Ocwen Financial Corp. (NYSE:OCN)
Q2 2008 Earnings Call Transcript
August 5, 2008 11:00 am ET
David Gunter – EVP and CFO
Bill Erbey – Chairman and CEO
Ron Faris – President, Ocwen Asset Management
Bill Shepro – President, Ocwen Solutions
Rick Shane – Jefferies & Co.
John Hecht – JMP Securities
Jason Deleeuw – Piper Jaffray
Welcome to the Ocwen second quarter 2008 earnings conference call. All participants will be in a listen-only mode. (Operator instructions) Today's conference is being recorded.
Now I will turn the meeting over to Mr. David Gunter, Executive Vice President and CFO. Sir, you may begin.
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 onto our Web site at www.ocwen.com, select shareholder relations, then calendar of events, then click here to listen to conference call, then under conference calls second quarter 2008 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 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 statements in today's earnings release as well as the company's filings with the Securities and Exchange Commission including Ocwen's 2007 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 firstname.lastname@example.org.
As indicated on slide #3, joining me for today's presentation are Bill Erbey, Chairman and CEO of Ocwen; Ron Faris, President of Ocwen Asset Management; and Bill Shepro, President of Ocwen Solutions.
And now I'll turn the call over to Bill Erbey. Bill?
Ocwen continues to produce strong operating results as indicated by our record levels of revenue and income from operations. Revenues of $131.2 million are $14.3 million or 12.2% higher than the second quarter of 2007.
Our operating expenses of $83.8 million are at their lowest level since the third quarter of 2005. As a result, our income from operations of $47.4 million for the second quarter improved over the same quarter last year by $19.7 million or 71.1% which more than offset the increase of $5 million in interest expense. In fact, interest expenses decreased from the first quarter by $4.8 million.
Our liquidity position has continued to strengthen since the second quarter of last year. Advances declined in the second quarter by $91.3 million which reduces our financing requirements. While advances and the need for funding continued to decline, we have continued to close financing facilities.
We closed a new $300 million facility in April to offset the expiration of a $200 million temporary facility that we established in September of 2007 and a $75 million three-year medium term note that was issued in May 2005.
The second quarter closed with $334.2 million in excess advanced financing with additional funding facilities in the pipeline. We also renewed our investment line related to auction rate securities through June 30, 2009.
With our liquidity position strengthened, we intend to pursue the acquisition of servicing portfolios in conjunction with private equity firms. This will enable Ocwen to continue to pursue an asset like strategy.
In comparison to figures provided by a third party industry valuation expert, our cost to service nonperforming loans is less than half the industry average. Given our cost structure and ability to reduce delinquencies, we believe that Ocwen can be an effective acquirer.
Our net income has been adversely affected by declining valuations for financial assets. We will continue to actively pursue the liquidation of our positions in residuals, $4.9 million, loans held for resale, $59.6 million, REO, $7.3 million; and auction rate securities, $254.7 million, which have been reduced by a combined total of $45.3 million for the quarter or 12.2%.
Valuation losses on financial assets when combined with losses on investments and unconsolidated entities and BOK totaled $33.7 million for the second quarter of 2008.
I'm very proud of the accomplishments of our management team during one of the most challenging times in the history of the mortgage industry. They took swift but thoughtful action during 2007 and the first half of 2008 including an increase in our loss mitigation staff by 23% in 2007, a further increase of 50% in 2008, both of which speak to the scalability of our operating platform.
Also the continued automation to ensure expense control, fine-tuning of advanced management program and an expansion of advanced funding which resulted in increased dollars of funding and a greater diversity of lenders.
We've not only survived but laid the groundwork for some very exciting opportunities to create shareholder value. Ron Faris, President of Ocwen Asset Management and Bill Shepro, President of Ocwen Solutions, will discuss revenue growth and operating expense controls within their respective lines of business. In addition, Ron will discuss delinquencies and advances.
But first I would like to ask Dave to take you through our consolidated results and liquidity position. Dave?
Thank you, Bill. Now I would like to invite you to step through several slides in order to see our consolidated results of operations.
Slide #4 presents record setting revenue performance of $131.2 million for the second quarter which is a year-over-year improvement of 12.2% and an improvement of 2.3% over the first quarter of 2008.
Our revenue growth continues to be driven by unsecured collections, process management fees and valuation services. These favorable trends offset decreases and float interest income and servicing fees that result from contracting unpaid principal balances.
Slide #5 shows that our operating expenses decreased by $5.4 million or 6.1% over the second quarter of 2007 and $7.7 million or 8.4% over the first quarter of 2008. The improvement is due to decreased amortization of servicing rights as a consequence of lower unpaid principal balances and reduced projected prepayment speeds and lower servicing and origination expenses of $3.6 million resulting from lower pay-off costs, and servicer expenses due to systems automation and process improvement programs.
Slide #6 demonstrates the dynamic growth in our operating income as total income from operations of $47.4 million exceeds second quarter 2007 by 71% and first quarter 2008 by 29%. This continuing improvement is driven by top line growth and our profit improvement initiatives.
Slide #7 shows that other income expense met was unfavorable compared to the second quarter of 2007 by $54.5 million and the first quarter of 2008 by $12.7 million due to unrealized losses on auction rate securities, lower gains on trading securities, higher interest expense on advanced financings and reductions in interest income received on whole loans and residual securities.
Slide #8 shows that our pretax profit for the second quarter was $7.4 million inclusive of $14.7 million of losses from equity and earnings of unconsolidated entities and $6.8 million in unrealized losses on our holdings of auction rate securities.
Due to the positive results of our operations and our continued commitment to maximize the efficiency of our financing arrangements, our cash on balance sheet has strengthened to $148.8 million as of June 30, 2008.
Total assets are $91.5 million or 3.8% higher than at December 31st 2007 due to the consolidation of $254.7 million in auction rate securities offset by decreases in all other asset categories with the exception of cash.
Our balance sheet at June 30, 2008 continues to reflect our borrowings under the JP Morgan Chase revolving demand note facility or investment line. As you may recall, the proceeds of this line were invested in AAA-rated auction rate securities collateralized by student loans, issued under the Federal Family Education Loan program. 97% of the unpaid principal balances of these loans are guaranteed by the U.S. government.
Because we continue to be unable to liquidate our auction rate securities through the auction process, our balance sheet reflects an investment in auction rate securities of $254.7 million and the related investment line liability of $229.8 million.
In estimating the fair value of the auction rate securities, we utilized two methods. First, we examined second quarter sales and redemption activity of auction rate securities with a par value of 29.0 million.
And second, we utilized a discounted cash flow analysis. This evaluation resulted in the recognition of an unrealized loss of $6.8 million for the second quarter and $15.7 million year-to-date resulting in a carrying value of 94.5% of par.
The investment line obligation at June 30, 2008 of $229.8 million takes into account payments totaling $68.2 million during the second quarter.
On July 10, 2008, we executed an amendment to the investment line that created a new term note secured by our investment in auction rate securities. The newly created term note matures on June 30, 2009.
The maximum borrowing is limited to 85% of the face amount of the securities through September 29, 2008, 80% from September 30, 2008 to December 30, 2008, 75% from December 31, 2008 to March 30, 2009, and 70% thereafter.
Under the new term note, we receive the interest on the auction rate securities while the proceeds from the redemption or sale of auction rate securities are applied to the outstanding balance. Once borrowing is below 70% of face, 50% of sales or redemptions go to pay down the investment line and 50% comes to us.
As shown on slide #9, total delinquencies during the past ten months have fallen by 4,326 loans which is equivalent to 3.6% of delinquencies as of August 31, 2007. We have been able to reduce the number of delinquencies through increased focus on our advanced management and REO programs. This performance continues to demonstrate the market leading advantage that Ocwen has in loss mitigation.
Our balance sheet line items advances and match funded advances of $262 million and $1 billion 96.4 million combined to $1 billion 358.2 million. While this combined balance represents an increase of $440.2 million or 48% over the second quarter of 2007, it reflects a decrease in advances of $91.3 million or 6.3% since the first quarter of 2008.
As shown on slide #10, our corporate items and other segment generated a pretax loss from continuing operations of $8.1 million in the second quarter of 2008 as compared to a gain of $768,000 for the second quarter of 2007. The majority of the pretax loss was the result of unrealized losses on auction rate securities of $6.8 million.
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.
We will continue to actively pursue the liquidation of our positions in residuals, $4.9 million, loans held for resale, $59.6 million, real estate owned, $7.3 million, and auction rate securities, $254.7 million which have been reduced by a combined total of $45.3 million for the quarter.
Our corporate items and other segment also include the results of Bankhaus Oswald Kruber, or 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 a loss from discontinued operations and are presented net of tax. In the second quarter of 2008, BOK reported a loss of $5.2 million.
During the second quarter of 2008, management received confidential proposals from third parties interested in acquiring BOK. Based on the values and the terms of the proposals, we have recorded a charge of $5.0 million that included the impairment of the remaining $3.4 million carrying value of goodwill and intangibles, a $1.4 million write-down of receivables, and a $0.2 million write-down of premises and equipment.
We continue to actively market BOK and have potential investors currently performing due diligence. We expect to complete the sale of BOK in 2008.
During the second quarter, we also sold our interest in GSS Canada's servicing rights for $5.7 million which represented a gain of $675,000.
Let me spend just a moment on our effective tax rate which was 34.81% for the first six months of 2007 including a reduction of 0.86 associated with the recognition of certain foreign deferred tax assets.
Our effective tax rate of 32.32% for the first six months of 2008 includes a benefit of approximately 2.6% associated with the recognition of certain foreign deferred tax assets.
The effective tax rate for the first six months of 2008 would have been 29.74% but was increased by approximately 2.58% due to the recognition of additional tax expense associated with the expiration of certain vested stock options.
The 32.32% effective rate includes a benefit for the amortization of tax, amortizable goodwill associated with our acquisition of Nationwide Credit, Inc.
Lastly, I want to make very clear the strength of our liquidity position. Liquidity is a challenge to all players in the mortgage industry. We have met that challenge and have continued to expand funding for our servicing business even as our assets are decreasing.
Excluding borrowings under the investment line, our borrowings have decreased by $56.7 million since December 31, 2007. This decline reflects a reduction in borrowings by the Loans and Residuals segment, the mortgage services segment, and corporate items and other of $27.7 million, $4.1 million and $42.8 million respectively.
The decline in borrowings of the Loans and Residuals segment is the result of both a decrease in the funding available from lenders and a reduction in loan balances.
Mortgage services borrowings declined as a result of our sale of the commercial MSRs which were held by GSS Canada and corporate items and other borrowings declined as a result of our sale of the remaining CMOs.
These reductions in borrowings were partly offset by an $18.1 million increase in borrowings related to our servicing segment of which $16.5 million resulted from increased borrowings on our advanced facilities.
Excluding the investment line, our total maximum borrowing capacity was $1 billion 630 million as of June 30, 2008, a decrease of $16 million as compared to December 31, 2007.
This decrease is primarily due to a $28.1 million decline in borrowing capacity of the Loans and Residuals segment and an $11 million decline in the Mortgage Services segment offset by a $23.1 million increase in borrowing capacity of the Servicing segment.
The increase in servicing borrowing capacity is primarily the result of our closing on a new $300 million match funded facility in April 2008 and an increase in the borrowing capacity under another match funded facility from $140 million to $200 million upon its renewal in February 2008.
These increases were offset by the pay-off of a $100 million term note under one matched facility and a $200 million variable funding note under another match funded facility that entered their amortization periods during the first quarter of 2008.
In addition, we repaid $36.9 million of a $75 million term note that had entered its amortization period in May 2008. When these notes enter their amortization periods, no additional borrowing is available even though the balance outstanding is less than the maximum borrowing capacity under the notes.
At June 30, 2008 excluding the investment line, $337.3 million of our total maximum borrowing capacity remained unused including $334.2 million attributed to the servicing business.
Of the unused borrowing capacity, none was readily available because with the recent decreases in advances and MSRs we had no additional assets to pledge as collateral to secure additional borrowings under our facilities.
Financing costs have come down from the historic highs in the latter part of 2007 that were driven largely by the increase in advanced borrowings. Declining advances and lower interest rates in the first half of 2008 have offset higher interest rate spreads. So that you can better understand the health of our business, I would now like to turn the call over to Ron Faris, President of Ocwen Asset Management. Ron?
Thank you, Dave. Hello, everyone. My remarks today will cover the Ocwen Asset Management business including servicing, loans and residuals and asset management vehicles.
As shown on slide #11, the total Ocwen Asset Management business generated $25.1 million in pretax income for the second quarter of 2008. This is a 35.6% decrease over the second quarter 2007 income of $39 million, but it is 76.8% increase over the 2007 quarterly average of $14.2 million.
2008 second quarter revenues for Ocwen Asset Management were $93.1 million, a 6.2% increase over the 2007 second quarter revenues of $87.7 million and an 8% increase over the 2007 quarterly average revenue of $86.2 million.
For second quarter 2008, servicing and subservicing fees decreased by $1.5 million or 1.7% but process management fees increased by $6.2 million, a 240% improvement over the 2007 second quarter fees. The decrease in servicing and subservicing fees is primarily the result of lower float balances.
On the expense side, operating expenses for 2008 second quarter were $46.6 million, a 25.8% decrease as compared to the 2007 second quarter expense of $62.8 million.
Considering the average number of loans serviced in the second quarter of 2008 decreased by 18.1% over the second quarter of 2007, we are very pleased with the continued progress we've made in controlling unit costs to service.
In an environment where everybody expects expenses to go up, we have met the challenge of expense control. Our operating expenses in our Loans and Residuals segment are 15.7% lower in the second quarter of 2008 compared to the same quarter last year.
In our servicing segment, our operating expenses have decreased from the second quarter of 2007 by $16.8 million or 28.3%. Even though we expanded our loss mitigation step by 381 positions since the second quarter of 2007 to meet the challenge of delinquencies, our compensation and benefits increased only by $1.6 million for the second quarter of 2008 compared to the same quarter one year ago.
Our amortization of servicing rights decreased by $12.8 million or 46.9%. Our occupancy and equipment costs have decreased by 9.2%, servicing and origination costs by $5 million or 63.4%, and other operating expenses by $1.7 million or 26.7%.
In our servicing business, we have driven 76.1% year-over-year growth and 11.6% sequential growth in total income from operations, primarily the result of process improvements that continue to enhance our industry leading cost structure and loss mitigation capabilities.
In a comparison to the second quarter of 2008 versus the same quarter one year ago, our revenues increased by 5.5% mainly due to an increase in certain fees received in late charges. Our operating expenses have decreased by 28.3% driving our 76.1% year-over-year growth in total income from operations.
While our total other income expense net has grown by 21.6% due primarily to interest expense on advances, our income from continuing operations before taxes has grown by 134.5% year-over-year. Our sequential performance from the first quarter of 2008 to the second quarter of 2008 is proportionately even stronger.
Our revenues have grown 6.8% to $92.4 million while our operating expenses have increased by only 1.7%. As a result, our total income from operations has improved sequentially by 11.6% and our income from continuing operations before taxes has improved by 48.7%.
We will now step through the slides in order to provide you with the details. Slide #12 illustrates the servicing portion of Ocwen Asset Management business. Servicing achieved pretax income of $32.1 million for the second quarter of 2008. This represents 134.5% increase from the second quarter of 2007 income of $13.7 million.
This increase is due to the net result of a $21.6 million or 76.1% increase in income from operations partially offset by increased interest expense of $6.9 million primarily relating to advanced financings as a result of the increase in advanced balances.
Pretax income for the second quarter of 2008 also shows an increase of 96.9% as compared to pretax income of $16.3 million for the 2007 quarterly average.
Slide #13 shows that in 2008 we saw a modest increase in prepayment fees after continued slowing throughout 2007. The prepayment rate of 26% for the second quarter of 2008 was above the rate of 23% for the first quarter of 2008 and second quarter 2007.
This is the result of a temporary increase in involuntary prepayment occasioned by the spike in delinquencies in the summer of 2007 and represents the approximately 25% of delinquent loans that we were unable to cure. This is a positive sign which has had and will continue to have a favorable effect on our advanced balances.
Turning to slide #14, delinquencies are down due to loss mitigation efforts. Nonperforming loans decreased by 4,678 loans in the second quarter of 2008 and 5,707 loans in the first quarter 2008 as compared to an increase of 9,878 loans in the fourth quarter of 2007.
This is a result of our effective loss mitigation processes which involves prudent loan modifications combined with the efficient foreclosure and REO resolution practices. The net effect will be lower advance balances.
As shown on slide #15, during the second quarter of 2008, our ending advance balances decreased by $91.5 million as compared to growth of $31.3 million for the first quarter of 2008 and $282.4 million for the fourth quarter of 2007.
As demonstrated on slide 16, loan servicing's unpaid principal balance decreased to an average of $47 billion for the second quarter of 2008, a 14.4% decrease from the second quarter 2007 average balance of $54.9 billion and a 7.7% decrease from the first quarter of 2008 average balance of $50.9 billion. The unpaid principal balance has dropped by $6.3 billion from the average of the previous three quarters.
As of June 30, 2008, we were the servicer for 360,000 loans as compared to 395,000 loans at March 31, 2008. Our second quarter 2008 mortgage servicing rate balance of $163.7 million represents a 9.9% decrease from the first quarter 2008 balance of $181.8 million as we did not add to the portfolio due to low origination volume in the second half of 2007.
We had been purposefully conservative in acquiring new mortgage servicing rights to protect the liquidity of our balance sheet. Presently, we are actively pursuing additional servicing rights from existing servicing platforms.
In order to execute on our asset light strategy, we intend to acquire most future acquisitions through asset management vehicles funded by hedge funds. Lower unpaid principal balances have led to reduced average float balances and in turn lower float income.
Slide #17 shows our average float balances of $431.4 million for the second quarter of 2008 which represents a 35.6% decrease from $669.4 million for the second quarter of 2007.
Slide #18 demonstrates pretax income of the loans and residuals portion of our asset management business. The second quarter 2008 pretax loss of $5.4 million shows a decrease over second quarter 2007 income of $25.4 million. Our 2007 second quarter income was primarily due to a gain of $25.6 million on the sale of the UK residuals.
The performance of our existing asset management vehicle is seen on slide #19. Second quarter 2008 shows a pretax loss of $1.5 million as compared to a loss of $0.1 million for the second quarter of 2007.
The second quarter 2008 results were mainly composed of a loss on Ocwen structured investments of $1.5 million and a profit of $0.5 million on Ocwen nonperforming loans. These results are largely the effect of valuation related unrealized losses on investments, loans and REO.
Thank you, everyone. I'd now like to turn the call over to Bill Shepro.
Thank you, Ron. My remarks today will cover the second quarter results for the Ocwen Solutions business including mortgage services, financial services and technology products.
In comparison of the second quarter of 2008 with the second quarter of 2007, Ocwen Solutions revenue has increased by 36% primarily as a result of the acquisition of NCI in June 2007. As you can see on slide #20, Ocwen Solutions generated $43.8 million of revenue for the second quarter of 2008. This represents an increase of $11.6 million compared to the second quarter of 2007.
Turning to slide #21, Ocwen Solutions second quarter 2008 pretax loss of $9.6 million represents a $12.1 million decrease compared to our second quarter 2007 pretax income of $2.5 million. The decrease of $12.1 million includes a $13.1 million decrease in the equity earnings of BMS included in our technology products segment which was partially offset by a $2 million increase in our mortgage services segment.
The decrease in BMS is primarily the result of a net unrealized loss on derivative instruments and an unrealized loss in auction rate securities. The derivative instruments are held to protect BMS's revenue earned through its deposit referral relationship from a decline in interest rates. During the second quarter of 2008, forward interest rates increased resulting in a reduction in the value of the derivatives.
BMS reported an unrealized gain on derivative instruments in the first quarter of 2008 caused by a decline in the forward interest rates during that period. In effect, the unrealized loss from derivatives for the second quarter represents a reversal of the gain recognized in the first quarter.
Excluding our share of the equity and the earnings of BMS, Ocwen Solutions pretax income grew by 40% from $2.8 million for the second quarter of 2007 to $3.9 million for the second quarter of 2008.
I will now give a brief overview of the financial performance of each of the Ocwen Solutions segments. As you can see on slide 22, mortgages services revenue in the second quarter of 2008 was $14.5 million, a decrease of $2.7 million compared to the second quarter of 2007.
This decrease is primarily the result of lower revenue in our international business resulting from our sale of GSS Canada's servicing rights for $5.7 million of which $675,000 is included as a gain in other income, the scale down of the mortgage due diligence business, and fewer valuation orders due to the substantial reduction in origination activity.
Slide #23 shows that despite the decline in revenue, mortgage services increased its pretax income from $2 million in the second quarter of 2007 to $4 million in the second quarter of 2008, an increase of $2 million compared to the second quarter of 2007.
This increase reflects the $675,000 gain from the sale of GSS Canada's servicing rights and our continuing efforts to reduce operating expenses through process reengineering and staff reductions. As a result, we decreased our operating expenses by $3.9 million compared to the second quarter of 2007.
While mortgage services front end loan origination revenue is down due to the continued deterioration of the secondary market, mortgage services has successfully offset a substantial portion of this revenue decline by focusing on services related to loans in default.
These services along with new services in development leverage Ocwen Solutions existing capabilities and technology. We expect some of these new services to generate revenue in the third quarter of 2008.
As shown on slide #24, financial services revenue for the second quarter of 2008 was $19 million, a $469,000 decrease compared to the first quarter of 2008. In addition, as shown on slide #25, pretax income decreased from $23,000 in the first quarter of 2008 to a second quarter 2008 pretax loss of $2.6 million.
Included in financial services pretax loss is $1.5 million of amortization and depreciation including $629,000 of amortization of intangible assets and depreciation expense of $851,000, almost half of which is an accelerated depreciation charge of $403,000 for a dialer which is being replaced. Also included in financial services pretax loss is $446,000 of internally allocated interest expense.
The results in the second quarter of 2008 reflect the overall revenue decrease the industry typically experiences in the second quarter as well as investments that we are making in new clients.
Comparing the first six months of 2008 with the last six months of 2007, in spite of eliminating approximately $1.5 million of support and overhead costs, overall operating expenses increased by $2.5 million as we invested $4 million and increased numbers of collectors and infrastructure in our first and third party businesses in response to the new customer projects and the increasing placements from our third party customers throughout 2008. As these collectors become trained and ramp up to full productivity, we should begin to see a benefit to earnings.
We remain focused on our initiatives to improve collector performance through the reduction and variability. This requires an investment in people and technology that will lead to improved client performance, more account placements, higher margins, and the continued growth of the company.
In addition, we continued to implement our strategy to reduce costs through the consolidation of NCI's corporate functions and the migration of corporate and collector positions to our offshore offices.
As shown on slide #26, technology products generated $14.2 million of revenue during the second quarter of 2008 which represents a $4.1 million increase over the second quarter of 2007. Of this increase, $2.4 million is revenue derived from technology services provided to NCI while real servicing fees charged to the servicing business accounted for a majority of the remaining increase.
Slide #27 shows that the pretax loss for the technology products segment was $11 million for the second quarter of 2008 compared to $1.6 million in pretax income for the second quarter of 2007.
The pretax loss of $11 million for the second quarter of 2008 includes a $13.6 million loss from the equity and earnings of BMS resulting from unrealized losses on derivative instruments and auction rate securities that I discussed earlier.
Excluding our share of the equity in the earnings of BMS, pretax income for the technology products grew by 23% from $2 million for the second quarter of 2007 to $2.5 million for the second quarter of 2008.
I would now like to turn the call back over to our Chief Financial Officer, David Gunter. Dave?
Thank you. We would now like to open the line for questions. Operator?
(Operator instructions) The first question comes from Rick Shane of Jefferies & Co. Your line is open.
Rick Shane – Jefferies & Co.
Thanks, guys. I appreciate all the discussion on the liquidity and funding side. But I have to admit I get a little bit confused in all the terminology because of all of the different funding structures. My understanding or from reading the 10-Q is that there is a $355 million senior secured facility that matures this August. Last Q, you said there was $140 million borrowed on that facility. Have you renewed that facility and what is the current borrowing on it?
That facility is currently under negotiation. This is Dave. We are working with JP Morgan and other lenders. And we are going to disclose in our 10Q for the second quarter which comes out today how much is outstanding on each line. The amount outstanding at the end of the month is probably similar to the number that you are thinking about. We had an auction that we will talk about to term out or to renew the facility so that work goes underway. The facility would normally expire August 13th. It was a 364-day facility and so we still are doing that work and expect funding going into the future.
Rick Shane – Jefferies & Co.
And what would happen if you were unable to roll that facility over? Could you (inaudible) somewhere else?
Yes, that would be the contingency plan. If you did not roll that facility over for any given reason, you still have by contract the availability to term out over an 18-month straight line period the mortgage servicing rights, and then of course the PSAs, you would take to the unused portion of other financing facilities.
Rick Shane – Jefferies & Co.
Got it. Thank you. And then other question I actually remember when you got involved with the BOK transaction. What changed strategically? Why is that no longer an attractive asset? My recollection was that the acquisition price was $8 million to $10 million, and you are describing a $5 million loss here. So you are basically writing off virtually the entire acquisition. Is that correct?
No. We had another $5 million that we invested approximately into BOK. The original advice that we received in the business from our counselors on that both our law firm and our accounting firm was that we could use that facility – that institution as a financing vehicle for both PMSRs and/or advances. And in fact, the business plan was filed with the German regulatory authorities with that in mind. They subsequently changed their mind with respect to – shall we say non-German assets in that facility even though our original plan was approved. So essentially it has very limited value for us going forward as a vehicle to finance our core business operation and we've made the election or the decision rather to really sell as you can see almost every asset that's not associated with our two core business lines. You asked another question with regard to that, Rick, I'm sorry.
Rick Shane – Jefferies & Co.
No, that answers it perfectly, Bill. Thank you very much.
The next question comes from John Hecht of JMP Securities. Your line is open.
John Hecht – JMP Securities
Good morning. Thanks for taking my questions. Bill, you mentioned – you referred to acquisition opportunities. I assume you mean servicing portfolio acquisition opportunities. Where are we in the cycle of identifying opportunities and where would you suspect the supply of that type of opportunity would come from?
We happen to think that the industry will start – already has started to consolidate. That as institutions have difficulties, there may be additional pools which we are seeing coming available on the market or additional platforms and/or servicing rights available on the marketplace. So it would not surprise me given the increasing demand for advances and continuing cost pressure on most other players in the industry that it wouldn't surprise me to see a further acceleration of the consolidation of the business.
John Hecht – JMP Securities
Now are you currently seeing opportunities you are I guess in negotiations for these types of things or are these more outsourced arrangements where you might just take over an effective process for others? Or are you seeing entire I guess institutions put their service their whole servicing up for bids?
I think a little bit of both. I mean certainly we see some offers for us to buy servicing. We would tend to do that in conjunction with some hedge funds that we have relationships with. We also are trying to push very hard to basically strike relationships with people who have exposure to servicing and to the underlying risks of those other mortgages on securities to basically bring us in on an incentive basis. So, I think we are pursuing a number of different avenues right now.
John Hecht – JMP Securities
And with respect to the CPR rate, I think Ron mentioned that it was a little higher this quarter because of running some delinquencies through the portfolio. In the absence of those, can you give us a sense where kind of recurring or core CPR rates are going right now?
Between 8% and 9%. What you thought was a large increase and the shock to the system in August of last year really the summer when the subprime industry shut down. You saw, as you see in our portfolio, you saw initially a large rise in our portfolio of delinquencies, those loss mitigation programs that we accelerated. Essentially, we are curing a large number of those, still above 70% cure rate but the remaining amount basically is going through the process. So the portfolio, if you will, looks like the parting of the Red Sea, you have some going to the backend of the portfolio and others basically being cured.
John Hecht – JMP Securities
Yes. And then if we could turn to a discussion on loan modifications it appears that you are successfully modifying a lot of loans, curing a lot of loans which is causing your advances to come down. And a couple months ago there was an article in the journal that suggested some of the AAA MBS holders were maybe pushing back a little bit on that activity given changing cash flow dynamics. Have you had some discussions with those and have you kind of worked through how roll modifications might work so you can continue to successfully do that without disturbing them?
First of all, I think what you read in the paper – let's make sure we have a clear fact pattern to begin with. Essentially, what was occurring was that modifications that we were doing were resulting in – or the modifications that we were doing were resulting in an application of the cash flow different than what we believe should have occurred within the waterfall and that's not our responsibility. So, we believe that that has in fact been corrected by the third party that was in fact doing that so that the press that occurred was really not that there was not cash flow, it was simply being misapplied to both the different people in the different tranches as well as between principal and interest.
John Hecht – JMP Securities
Can you – I mean I guess can you be a little bit more specific with just the variance principal and interest and – or was there anything else more technical going on with the cash flow distribution?
Well, if you were to apply a – let's suppose we had one of the resolution techniques we use are for people that are significantly under water. We would forgive principal. It's sort of like giving people the sleeves out of the vest – sleeves out of your vest. Let's suppose a property were – and, Ron, you can jump in any time to correct me where I go astray. Let's suppose you have a property that's a $200,000 mortgage that's worth about $100,000. If you were to forgive $50,000 in principal basically you would incent that person to stay current on their modification program. Now that $50,000 should in fact be passed through as a loss that would impact the over-collaterization level and as a result impact the residual holder. If that money were to be applied basically as a reduction of interest which it should not have been, it would have in fact reduced the interest payments that were available to the AAA bond holders. So what occurred was not – it was – it had nothing to do with the modifications program per se, it related to that the cash flows were being applied (a), in a manner that diverted cash for the AAA bond holder to the residual holder and also had cash going as a reduction in principal, and so the hyper amortized principle as opposed to paying interest. It was an application of that and that's probably a fairly technical thing. It has since then corrected by the third party that was doing that work. It was not associated with Ocwen at all. It happened to occur – it happened – our name happened to occur in conjunction with that just because we are part of the most successful firm out there that actually modify loans. So it shows you how much different we are on getting loans current that, that would have been our interest – it was our name would have been associated with it. But it had nothing to do with any actions that Ocwen took with respect to the application of cash. We simply provide the cash to the third party who applies that cash.
John Hecht – JMP Securities
So given where I guess your perceptions where we are in the mortgage credit cycle is loan modification still a key focus and should we see more of that or as you get over kind of the peak loss curve – peak charge-off curve – excuse me peak charge-off period of loss curves will we see less modification take place going forward?
Let's step back for a moment and look at the whole thing of loss mitigation, if you will. Historically, we were the leader and basically we still are the leader in curing loans which creates the highest cash flow available to the investor and keeps the most – the greatest number of borrowers in their home. When we look at how we do that, what you are attempting to do is to get the borrower to pay the maximum amount of affordable cash that they have available to them to pay the investor. Now, historically you could do that through a forbearance plan, i.e., you could ask that investor – you could ask that borrower rather to pay not only the scheduled principal and interest but a greater amount to catch up. What has happened is that basically the borrowers because of the rising cost of living and a variety of other matters were falling slightly below if not even worse because of lost income even more below that ability to pay at least the scheduled principal and interest. So what we have done is basically continue it's very consistent, we tried to get them to pay as much money as they possibly can afford to increase the net present value for the investor and keep the people in their home. So it's really – it's not a change in strategy, it's a change in condition, if you will, of the borrowers, the average subprime borrower is under enormous financial stress. Their cost of living is going up dramatically and their income levels are not keep – anywhere close to keeping pace. So that's a problem for us, many of them basically bought homes they could never have afforded if it were not for a home price appreciation bailing them out. So, our goal here is subprime severity is now about 59%. You really need to keep these people in their homes from a social issue and also from a perspective of the investor. If you start foreclosing on all these properties, the investor is going to get just hammered with losses. So, I think we have created a lot of value for our investors and I also think that we have kept a lot more people in their homes than any other servicer would.
John Hecht – JMP Securities
I appreciate your color on this and the clarification. Thanks very much.
The next question comes from Jason Deleeuw of Piper Jaffray. Your line is open.
Jason Deleeuw – Piper Jaffray
Thank you. A lot of moving parts this quarter, but congratulations on generating some solid operating results once again. The servicing revenue was a little bit stronger than what we expected. Can you – I didn't catch all of that but I believe the process management fees were a little bit higher. I'm trying to get a sense for is that sustainable going into the next quarter? And what do you guys view as a run rate for servicing revenue?
I would say, I'll take that, we don't make forward-looking projections as to what our revenues are going to be, but we can say operationally you would look for us in the third and the fourth quarter, the rest of this year at least to continue to run operations in a similar fashion. So, I don't think I would anticipate any dramatic change in the revenue flow. So, I think what you really see is that the earnings really do reflect pretty solid operations.
Jason Deleeuw – Piper Jaffray
And then on the delinquency trends, last quarter, you gave us an update on delinquency trends for the month of April. And I was wondering if you could provide us with an update for what you are seeing so far in July? And then also, I'm just trying to get a sense for how much loan modifications have contributed to the delinquency downturn that you guys have experienced? I believe you started ramping up the loan modifications sometime in the spring, but your delinquencies actually started declining at the beginning of the year. I mean there might be some seasonality there, but can you just give us a sense for how much loan mods have helped with the delinquencies versus just your normal loss mitigation efforts?
Again, what we should look at is if you think about it as a 100%, it's either forbearance or it's a loss – or it's a modification. These are not – these borrowers do not self heal. They are not – everyone of them that you get that current and reperforming requires tremendous amount of effort to deal with it and what you are seeing as modifications become a larger portion of your cure process is the fact that the U.S. consumer is losing income relative to the expected payment under their mortgage. So, yes, modifications are important. I think we have done – Ron, correct me if I'm wrong, 20,000 modifications?
So we will use whatever means – I mean we – our goal is to generate – our decision-making rules are to generate the highest net present value that we can for the entire security. So, if it's necessary to modify, I will tell you that that almost always beats a (inaudible) loss severity of taking the loan through the foreclosure process. So, delinquencies and – I don't have the numbers in front of me, but delinquencies were down again in the month of July. I think they were down by 2,000, 3,000 units. Am I wrong on that, Ron or do you have that?
No, that's correct. I think around 3,000.
Jason Deleeuw – Piper Jaffray
Thanks. And then just turning to the financial services segment, I don't think I wrote down all the numbers, but I'm just trying to figure out what the results would have been if you ex out the new business investment and the accelerated depreciation? What were those amounts and just trying to get a sense if you were profitable in the segment during this quarter if you exclude those?
We spent $4 million more on operations first half of the year and that's the first half. What did – do you know have for the second quarter? And then we spent on accelerated depreciation was $400,000 to $500,000 in the second quarter.
Right, that's $400,000 on the accelerated depreciation through.
Jason Deleeuw – Piper Jaffray
Thank you very much.
At this time, there are no further questions.
Thank you very much. Everybody have a great day.
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