due to MRS or other assignment-related issues.

Fourth, we do not believe that we have any material put-back exposure with respect to the loans that we service. Except in a very small percentage of cases, we did not originate these loans nor were we the depositor or underwriter. To our knowledge, no investors have challenged any of the trusts that we service. In fact, we are working with various investors who are possibly looking to move servicing from under-performing servicers to Ocwen. We believe that this could be an important opportunity for us to expand our special servicing.

We did, however, make representations and warranties for one residential mortgage securitization with residential loans originated within the last ten years. The original unpaid principal balance was approximately $200 million and Ocwen performed due diligence on each of the loans. We are not aware of any inquiries or claims from trustees or investors regarding loan put-backs.

Finally, we continue to pursue additional acquisitions of seasoned, non-prime portfolios, and are actively bidding on a portfolio of over $90 billion. We also continue to work with Altisource on developing a channel to capture FHA servicing on a flow basis. Through its cooperative relationships, Altisource has direct access to 175 originators that originated close to $80 billion in 2009, of which 40% was Ginny Mae production.

Thank you for your time. Now I would like to turn the call over to John Van Vlack. John?

John Van Vlack

Thank you, Ron. I’d like to walk through a reconciliation of the items impacting our Q3 results, which is shown on the last slide. We accrued $20.1 million in litigation related charges, primarily related to an adverse jury verdict and legal fees in connection with the cartel case. As previously reported, this case was unrelated to our servicing business.

We incurred one time transaction related expenses associated with the acquisition of the HomEq portfolio of $33.9 million, including severance and Warren Act compensation of $30.3 million, technology contract exit costs of $2.3 million, and other expenses of $1.3 million. While we have not finalized the purchase accounting for HomEq, our estimate for Q4 transition costs is approximately $19 million and by the end of the year we should be substantially complete.

And finally we recorded reduction in the fair market value of (inaudible) securities of $3 million.

As shown on slide 8, the net effect of all of the above items is that normalized income from continuing operations improved from $24.2 million in the Q2 of this year to $36.3 million. This growth is attributable primarily to the ramp up of Saxon revenue, improved collections across the portfolio, and the growth of HAMP annual success fees now that a number of performing loans modified under HAMP are starting to reach their one year anniversary.

Moving on to the health of the balance sheet. Even after the closing of the HomEq transaction we had $312.6 million of cash and fully collateralized available credit at the end of the Q3. Also at the end of the Q3, upon completion of the HomEq transaction acquisition, our book value per share was $8.84. This is calculated based on total equity of $888.7 million divided by 100.5 million shares. Adjusting items to the fair value of our assets include $1.25 per share if our deferred servicing fee is rebooked under the accrual method versus our cash basis method. Deferred servicing fees are at the absolute top of the waterfall and our collectible under all circumstances; $4.01 additional value per share if our MSRs were valued using lower internal costs rather than average market participant costs. After adding these items, our adjusted book value at the end of the Q3 is approximately $14.10.

Thank you. We would now like to open the call up to questions. Operator?

Question and answer session

Operator

Thank you, sir. (Operator instructions) One moment please. The first one comes from Bob Napoli. Your line is open, sir.

Bob Napoli - Piper Jaffray

Thank you. With regards to additional acquisitions, you talked about a $90 billion portfolio. I mean ResCap I think suggested yesterday that maybe they weren’t selling their portfolio. I think that was a little bit unclear, and I’m not sure if that’s specifically what you’re talking about or if I misheard that. And what else is out in the market? I mean if you can give me some feel for other types of portfolios that are out there.

Bill Erbey

Hi Bob, this is Bill. Good morning.

Bob Napoli - Piper Jaffray

Good morning.

Bill Erbey

It’s difficult for us to say more than what we said within the earnings release with regard to that, and we’d like to leave it there. There are other transactions that I think are further away on terms of pools of loans, pools of securities. I do think however there’s becoming an increasing reevaluation on the part of companies that own these legacy-based portfolios, and I think it’ll take awhile for additional ones to come to market. So on the acquisition side I think that’s where we stand. I think obviously we’re optimistic regarding both public and private in terms of flow business in terms of special servicing.

Bob Napoli - Piper Jaffray

Are you hearing more from Fannie and Freddie? I mean there was some discussion that they are looking to increasingly use some smaller servicers, in which your name was mentioned as a potential. What kind of activity is there on that front?

Bill Erbey

Again, I think some of the same issue that we had to treat that confidentiality as being important. I think the material you have in the public domain is accurate.

Bob Napoli - Piper Jaffray

If you don’t get a large portfolio acquisition would you start buying back stock? And if so, when would you start doing that?

Bill Erbey

If we do not believe that we would get a large acquisition to be able to use the cash, we certainly would recommend to the board that we look to begin to retire shares and retire shares at this time. So it’s a little bit difficult to tell you the exact time for that but it won’t be going on forever.

Bob Napoli - Piper Jaffray

Ron, congratulations on your promotion, well deserved. I was hoping you could give a little more color on the affidavits that I guess you said you were re-verifying a portion. It was a little unclear exactly what you were doing there.

Ron Faris

Well first off, as I mentioned the number is relatively small, around 5500. As I indicated, in some cases we’re finding that the advice that we’re getting or the direction that we’re getting from the courts and the states themselves is that “Let’s have everybody just go back and re-verify the information so that we know that it’s accurate, and we can keep the process moving.” So that is what we are doing. Foreclosures are continuing to occur, but what we’re really focused on, what we’ve always been focused on and why I think we’re different than others and have less of an issue is because of our ability to modify a very significant number of these loans. And even though there may be 5500 right now that are in that state, we would hope that many of those would ultimately result in a loan modification through our normal course regardless.

Bob Napoli - Piper Jaffray

Okay, and then just last question. The process management fees, the amount that you have for this quarter, is that a good run rate? And can you maybe just remind me exactly what’s in that number and would you expect that to be steady as a percentage of the UPB, of the owned UPB?

John Van Vlack

There are two primary items that make up process management fees. One is referral fees for REO sales and then the other is fees related to services provided to attorneys that handle foreclosure processing. And I think the REO sales certainly have potential to improve, so we don’t think that that number will decrease over time.

Bob Napoli - Piper Jaffray

And the mix of each type of fee is the percentage of that $7.9 million?

John Van Vlack

Yeah, it’s about 80/20.

Bob Napoli - Piper Jaffray

Okay, thank you.

Operator

Next question will come from Ryan Zacharia. Your line is open, sir.

Ryan Zacharia - Jacobs Asset Management

Hey, gentlemen, how you doing?

Bill Erbey

Fine, thank you. How are you?

Ryan Zacharia - Jacobs Asset Management

Doing well. So just trying to understand HomEq was on for a quarter. If I just do a very back of the envelope math it looks like September month basically contributed $10 million to the top line. Is my math correct?

Bill Erbey

Your math is correct. It was on for one month and we had the interest expense on the $350 million for two months.

Ryan Zacharia - Jacobs Asset Management

Okay, so as you look at interest expense you had some drag there that maybe reduced core earnings. As you look to the Q4 and really the Q1 of 2011, you’ll expect to see a ramp in the revenues as HomEq is on both for a longer period of time and the interest expense won’t ramp in the same fashion. So is that fair, that you would expect to see a pretty significant ramp in revenues over the next couple, few quarters?

Bill Erbey

Yes, you would see… First of all, HomEq will be on for three full months as opposed to one month. Interest expense will go up by basically 50% of what you saw in the change. You’ll have a little over $3 million on the interest expense in the next quarter on the $350 million, and you should expect some ramp in terms of basis points per UPB.

Ryan Zacharia - Jacobs Asset Management

Gotcha. And then looking at expenses, they seem to be pretty well contained. I mean is that an appropriate run rate, this kind of core figure of $39 million, $40 million? Or are there still a lot of kind of expenses to come from HomEq?

Bill Erbey

Well HomEq, we expect the one time up front purchase accounting effect to be $19 million in the Q4, but we expect those’ll be fairly closed to our normalized run rate for the business. It’ll go up because of the two- It’s only on there for one month but you won’t see a tremendous increase in operating expenses next quarter.

John Van Vlack

The main increase in the un-normalized operating expenses would be three months’ worth of amortization on the HomEq MSRs rather than one.

Ryan Zacharia - Jacobs Asset Management

Gotcha. So you think as you ramp the revenues of HomEq being on for three quarters, the operating expense are really goin to be kind of modest in terms of their upward movement.

John Van Vlack

Yeah, at the margin we’re very efficient.

Ryan Zacharia - Jacobs Asset Management

Great. And then there was a discussion of ResCap and there’s speculation all the time, so I won’t ask you to comment on that. But one of the things that I will ask is the Barclay’s portfolio as you guys had said was on and off and it was a nine month process. The previous discussion about buybacks and how long it will take before you guys kind of say “Enough is enough,” what is the timeframe? Obviously ResCap, it even seems like a more complex process given the involvement of the government and the foreclosure issue, and kind of all those issues. Maybe you guys can comment on what your appetite is to absorb that kind of timeline.

Bill Erbey

Yeah, that’s a little bit difficult for me to comment on that right now because we haven’t, we’ve discussed it but have not formally reviewed that with the board with regard to that. But obviously it is a significant decision to reach because of its impact on earnings per share. So I am very sensitive to that and we certainly will have continuing discussions with the board as how to deal with that, because running with over $300 million in cash and building cash at a fairly rapid pace for months, that’s a large drag to EPS that we don’t need to continue to suffer if we do not feel we have a good probability of closing a large transaction.

Ryan Zacharia - Jacobs Asset Management

That’d be a purchase transaction, so that brings up my next question as it relates to sub-servicing. You have the Freddie pilot program, of which you are one of two providers there. How is that going? What have the results been to date and how can we think about what might happen in the future based on that performance?

Bill Erbey

Well, we believe we’ve performed very well with regard to that and obviously we are cautiously optimistic with respect to our relationship with Freddie Mac.

Ryan Zacharia - Jacobs Asset Management

And when do you think Lend One will start being a contributor in terms of servicing?

Bill Erbey

It probably will not be even a meaningful contributor to servicing until the latter half of 2011. We intend to start Lend One out on a trial basis to make sure we have everything in place that we need to have in place. Once we’ve vetted that and we’ve put our processes and procedures in place we think that we can ramp it up much more rapidly. But the earliest we’ll be starting to do loans, Ford loans will probably be in the Q2 at the earliest next year.

Ryan Zacharia - Jacobs Asset Management

Okay, great. And one final question: just what was the remainder of the litigation expense. There’s $20 million, $13 million of which is for the cartel verdict. What was the remainder?

John Van Vlack

The remainder is largely comprised of legal fees, interest, and appeal costs.

Ryan Zacharia - Jacobs Asset Management

Okay, thanks a lot, guys.

Bill Erbey

Thank you.

Operator

The next question will come from Sam Crawford. Your line is open, sir.

Sam Crawford – Stone Harbor Investment Partners

Thanks very much for taking my questions; I have a few. Let me start with the most modest one: just on the professional services line between the year on year, 2009 to 2010, I haven’t been able to put that against the increase in UPBs yet but it looks like it might be a bit out of line. And I’m wondering if you can help me break that down between what is true operating and what is acquisition related?

John Van Vlack

The legal accruals are in professional services, and so there was $20.1 million within the $25.1 million for Q3 2010, and then we have $25.3 million within the $37.5 million for the nine months of 2010.

Sam Crawford – Stone Harbor Investment Partners

Okay. And on the foreclosure situation you did make a comment about the refilling of affidavits in New York, and the Supreme Court there I guess has sort of established what the policy will be. But in more contentious markets like Florida and Ohio, where maybe refi’ing is not so acceptable, how are you all choosing to proceed in those markets and what sorts of delays are you seeing?

Ron Faris

Well at this point we’re not seeing any delays. I don’t think we’re going to get into how we are handling each individual state, but I think it’s fair to say that we have good relationships in both of those states and we’re not seeing any delays related to our foreclosures. And again, we’re going to proceed based on what we think will help provide confidence to the system and help things move through the process. That’s what we’re going to do but right now we’re not seeing any delays.

Bill Erbey

Excuse me, two clarifications on that. One, we are not refilling in New York; we’re re-verifying as requested. And just to provide for our second one, a context to it – as Ron said, there were 55000 affidavits nationwide, which is 1% of our portfolio.

Sam Crawford – Stone Harbor Investment Partners

Yes, yes. The last thing is just a broader question that probably you all have had occasion to answer in other forums, but as you look at the possibility of large acquisitions I’m curious as to how you want to proceed with the financing of that. Clearly you’ve been building up cash from quarter to quarter, but apart from that what sorts of goals do you have in terms of maintaining an equity/debt mix post acquisition? What kind of fundraising might be implied?

Ron Faris

John, would you like to go through the equity/debt mix?

John Van Vlack

Sure. So we’ve got covenants that are connected to our $350 million term loan, and that would really drive the upper end of the debt mix. There’s room to increase that but I think if we had a very large acquisition we would look to bring in some additional equity as needed. But the pattern after making large acquisitions is a rapid generation of cash as the profits materialize and the advances combine.

Sam Crawford – Stone Harbor Investment Partners

Right, okay. And very last, do you anticipate any additional costs associated with boarding the home equity portfolio in the next quarter or are we done now?

Bill Erbey

Yes, we project $19 million of charges in the Q4 with respect to HomEq, and then we’ll be done.

Sam Crawford – Stone Harbor Investment Partners

Thank you all very much indeed.

Bill Erbey

Thank you.

Operator

Next question will come from Mike Randall. Your line is open, sir.

Mike Randall

Yeah, a couple questions, guys, and thank you for taking them. The first one, what was the prepayment speed in the quarter and the overall delinquency rate at quarter end?

John Van Vlack

The prepayment speed is in the 13% range for the quarter, which is consistent with where we’ve been throughout the year. And at quarter end, if you look at the overall delinquency rate, we were at 27.2% and I’ll tell you how that’s calculated. That includes loans that are greater than 90 days delinquent and it excludes loans that are performing under a forbearance or bankruptcy plans or modifications. When we pull this number we exclude special servicing of delinquent loans; for example, the Freddie Mac numbers would be out of that 27.2% delinquency rate.

Mike Randall

Great, okay. And then Bill, can you talk a little bit- You had mentioned in your prepared remarks about the principal reduction HAMP program you rolled out in October, and then I think you said a non-HAMP program in November. Can you talk a little bit about that and how incremental you think that will be to the portfolio?

Bill Erbey

It’s a little difficult to give you the exact incrementals but let me just make a few comments on it. Yes, we believe that principal reductions are an important tool in terms of modifications on not only acceptance rates but also re-default rates. If you look at it, about 70% of our advances are on loans that are defaulted with LTVs over 100%. It is certainly a major driver of borrowers’ behavior patterns. So our belief is to the extent that we’re able to get those borrowers’ equity into alignment with the loan amount that they will not only accept more modifications; they also at the same time will basically keep to the modification program and significantly reduce the re-default rates. So the reason we rolled it out now is we were always mindful of what people’s perceptions were with regards to principal reductions. Obviously with the administration rolling out the HAMP program and having principal reductions as a part of it we thought we could in fact mirror that in the non-HAMP program. Our policy has been to try to mirror as best we can the government programs and then execute those on the non-HAMP side. But it’s an enormous, if you just look at the numbers there’s an enormous amount of default in higher LTV loans, and those loans that get modified tend to default – the higher the LTV on a modified loan the higher probability that the loan will re-default once again. And also given just the extension of timelines that we’ve seen on foreclosure timelines, your net present value, if you actually go to a foreclosure solution is quite low.

Mike Randall

Gotcha. So I assume that this is one of the reasons why you think advances can keep dropping. And then maybe as a follow-up to that, I assume you can also do this and continue to kind of lower your operating costs in 2011.

Bill Erbey

Well yes. I mean I think that it is probably the most impactful tool that we can deploy, is really working on the principal. Historically we’ve worked on interest, right, and to a limited extent extensions on the maturity date of the loan. So any of our models would show us that those are much less important than the principal amount of the loan. So we’re doing, not only rolling that out; we’re also rolling out a different contact methodology that we think will significantly improve customer satisfaction and at the same time significantly reduce operating costs because of not have to have repeat calls, being able to do one call resolution with our customers, which increases customer satisfaction, increases your modification rate, acceptance rate because you do it earlier, and reduces re-default rate. So we’re rolling out a number of new technologies, quite a number of them we have and we’ll continue to roll them out over the next several months.

Mike Randall

Well that’ll be interesting to watch. And then just one follow-up for John. John, can you mention again the two reasons why the adjusted book value was $14.10? I didn’t catch those.

John Van Vlack

Sure. So the first is that our accounting does not include any valuation of the deferred servicing fees, and so deferred servicing fees at the end of the quarter stood at $125 million, a little bit over, which comes out to $1.25 per share, an additional value that had we been under a different accounting method would be reflected on our balance sheet. And then the other item which is $4.01 per share, is related to the valuation of our MSRs. So the practice in MSR valuations is to book them based on the industry cost. Ocwen’s cost structure is lower than the average cost for market participants in the industry, and that equates to an additional $4.00 per share.

Mike Randall

Gotcha. And so the gap got bigger this quarter because your portfolio got bigger. Is that the correct way to kind of interpret? Because there’s never been this big a gap but now there’s a pretty big gap.

John Van Vlack

Absolutely. If you go back to the first time we covered this which was the Q3 of last year, it was a couple of dollars a share for both. And so the acquisitions increased our deferred servicing fees from about $50 million, or what I’ll call our legacy portfolio, to $125 million. So we purchased those deferred servicing fees with our acquisitions.

Mike Randall

Gotcha, okay. Thanks guys.

Operator

Next question will come from Bose George. Your line is open, sir.

Bose George - KBW

Thanks. Hey, good morning. I had a couple of little things. One is just on the clarification on the margin outlook: with the Barclays integration this quarter, is there going to be any noise in that margin or should we look at that number at the end of this quarter and look at that as a baseline from which things go up?

John Van Vlack

Well without providing guidance, what I would say is that if you were to model the additional revenue from HomEq for a three-month period rather than a one-month period, and you were to hold the cost constant at the level shown in the normalization and adjust the amortization, I think you’d have a substantially bigger increase in revenue than expense.

Bose George - KBW

I guess I kind of refer to the way the Saxon portfolio came in, where the initial margins were lower and then it kind of ramped up after the first few months. And Barclays has just been on a month, so I’m wondering in the initial margins of the Barclays’ portfolio, whether that’s going to be lower than the overall margin; and since it’s such a big portfolio, take that overall margin down a little bit until it’s fully ramped.

John Van Vlack

On an incremental basis, I think that the margins on HomEq will be higher.

Bose George - KBW

So it’s higher than the legacy-

John Van Vlack

Higher than the pre-HomEq Ocwen portfolio.

Bill Erbey

Another way to look at it to try to maybe simplify it, the HomEq portfolio was on for one month. If we applied one month of interest for the $350 million credit facility, we would have made between $3 million and $4 million on HomEq for the month if revenue does not ramp.

Bose George - KBW

Okay, yeah – that makes sense.

Bill Erbey

So the impact of HomEq, we didn’t put in our adjusting, in our normalization – we assumed the full two months of interest and didn’t normalize for that. We didn’t normalize for the extra month of interest.

Bose George - KBW

Okay, yeah – that helps. And then just switching to the principal reduction program, the non-HAMP modification program, for that do you need the investors to agree? Or does it pass the NCB test and then you can apply it as long as it meets that hurdle?

Ron Faris

It depends on the investor.

Bose George - KBW

Okay. Do a lot of investors, is it sort of 50/50 or how does that mix work? Is there enough room to roll this out without contacting investors?

Ron Faris

Well obviously there’s three different ways. Either you’re not restricted, you’re absolutely restricted, or you have to go back and get their permission.

Bose George - KBW

Okay, great. Well thanks a lot.

Ron Faris

But we think we can roll out over a majority of the portfolio.

Bose George - KBW

Okay, great. Thanks.

Operator

The next question will come from DeForest Hinman. Your line is open, sir.

DeForest Hinman – Walthausen & Company

Hi, I had a few questions. This is from Bill, can you talk in a little bit more detail to why is the time right for you to transition from the CEO to the Chairman position? I have a couple others.

Bill Erbey

Sure. We have a very large focus on secession planning in Ocwen. I think it’s the right thing to do, and Ron has the same goals in his areas, to basically make sure he brings people along who can act if something happened to one of us; that we in fact have back up. So it’s a natural progression. Ron for several years had the servicing business; I basically dealt more with strategy with how we developed loss mitigation models, corporate finance and personnel development. And Ron’s clearly the guy who runs the servicing business within Ocwen. As we begin to expand responsibilities with Alitsource and with Ocwen and with Lenders One, I think it’s important that each of those entities are self-sufficient. But I can assure you, my working day has not changed.

DeForest Hinman – Walthausen & Company

Okay, that’s helpful. And I think this is implied but I don’t know if you’ve specifically said this: are we assuming that the match funding advances will decline in the Q4?

John Van Vlack

The advances have declined every quarter and we don’t see any reason why that would be interrupted.

DeForest Hinman – Walthausen & Company

Okay. And then you guys were going through-

Bill Erbey

Excuse me. The Q4 is generally a more challenging quarter for that simply because it’s basically when tax payments are funded.

DeForest Hinman – Walthausen & Company

Okay. You were also talking about some of the issues with the potential risks, and you briefly mentioned some warranties on $200 million of loans. I guess my question is can you kind of explain that more fully, what that could potentially mean? And when were those loans originated and I guess what’s our net risk? Because I would assume some of those loans have been refinanced over time and then maybe our risk goes away, or maybe I’m thinking about that incorrectly.

Bill Erbey

Well, the reason we brought that up is that the SEC is requiring all financial institutions to lay out what their put back risk is. So our put back risk we believe is- There was one security where we made representations as to the, where we were technically the servicer and the depositor and made representations with respect to those loans that originated within the past ten years, those two conditions. The $200 million securitization, that’s a very small securitization, so you could run- I don’t, we don’t believe we have any risk with regard to it, so what you’d have to do though if you wanted to assess it is say “What potentially would be the loss on that pool in terms of underlying loans? And then what percentage of that number would actually be where there is underwriting error?” I’ve found in my life when you multiply a percentage times a percentage it gets to be a real small number pretty fast.

DeForest Hinman – Walthausen & Company

Okay, but just to be clear when were those loans originated?

Bill Erbey

In 2005 and 2006.

DeForest Hinman – Walthausen & Company

Okay.

Bill Erbey

So they had very, at least in the early years before the market turned down, had very rapid prepayment where they paid off in full.

DeForest Hinman – Walthausen & Company

Do we have a number where that securitization is trading at right now?

Bill Erbey

You want to know what the outstanding balance is today?

DeForest Hinman – Walthausen & Company

Yes, either that or what it’s trading for.

Bill Erbey

These securities have multiple traunches. I don’t know what those traunches are trading at.

DeForest Hinman – Walthausen & Company

Alright, thank you.

Bill Erbey

Thank you.

Operator

Our next question comes from Jake Blair. Your line is open, sir.

Jake Blair – Highbridge Capital Management

Thank you, guys. In the $6 million of interest expense that was related to the term loan, some of that’s got to be fees and amortization. Can you delineate the actual cash interest expense and what was fees, and how that’ll look going forward?

John Van Vlack

Well, the amortization is over the expected life of the facility, and so you would have the 2% OID in there, and any legal fees and upfront payments go to the lenders that organized the facility. And so the goal for the amortization was that that would be relatively level based on the anticipated prepayment schedule.

Bill Erbey

We can get back. I mean the coupon on it was 9%, right?

John Van Vlack

Well, the coupon is LIBOR plus 7 with a 2% floor. So assuming that we have a coupon rate that remains at 9%, that LIBOR doesn’t go above 2%, then this number will decline gradually. We made our first amortization payment at the end of September on this loan, so the interest component will decline and the amortization is set to decline as well at the same rate as the interest.

Bill Erbey

If I understand your question the coupon rate’s 9%. You multiply that by $350 million and you take two months, so it’s $5.25 million. Now it’s a little more than that because there were actually several days in the month of July, but suppose that $5.3 million was the actual coupon that we were paying. And as John said there’s a 2% discount and then there were upfront legal fees, and the discount and the legal fees would make up the difference.

John Van Vlack

So I found the number within the $6.3 million that we booked - $5.3 million of that was interest and the rest was amortization.

Jake Blair – Highbridge Capital Management

Right, so that $1 million will be there going forward, declining.

John Van Vlack

It will decline going forward based on the anticipated amortization.

Jake Blair – Highbridge Capital Management

Perfect. And just to be clear, you guys have talked about a $60 million number and now it looks like you only have expenses for HomEq for the Warren Act and the like, and obviously you took $30 million and change in this quarter and talking about $19 million in the Q1. Can you, that’s it, right? There won’t be any more additional charges there.

John Van Vlack

That is our expectation as of now.

Bill Erbey

Right. We haven’t fully completed purchase accounting but as John said that’s our expectation. Any other changes would simply, and as a matter of fact a good number of those changes are non cash. Any other changes would be simply moving expenses around from one period to the next. At the end of the day when the deal’s done it wouldn’t have changed the absolute dollar of expenses.

Jake Blair – Highbridge Capital Management

Right, okay. Thank you, guys.

Operator

Our next question comes from Rob Schwartzberg. Your line is open, sir.

Rob Schwartzberg – Compass Point

Good morning. I apologize, I came in a little bit late and I missed the beginning. I think there was some discussion about the foreclosure timeline being extended 29 days but the actual resolution being shortened, and I just wanted to double check those numbers. So 29 days, from what to what is the 29 day increase and what’s the resolution timeframe?

Bill Erbey

Our overall time that a loan was in a 90-day plus bucket went down 22 days even including the 29 day foreclosure extension. I believe, Ron, what is it – 343 or something like that was our average foreclosure timeline at the end of Septemebr?

Ron Faris

Yep. Correct.

Rob Schwartzberg – Compass Point

So that timeline went up, okay, 29 days.

Bill Erbey

The timeline, on those loans that foreclosed they increased our overall timeline by 29; in which we had to foreclose, increased our overall timeline on the foreclosure by 20 days but modifications and non-foreclosure collateral resolutions were more impactful than that and brought the overall time that a loan remains in 90-day plus bucket by 22 days.

Rob Schwartzberg – Compass Point

That’s very helpful, thanks. And then I just wanted to double check another number that I heard, which was 1% of your portfolio is basically connected to the affidavit issue. Is that correct?

Ron Faris

Yes.

Rob Schwartzberg – Compass Point

Great, very helpful. Thank you very much.

Operator

Our next question comes from Charles Gregg. Your line is open, sir.

Charles Gregg - Barclays

Good morning. Just a couple of clarifying questions. On the securitization that took place in 2005 and 2006, you said the original UPB was about $200 million and that was a period, or shortly thereafter that was a period of significant refinancing activity. What’s the UPB today?

John Van Vlack

Approximately $40 million.

Charles Gregg - Barclays

And do you have a sense as to the percentage of the UPB that was, the $160 million, what percentage of that was refi versus default?

John Van Vlack

We don’t have that information.

Charles Gregg - Barclays

Alright. But it’s 20% of the securitization is outstanding today.

John Van Vlack

That’s correct.

Charles Gregg - Barclays

And even if you gross it up some percentage, to your point, Bill, multiplying that by a percentage and then another percentage, it gets pretty small.

Ron Faris

Right. Our losses tend to be much lower than the industry, so the only starting bucket is what percentage of the $200 million are losses then pay ultimately. Then you say how many times did we screw up the underwriting or when we re-underwrote them, which I think also will be a very small number if at all, if any at all.

John Van Vlack

Because if you think of most of the defaults, in the early days the predominant method of payoff was a total debt payoff and then we got into the period where there were more defaults. And we think that probably most of them were related to people losing income and not necessarily underwriting issues.

Bill Erbey

It’s kind of ironic – we were very unsuccessful underwriting mortgages because of our underwriting standards. So we couldn’t originate much product because we kept wondering how on Earth you could accept the underwriting standards that were out there. So the good news is we didn’t originate many loans because our underwriting standards were much more stringent than the industry. So I don’t, the reason we brought it up is simply because the SEC sent out a large letter saying “Please be detailed as to the extent of put back risk you have.” Well, we have one security.

Charles Gregg - Barclays

Okay.

John Van Vlack

And there have been no inquiries or claims regarding the security.

Charles Gregg - Barclays

And then my second question was with regard to HomEq. It closes on or about 9/1, you start the supporting process; creates a lot of messiness in the numbers, right? As you look to 2011, using a baseball analogy, where would you expect to be on January 1 of 2011 in the integration of the HomEq? I mean is the Q1 of 2011 going to be a pretty clean quarter?

Bill Erbey

Well, I’ll let Ron respond to the operational. The operational execution I think is impeccable. The sloppiness is as we say- The charges up front were charges that were in fact related to purchase accounting and the shutdown of the existing HomEq operation. Our expenses were very, very stable and had minimal increase as a result of HomEq. So it’s been boarded and it’s fully functional.

Charles Gregg - Barclays

Okay, but we saw that-

Ron Faris

I think the answer is that by the Q1 things should be very clean. As Bill said, everything was transitioned immediately under our technology. As far as the staffing and other types of transition items, those are materially complete as we sit here today; and by the end of this quarter there really will be virtually nothing left related to what you would call “transition items” and the Q1 should be clean. And as we’ve indicated we expect that revenue items and things like that, and advances, will start to- Revenue ramps up and advances ramp down as the portfolio becomes more seasoned. So over a couple-quarter timeframe is what it takes us to do that, but as you saw with Saxon it starts to happen relatively quickly.

Bill Erbey

And we have some programmatic charts that we’ll take. I mean for example it’s least shutdown costs, for example, where these are all scheduled sort of expenses associated with basically shutting down the HomEq platform that we knew about when we actually went into the transaction and priced it within our return for amorters.

Charles Gregg - Barclays

So in terms of incremental expenses for 2011 just with regard to HomEq, do you anticipate really any in 2011?

Bill Erbey

No.

Charles Gregg - Barclays

So 12/31 this year we’re done – we’re just back to running the business.

Bill Erbey

Maybe I’m not being articulate here. The actual expenses you saw on the normalized basis for the underlying operations business is pretty much what they’re going to be in the Q4, what they’re going to be in the Q1, etc. The charges that you see and that we’re projecting in the Q4 related to shutting down the old operation but nothing with respect to running HomEq.

Charles Gregg - Barclays

So the hiring, the training, the technology, etc.

Bill Erbey

We absorbed all of those expenses in the Q2 and Q3. All of those startup expenses are in the normalized numbers. The numbers we took out related to shutdown costs associated with HomEq and they’re one time charges. They’re terminating of the employees, paying severance and Warren Act; terminating technology; terminating leases. These are all scheduled items that we knew about, and as a matter of fact they’re coming in slightly under what we had projected with regard to it. We had projected originally $60 million; we believe we will come in under that barring any sort of purchase accounting adjustments that would simply move income from one period to another. It would be a non cash charge.

Charles Gregg - Barclays

Okay. So business as usual, things obviously get a lot cleaner from a reporting standpoint next year, and to the extent there aren’t any more acquisitions done the cash flow you’re going to generate through net income and advance reduction you could use for share repurchases, dividends, etc.

Bill Erbey

Yes.

Charles Gregg - Barclays

Okay, thank you very much.

Bill Erbey

You’re welcome.

Operator

Next question will come from Ryan Zacharia. Your line is open.

Ryan Zacharia – Jacobs Asset Management

Okay, thanks, guys. Just a couple of follow-up questions. As we talk about principal reduction, so there’ll be a decrease in servicing fees on the amount that you reduce. I guess there’ll be increased amortization cause it’s almost like a prepay, but your interest expense will come down. So you amalgamate all of that stuff and you believe that there will just be a measurable positive impact to principal reductions?

Ron Faris

Yes, and keep in mind, Ryan, we’re already running at over 5% below our amortization rate. I mean we amortize our PMSRs at 18%. We’re running at 13%, so any principal forgiveness should come in well under that number.

Ryan Zacharia – Jacobs Asset Management

But from MyAC perspective, does it matter? I mean do they just look at these numbers coming in and the fact that if you’re running at 13% and you forgive principal and that number goes up to 16%, do they just keep the spread so that you amortize now at 21%?

John Van Vlack

This is a very technical point, but we use the MyAC evaluations, we disclose that in the K and the Q, obviously, but we use that to perform lower cost through market testing. And we’ve got a substantial spread between the MyAC value versus the basis that we use to carry MSRs in our books. We use the cost method less amortization and so there’s a substantial spread between the amount we have on our balance sheet versus MyAC value. So if UPB came down, and MyAC let’s say values that UPB at the same bps value per dollar UPB, that would reduce the MyAC value. That doesn’t necessarily lead to any P&L impact or balance sheet impact at Ocwen

Bill Erbey

Ryan, let me try it this way. I hate to speak for MyAC but my understanding is they use a long-term estimate for the industry’s prepayment rate of 18%. The reason we don’t hit 18% is because we don’t foreclose on nearly as man properties as other firms do, because a foreclosure is an involuntary prepayment. So that number should not vary based on our performance; it’s the industry’s performance.

Ryan Zacharia – Jacobs Asset Management

Okay, that helps clarify it.

Bill Erbey

So we run basically even faster. As John’s saying, we actually amortize our MSRs even faster than the MyAC number, but we don’t believe the MyAC number based on our performance will change because it’s supposed to be an industry number, and we should continue to run materially below that.

Ryan Zacharia – Jacobs Asset Management

Okay, that makes sense. And then in terms of the mod estimate for Q4, what portion of that do you think will be attributable to HAMP?

Ron Faris

I think it’ll be in the 20% range.

Ryan Zacharia – Jacobs Asset Management

And will you guys be releasing the Q-SIPS for this securitization that you made warranties on?

Bill Erbey

We weren’t planning to.

Ryan Zacharia – Jacobs Asset Management

Okay. Thanks a lot, guys.

Bill Erbey

Thank you.

Operator

Our next question comes from Ron Schwartzberg. Your line is open.

Rob Schwartzberg – Compass Point

Hi, I just had two follow-up questions also. I think at the time of HomEq you had targeted a 25% ROE, and I’m just wondering is there any update to that guidance, positive or negative, since you’ve now been in there for a couple months? That’s my first question. And then my second question is on the put back, the $200 million security, had you actually had any requests put to you on this or not?

John Van Vlack

Ron, would you like to treat both of those?

Ron Faris

Sure, on the second question I think we’ve already stated – we’ve had no requests for put backs on that security nor really on anything that we service, and we don’t expect on that security to have any requests. We at this point have no reason to change our estimate on our returns on HomEq, but keep in mind a couple of things: one, that return included all of these charges that we’re taking on the front end. So since we’re taking a lot of the charges on the front end the actual, starting say next year the returns should look even better because we took a lot of the charges on the front end. And as Bill mentioned, we’re optimistic that even that front end charge may be slightly lower than what we originally projected, which is a little bit of a pickup for us. But other than that it’s part of the portfolio itself, and the performance of the portfolio and our expectations, those are unchanged. There’s nothing that we’ve seen that would change those views.

Rob Schwartzberg – Compass Point

Yeah, that was actually more my question but you’ve answered it, so thank you very much.

Operator

Our next question comes from Bose George. Your line is open, sir.

Bose George – KBW

Thank you. My question was also on the put backs to date. Thanks.

John Van Vlack

You’re welcome.

Operator

At this time I show no further responses, sir.

Bill Erbey

Thank you very much. We appreciate everybody joining the call. Have a great day.

Operator

At this time that will conclude today’s conference. You may disconnect; thank you for your attendance.

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