Ocwen Financial Corporation Q4 2007 Earnings Call Transcript

Feb.12.08 | About: Ocwen Financial (OCN)

Ocwen Financial Corporation (NYSE:OCN)

Q4 2007 Earnings Call

February 12, 2008 11:00 am ET

Executives

David Gunter - Senior VP, CFO and Treasurer

Bill Erbey - Chairman and CEO

Ron Faris - President

Bill Shepro - Senior Vice President of Ocwen Recovery Group

Operator

Welcome to the Ocwen's Fourth Quarter and Year End 2007 Earnings Call. All participants will be in a listen-only mode for the duration of today's conference. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now, I will turn the meeting over to Mr. David Gunter, Senior Vice President, CFO and Treasurer. Sir, you may begin.

David Gunter

Thank you. Good morning, everyone and thank you for joining us today. 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 Calendar of Events, then Click Here to Listen to Conference Call. Then under Conference Call, Fourth Quarter 2007 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 gray button pointing to the right.

As indicated on slide 2, our presentation may contain certain forward-looking statements that are made pursuant to the Safe Harbor provisions of the federal securities laws. These forward-looking statements may be identified by 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 risk disclosure statement in today's earnings release, as well as the company's filings with the Securities and Exchange Commission, including Ocwen's 2006 Form 10-K. If you would like to receive our news releases, SEC filings, and other materials via e-mail, please contact Linda Ludwig at linda.ludwig@ocwen.com.

As indicated on slide 3, joining me for today's presentation are Bill Erbey, Chairman and CEO of Ocwen; Ron Faris, President of Ocwen; and Bill Shepro, Senior Vice President in charge of Ocwen Recovery Group. In light of the recently announced and still pending 'Going Private' Proposal which Bill will address in his remarks, legal council has advised that we not include a question-and-answer period in this earnings call.

And now, we'll turn the call over to Bill Erbey. Bill?

Bill Erbey

Thank you, Dave, and thanks to all of you for attending Ocwen's fourth quarter conference call. I would like to cover three topics in my remarks today. First, an overview of our fourth quarter earnings; second, the realignment of our business segments to position us for growth in 2008 and beyond; and third, as Dave just mentioned, my proposal together with Ocwen management and funds managed by Oaktree Capital Management and Angelo, Gordon & Co to acquire Ocwen for $7 in cash per share.

During the fourth quarter of 2007 we recorded $23.6 million of unrealized losses to write down residuals at estimated market values. As a result of these unrealized losses, residuals with the caring value of $32.1 million, at September 30, 2007 are reflected on our December 31, 2007 balance sheet at $7.4 million. These write downs were largely based on projected loss assumption recently published by Standard and Poor's. SMPS projecting cumulative losses on RMBS securities, RMBS transaction for which Ocwen is the residual holder ranging from 13.9% to 21.3%. Our historical residential origination services segment, which benefited from the strong performance of our fee-based businesses, as well as the shutdown earlier this year of our former subprime loan origination operation.

Slide six shows fourth quarter of 2007 revenues of $123.4 million, an increase of $9.4 million over the fourth quarter of 2006, reflecting the inclusion of NCI in our 2007 results. Excluding NCI, revenue decreased by $6 million. This decrease was primarily due to lower float income as custodial balance averaged $474 million for the fourth quarter of 2007, compared to $972 million for fourth quarter of 2006. Rise in delinquencies kept servicing fees flat, despite a 7% increase in average UPB, because servicing fees are recognized when they are collected.

As shown on slide 7 fourth quarter of 2007, revenue excludes $8.3 million of uncollected servicing fees, related to delinquent borrower payments, compared to $3.1 million of delinquent service fees for the fourth quarter of 2006. We anticipate that we will ultimately collect these fees, because servicing fees have priority over any interest or principal payment to the borrowers.

Operating expense of $90.8 million, as depicted on slide 8, increased by $1 million, compared to the fourth quarter of 2006, largely due to the inclusion of NCI's operating expenses in the fourth quarter of 2007. Amortization of servicing rights decreased by $11.6 million, reflecting a decrease in prepayments fees to 21% for the fourth quarter of 2007, compared to 30.8% for the fourth quarter of 2006.

As shown on slide 9, other income and expense reflects an expense of $45.7 million in the fourth quarter of 2007, as compared to expense of $8.5 million in the fourth quarter of 2006. In addition to write-downs of residuals interest expense increased by $10.3 million, due primarily to increased funding requirements for servicing advances. While interest income decreased by $5.9 million, due to our efforts to reduce our investments in subprime mortgage assets.

In summary, operating income increased by $8.4 million to $32.6 million and interest expense increased by $10.3 million. Unrealized losses of $23.6 million to write residuals down to estimated exit prices attributed to a loss for the quarter.

We are realigning our business segments to position Ocwen for growth in 2008 and beyond. Ron Faris, our President will be responsible for Ocwen Asset Management or OAM. In addition to our core Residential Servicing business, OAM includes our existing asset management vehicles.

Ocwen Structured Investments, also referred to as OSI, and Ocwen Non-Performing Loans also referred to as ONL. OSI invest in mortgage servicing rights in the related lower tranches and residuals of residential mortgage-backed securities, the credit risk of which is hedged with single named, credit default swaps in the ABX Index. We manage OSI's portfolio and sub-service the mortgage servicing rights that are acquired by OSI.

ONL purchases and resolves non-performing loans. We service the loans owned by ONL. Both OSI and ONL benefit from our superior servicing and loss mitigation performance. These vehicles afford Ocwen a controlled source of supply of servicing and enable Ocwen to generate premium pricing for our superior loss mitigation performance.

Under Ron's leadership, we expect to grow our existing asset management vehicles and develop other vehicles that leverage our asset management capabilities and allow us and our partners to benefit from our superior servicing and loss mitigation capabilities.

Bill Shepro will head up Ocwen Solutions or OS. In addition to our unsecured collections business, OS will include the fee based businesses that are currently part of our residential origination services segment, all of our technology platforms and our interest in bankruptcy management solutions.

OS is a knowledge process outsourcer. Our competitive advantage, which is similar to the servicing business, is to migrate high value, knowledge based job functions, to low cost global platforms, utilizing artificial intelligence, scripting engines, decisioning models and workflow management to improve quality through the elimination of variability. We believe that this new alignment best positions us to leverage our superior asset management capabilities, our efficient global human resources and our world class technology platforms.

As I previously disclosed, I have, together with members of Ocwen Management and the funds managed by Oaktree Capital Management and Angelo, Gordon & Company, collectively the sponsors, propose to acquire by merger, for a purchase price of $7 per share in cash, all of the outstanding shares of Ocwen common stock.

I would participate by making a significant investment in the transaction and I expect that we will provide members of the company's senior Management team with the opportunity to participate in the transaction as well. I will continue as Chairman and CEO, following the transaction, and would expect that our senior leadership team would continue to lead the company into the future with me.

The company will not have more debt and we expect that it will likely have less debts than it currently has, as a result of this transaction. The transaction would be financed through a combination of equity from investment funds managed by the sponsors, together with equity investments by myself and members of our senior management team, and certain other exiting shareholders of the company, and approximately $150 million of debt or other financing in order to repurchase certain debt obligations of the company.

In the event of such debt or other financing becomes unavailable, the sponsors are willing to provide additional equity or debt financing for the porpose of repurchasing the outstanding debt obligations of the company.

Loss experience on the same RMBS pools for which we are the servicer has ranged from one half of 1% to seven-tenth of 1%. We used discount rates ranging from 21% to 31.6% to value these residuals.

During the fourth quarter, these residuals generated $2.5 million in cash flow. Although we believe that current and future cash flow from these securities would indicate a higher value, we are required by GAAP to value them at an exit price.

Outside of these write downs, our fourth quarter results were characterized by strong operating income and increased interest expense related to funding requirements for servicing advances. As result of the write down of residuals, free tax loss from continued operations, as shown on slide 4, was $13.1 million for the fourth quarter of 2007, compared to income of $15.7 million for the fourth quarter of 2006.

Slide 5 demonstrates the strength of our operations as operating income increased to $32.6 million from $24.2 million for the fourth quarter of 2006, much as of 35% increase was attributable to our Residential Origination Service segment, which benefited from the strong performance of our fee based businesses, as well as the shutdown earlier this year of our former subprime loan origination operation.

Slide six shows fourth quarter of 2007 revenues of $123.4 million, an increase of $9.4 million over the fourth quarter of 2006, reflecting the inclusion of NCI in our 2007 results. Excluding NCI, revenue decreased by $6 million. This decrease was primarily due to lower float income as custodial balance averaged $474 million for the fourth quarter of 2007, compared to $972 million for fourth quarter of 2006. Rise in delinquencies kept servicing fees flat, despite a 7% increase in average UPB, because servicing fees are recognized when they are collected.

As shown on slide 7 fourth quarter of 2007 revenue excludes $8.3 million of uncollected servicing fees, related to delinquent borrower payments, compared to $3.1 million of delinquent service fees for the fourth quarter of 2006. We anticipate that we will ultimately collect these fees, because servicing fees have priority over any interest or principal payment to the borrowers.

Operating expenses of $90.8 million, as depicted on slide 8, increased by $1 million, compared to the fourth quarter of 2006, largely due to the inclusion of NCI's operating expenses in the fourth quarter of 2007. Amortization of servicing rights decreased by $11.6 million, reflecting a decrease in prepayments fees to 21% for the fourth quarter of 2007, compared to 30.8% for the fourth quarter of 2006.

As shown on slide 9, other income and expense reflects a expense of $45.7 million in the fourth quarter of 2007, as compared to expense of $8.5 million in the fourth quarter of 2006. In addition to write-downs of residuals interest expense increased by $10.3 million, due primarily to increased funding requirements for servicing advances. While interest income decreased by $5.9 million, due to our efforts to reduce our investments in subprime mortgage assets.

In summary, operating income increased by $8.4 million to $32.6 million and interest expense increased by $10.3 million. Unrealized losses of $23.6 million to write residuals down to estimated exit prices attributed to a loss for the quarter.

We are realigning our business segments to position Ocwen for growth in 2008 and beyond. Ron Faris, our President will be responsible for Ocwen Asset Management or OAM. In addition to our core Residential Servicing business, OAM includes our existing asset management vehicles.

Ocwen Structured Investments, also referred to as OSI, and Ocwen Non-Performing Loans also referred to as ONL. OSI invest in mortgage servicing rights in the related lower tranches and residuals of residential mortgage-backed securities, the credit risk of which is hedged with single named, credit default swaps in the ABX Index. We manage OSI's portfolio and sub-service the mortgage servicing rights that are acquired by OSI.

ONL purchases and resolves non-performing loans. We service the loans owned by ONL. Both OSI and ONL benefit from our superior servicing and loss mitigation performance. These vehicles afford Ocwen a controlled source of supply of servicing. Enable Ocwen to generate premium pricing for our superior loss mitigation performance.

Under Ron's leadership, we expect to grow our existing asset management vehicles and develop other vehicles that leverage our asset management capabilities and allow us and our partners to benefit from our superior servicing and loss mitigation capabilities.

Bill Shepro will head up Ocwen Solutions or OS. In addition to our unsecured collections business, OS will include the fee based businesses that are currently part of our residential origination services segment, all of our technology platforms and our interest in bankruptcy management solutions.

OS is a knowledge process outsourcer. Our competitive advantage, which is similar to the servicing business, is to migrate high value, knowledge based job functions, to low cost global platforms, utilizing artificial intelligence, scripting engines, decisioning models and workflow management to improve quality through the elimination of variability. We believe that this new alignment best positions us to leverage our superior asset management capabilities, our efficient global human resources and our world class technology platforms.

As I previously disclosed, I have, together with members of Ocwen Management and the funds managed by Oaktree Capital Management and Angelo, Gordon & Company, collectively the sponsors, propose to acquire by merger, for a purchase price of $7 per share in cash, all of the outstanding shares of Ocwen common stock.

I would participate by making a significant investment in the transaction and I expect that we will provide members of the company's senior Management team with the opportunity to participate in the transaction as well. I will continue as Chairman and CEO, following the transaction and would expect that our senior leadership team would continue to lead the company into the future with me.

The company will not have more debt and we expect that it will likely have less debts than it currently has, as a result of this transaction. The transaction would be financed through a combination of equity from investment funds managed by the sponsors, together with equity investments by myself and members of our senior management team, and certain other exiting shareholders of the company, and approximately $150 million of debt or other financing in order to repurchase certain debt obligations of the company.

In events such debt or other finances becomes unavailable, the sponsors are willing to review additional equity or debt financing for the purpose of repurchasing the outstanding debt obligations of the company. The Board of Directors of the company has formed a special committee of independent directors to consider the proposal.

I would now like to turn the call over to President Ron Faris, Ron?

Ron Faris

Thank you, Bill. My remarks today will cover our Residential Servicing and Residential Origination Services segment. As shown on Slide 10, the Residential Servicing segment generated $10.3 million in pretax income from continuing operations for the fourth quarter of 2007.

This represents a decrease of $10.3 million or 50% from the fourth quarter 2006 income of $20.6 million. This decrease is mainly the result of an $11.4 million increase in interest expense, primarily related to increased advanced funding requirement combined with decreased revenues due to lower float income and increase in levels of delinquent service fees.

Pretax income for full year 2007 was at $66 million, a $14.5 million or 18% decrease as compared to income of $80.5 million for full year 2006. So, the pretax income decreased in 2007, our income from operation increased by $14.7 million or 13.2% as compared to the 2006 results.

Residential Servicing revenues were $355.1 million for 2007, a 3.3% increase over the 2006 revenues of $343.6 million. Servicing and sub-servicing fees increased by $4.3 million or 1.3%, while processed management fees increased by $5.6million, a 61.8% improvement over 2006 fees.

The increase in servicing and sub-servicing fees is primarily the result of higher servicing fees due a 16.1% increase in the average balance of loan serviced. We achieved year-over-year growth in servicing and sub-servicing fees, despite a $19 million decrease in float income due to lower custodial balances and $24.9 million increase in delinquent service fees.

On the expense side, operating expenses for 2007 were $229.3 million, a $3.2 million or 1.4% decrease as compared to the 2006 results. Considering the facts that the average number of loans serviced in 2007 increased by 11.4% over 2006, we are very pleased with the continued progress we've made in controlling our costs, which results in a lower cost per unit to service.

For the fourth quarter of 2007 Residential Servicing revenues were $84.4 million, a 9.5% decrease from the fourth quarter of 2006 revenue of $93.3 million. Servicing and sub-servicing fees decreased by $11 million or 12.4%, while process management fees increased by $1.1 million, a 46.2% improvement over the fourth quarter of 2006.

The decrease in servicing and sub-servicing fees is primarily the result of lower float income as declining prepayments have led to reduced float balances and income. Servicing fees were flat despite a 6.6% increase in the average balance of loan service due to increased levels of delinquent service fees.

Amortization and servicing rights totaled $17.9 million for the fourth quarter, which represents a decrease of 39.4% from the fourth quarter of 2006. This decrease is the result of slower actual and projected prepayments fees, offset by the 13.6% increase in the average balance of mortgage servicing rates carried in the fourth quarter of 2007 compared to the fourth quarter of 2006.

Slide 11 illustrates the loan servicing portion of our Residential Servicing segment. Loan servicing achieved $17 million in contribution margin for the fourth quarter of 2007. This represents a 23.4% decrease from the fourth quarter of 2006 results, up $22.2 million. This decrease is due to the net result of a $5.3 million or 16.2% increase in income from operations, offset by increased interest expense of $11.2 million primarily relating to advanced financing as a result of the increase in advanced balances.

When comparing the yearly contribution margins, 2007 contribution margin at $78.5 million shows a decrease by $7.2 million or 8.4% from the 2006 margin of $85.7 million. Though contribution margin has decreased, our operation efficiency is positive, as demonstrated by income from operations improving by 18.4% to $136.3 million as compared to operating income of $115.1 million for 2006.

Slide 12 shows the continued slowing of prepayments fees. Prepayments fee at 21% for the fourth quarter of 2007 were well below the 30.8% for the fourth quarter of 2006, having steadily decline throughout 2007.

Turning to Slide 13, delinquencies have increased over the past year. This is a result of an increase in the average age of our portfolio by eight months, the poor performance of 2006 originations, and increase in the number and level of ARM resets, a slowdown in home price appreciation, amongst other factors. The balance of performing loans serviced represents 80.4% of total unpaid principle balance at December 31st, 2007. This compares to 91.9% at December 31st, 2006. Performing loans include loans for which borrowers are making scheduled payments under forbearance or bankruptcy plans.

Slower prepayment speeds have led to lower average float balances, and in turn lower float income. Slide 14 shows our average float balances of $474.2 million for the fourth quarter of 2007, which represents a 51.2% decrease from $971.5 million for the fourth quarter of 2006. Since float income is a component of our servicing and sub-servicing fees revenue line item, lower float balances in float income result in revenue growth being less than the growth in our servicing portfolio.

Increasing delinquencies and slower prepayment speeds have combined to significantly increase our servicing advance balances, as shown on Slide 15. For the fourth quarter of 2007, our average advance balance was $1.1 billion, compared to $711 million for the fourth quarter of 2006. This increase in average advance balances has led to higher interest expense related to advance financing. This is the primary driver of the $11.2 million increase in loan servicing interest expense, compared to the fourth quarter of 2006.

As demonstrated on slide 16, loan servicing unpaid principal balance increased to an average of $54.4 billion for the fourth quarter of 2007, a 6.7% increase from the fourth quarter of 2006 average balance of $51 billion. For the last two quarters, however, the trend for unpaid principle balance has remained flat as we did not add the portfolio due to low origination volume in the second half of 2007. As of December 31st, 2007, we were the servicer for 427,000 loans, as compared to 455,000 loans at September 30th, 2007.

Our fourth quarter 2007 mortgage servicing rates balance of a $191.9 million represents a 6.4% decrease from the third quarter of 2007 balance of $205 million. This changes the net result of purchases of $4.8 million of mortgage servicing rates and amortization of $17.9 million during the fourth quarter of 2007. As previously discussed, amortization has slowed due to [reflect] decreasing previous-payments fees, as we expect earn servicing income over a longer period of time.

Slide 17 shows our Residential Origination Services segment's fourth quarter 2007, pre-tax loss of $24 million, compared to a fourth quarter 2006 pre-tax loss of $3.4 million. The increased loss is primarily attributable to $23.6 million in unrealized losses on residuals, which Bill covered, coupled with lower interest income due to reduced balances of loans held for sale. These items have been somewhat offset by increased contribution from our fee based businesses and by the shut down earlier this year of our subprime loan origination operation, which generated losses of $6.9 million in the fourth quarter of 2006.

By year-over-year basis, pre-tax income decreased by $1.1 million, as residual write downs were largely offset by the gain on the sale of UK residuals in May 2007. And decreased interest income was offset by lower interest expense and savings associated with the shutdown of the origination business.

Slide 18 however, demonstrates the solid revenue performance of the fee based businesses, included in Residential Origination Services, despite challenging conditions during the quarter. Revenue totaled $18.8 million for the fourth quarter of 2007 versus $17.2 million for the fourth quarter of 2006. Compared to full year 2006 revenue of $71.9 million, 2007 revenue was flat at $71.8 million. This shows that our balance of servicing and resolution related services, along with origination services, has allowed us to maintain strong revenues despite the significant decrease in origination activity compared to last year.

Slide 19 shows that we have been able to maintain strong contribution margins in these businesses as well. Contribution totaled $5.7 million for the fourth quarter, compared to fourth quarter of 2006 contributions of $4.4 million, which is an improvement of 30.6%. For the full year contribution increased by 19% to $18. 7 million, as we were able to generate the same level of revenues, while reducing our costs by exiting certain lines of business that were not profitable.

In summary, our residential servicing segment and the fee based businesses, within our Residential Origination Services segment continue to produce strong operating results. Thank you. I would now like to turn the call over to Bill Shepro. Bill.

Bill Shepro

Thank you, Ron. My remarks today will cover two topics. First NCI's financial performance for the fourth quarter and second Ocwen's progress on its plan to improve NCI's financial performance. As you all recall NCI is primarily a continuous [recollection] and customer service company that Ocwen acquired in June 2007. NCI has been combined with Ocwen Recovery Group.

As shown on Slide 20, NCI generated $16.3 million in revenue for the fourth quarter of 2007. This represents a decrease of $581,000 compared to the third quarter. It is typical for collection agencies to experience this decline in fourth quarter revenue compared to our third quarter due to the holiday season.

As shown on Slide 21, NCI generated a fourth quarter 2007 pretax loss of $2.8 million. Despite the 3.5% decrease in revenue in the fourth quarter over the third quarter, this pretax loss represents a $157,000 or 5.2% improvement over NCI's third quarter 2007 pretax loss of $3 million. The fourth quarter 2007 result includes $735,000 of the amortization of intangible assets, $596,000 of depreciation, and $410,000 of internal transfer pricing and interest expense.

While NCI's fourth quarter 2007 financial performance remains below our expectations, NCI demonstrated a modest improvement over the third quarter of 2007. This is attributable to the progress we have made in executing our action plan to improve performance and in realizing some of the synergies from the merger. At the same time, we have continued to perform well for our customers. We rank among the top vendors for our largest customers and strive to rank among the top third for all clients.

As you will recall from our third quarter earnings call; we have identified an action plan to improve NCI's financial performance by one; appropriately staffing collectors with a current and expected volume of business; two; improving financial performance on NCI's largest first party outsourcing plan; and three, continuing to improve the performance of our collectors at our new facility in India.

In addition to further improve NCI's earnings the management team developed an integration plan to generate cost savings from the combined Ocwen and NCI operations. I will briefly address our progress in each of these initiatives.

As shown on slide 22, the number of accounts placed with NCI from our largest customer in the fourth quarter of 2007 was 13% greater than the number placed in the fourth quarter of 2006. This also represents a 17.8% increase in placements over the third quarter of 2007. The increase in placement volume is reflective of rising and charge-offs in the current credit environment.

To address the increase in placements as you also previously identified staffing shortage, NCI had a net increase of 100 collectors from the end of the third quarter to the end of the fourth quarter. As these new collectors reached full goal status over a 6 to 7 months period, we expect to substantially improve NCIs financial performance.

In addition, we are gaining market share from our largest clients, and we continue to recruit collectors to address the increase in placement volume, as well as to support new clients. To improve the profitability with NCIs largest first party outsourcing client, NCI successfully negotiated a 15% fee increase and a client has agreed to place all vendors on the same pricing methodology, increasing the likelihood that the clients call volume will be distributed evenly amongst all vendors. The fee increase in our revised pricing methodology became effective on January 1, 2008.

Collections in our new Indian facility continued to increase. In the fourth quarter 2007 net startup cost related to the opening and staffing of this new facility were $419,000. This represents an $85,000 improvement as compared to the third quarter of 2007. Although it is still early in the development of [art] collectors at this facility, we remain very pleased with our progress and we expect continued improvement throughout 2008.

Lastly, NCI's management continued to make progress in eliminating redundant expenses and migrating US based collector and administrative jobs primarily through attrition to India. In summary, our fourth quarter 2007 earnings were below our expectations; however we remain optimistic that performance improvement in integration plans that we've put in place will substantially improve NCI's financial results.

These initiatives will allow us to continue to improve performance for our customers, which in turn will lead to more account placements and a continued growth of the company.

I would now like to turn the call back over to our Chief Financial Officer, Dave Gunter, Dave?

Dave Gunter

Thank you, Bill Shepro. I would like to focus on three areas; changes in our balance sheet, operating results of our corporate segment, and our effective tax rate for 2007 compared to 2006. Our balance sheet reflects higher levels of servicing advances and associated borrowing, reductions in subprime mortgage assets due to evaluation adjustments, and our acquisition of NCI along with increased investments in unconsolidated asset management vehicles.

Total servicing advances were $1.42 billion at December 31, 2007. This represents an increase of $282 million compared to September 30, 2007 and $522 million compared to December 31, 2006. These increases, which have been driven by rising delinquencies and declining prepayments fees, has led to an associated increase in advanced financing.

Borrowings under match funded advanced facilities and lines of credit totaled $1.34 billion at December 31st, 2007, an increase of $227 million from the third quarter and $507 million from December 31st, 2006. We have been able to increase our borrowing capacity in anticipation of these increased levels of servicing advances. Maximum borrowing under advanced financing facilities and our senior secured credit agreement totaled $1.585 billion at December 31st, 2007, compared to $1.185 billion at September 30, 2007 and $865 million at December 31st, 2006.

Valuation adjustments, coupled with the concerted effort to reduce our exposure to subprime mortgage assets are reflected in our balances of loans held for resale and subordinates and residuals, which totaled $82.6 million at December 31, 2007. This represents a decrease of $33.4 million, compared to September 30, 2007 and $81.7 million, compared to December 31st, 2006. With regard to residuals, the sale of our UK residuals, along with $29 million of unrealized losses during 2007 have left us with a balance of $7.4 million at December 31st, 2007.

We have also dramatically reduced our balance of loans held of resale, which totaled $75.2 million at December 31, 2007, as a result of significant liquidations and realized and unrealized losses totaling $16.7 million for the year. Goodwill and intangibles have increased by $51.2 million, because of the NCI acquisition that closed in June of 2007. Other assets have increased by $17.4 million during this year, due primarily to a $56.6 million increase in interest bearing debt service accounts, which represent payments made pursuant to our advanced securitization facilities, which have not yet been applied to the associated debt.

Investments in unconsolidated entity totaled $77 million at December 31st, 2007, compared to $46.2 million at December 31st, 2006. The December 31, 2006 balance represents our 46% ownership interest in Bankruptcy Management Solutions or BMS. In the first quarter of 2007, we received a return of our $45.9 million initial investment in BMS.

During 2007, we have invested $37.5 million is OSI and $36 million in ONL and related entities. We have a 25% ownership interest in OSI, as well as in the ONL entities. As shown on slide 23, our corporate items and other segment generated pre-tax income from continuing operations of $3.5 million in the fourth quarter of 2007, as compared to a loss of $1.5 million for the fourth quarter of 2006.

This segment includes certain general corporate revenues and expenses, including any unallocated interest income or expense, as well as the results of operations that are not individually significant. The fourth quarter of 2007 includes $3.3 million of equity in the earnings of BMS, which we account for, under the equity method. BMS had significant hedge gains during the quarter, driven by declining interest rates.

Our corporate items and other segment also include the results of Bankhaus Oswald Kruber, BOK, the company's German banking subsidiary. During the fourth quarter of 2007, we decided to sell BOK and we are actively pursuing such a sale. As a result, BOK results are reflected as loss from discontinued operations and are presented net of tax.

The fourth quarter 2007 loss includes a charge of $2 million to adjust BOK to its estimated fair value. I also want to touch briefly on our affective tax rate. As you recall, in the second quarter of 2006 we reported a tax benefit at $141.7 million, primarily due to the reversal of $145.2 million of the valuation allowance on our deferred tax assets that we had established in prior years.

Our effective annual tax rate for full year 2006 was 25.36%, excluding the impact of reversal of the valuation allowance, but including a reduction of 10.83% for the anticipated use of tax credits during that year. No such benefit is included in our effective annual tax rate for the full year 2007, since we released the valuation allowance against our deferred tax assets during the second quarter of 2006.

Our effective annual tax rate for the full year 2007 was 29.38%. This rate does not include a benefit of 0.93% associated with changes to our valuation allowance. However, it includes the benefits of approximately 3.32% associated with recognition of certain foreign deferred tax assets and 5.23% associated with certain provision to return reconciling items, recognized in the fourth quarter. These reconciling items are result of certain estimates we used in the 2006 year end tax provision, for which additional information was obtained as part of the tax return preparation process.

As I stated at the outset, there will be no questions and answers in this call due to the pending go private transaction proposed by Mr Erbey and senior Management, Oaktree Capital Management and Angelo, Gordon & Contain. Should Ocwen agree to enter into such a transaction, you are urged to read Ocwen's proxy statement and other transaction related documents filed with the Securities and Exchange Commission, when they become available.

You may obtain a free copy of the proxy statement when and if available and other documents filed by Ocwen at the SEC's website at www.sec.gov. The Ocwen fourth quarter 2007 earnings call is now concluded. We thank you for attending.

Question-and-Answer Session

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