Ocwen Financial's (OCN) CEO Ron Faris on Q2 2016 Results - Earnings Call Transcript

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Ocwen Financial Corporation (NYSE:OCN) Q2 2016 Earnings Conference Call July 27, 2016 5:00 PM ET

Executives

Steve Swett - IR

Ron Faris - President and CEO

Michael Bourque - CFO

Analysts

Jaise Diaz - KBW

Kevin Barker - Piper Jaffray

Fred Small - Compass Point

Indraneel Chatterjee - Nomura

Operator

Good day, ladies and gentlemen. And welcome to the Ocwen Financial Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. [Operator Instructions] As a reminder, this conference is being recorded.

And now I'll turn the conference over to your host, Steve Swett. Please begin.

Steve Swett

Good afternoon. And thank you for joining us today for Ocwen’s second quarter 2016 earnings conference call. Before we begin, please note that a slide presentation is available to accompany today’s call. To access the presentation, please go to the Shareholder Relations section on our website at www.ocwen.com and click on the Events and Presentations link.

As a reminder, the presentation and our comments today may contain forward-looking statements 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.

Forward-looking statements, by their nature, address matters that are to a different degree uncertain. Our business has been undergoing substantial change, which has magnified such uncertainties. You should bear these factors in mind when considering such statements and should not place undue reliance on such statements.

Forward-looking statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. In the past, actual results have differed from those suggested by forward-looking statements and this may happen again. Our forward-looking statements speak only as of the date they are made and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

In addition, the presentation and our comments contain references to non-GAAP financial measures, such as adjusted operating expense, normalized adjusted cash flow from operations, adjusted pretax income and the economic value to Ocwen of our MSRs. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition.

We also believe these non-GAAP financial measures provide an alternate way to view certain aspects of our business that is instructive. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company’s reported results under accounting principles generally accepted in the United States.

For an elaboration of the factors that I just discussed, please refer to our presentation and today’s earnings release as well as the company’s filings with the SEC, including Ocwen’s 2015 Form 10-K, Ocwen's first quarter 2016 Form 10-Q and once filed Ocwen's second quarter 2016 Form 10-Q.

Joining me on the call today is Ron Faris, President and Chief Executive Officer; and Michael Bourque, our Chief Financial Officer.

Now, I’ll turn the call over to Ron.

Ron Faris

Good evening. And thank you for joining us today. Let me get right to it. First off, Ocwen continues to be the best servicer in the industry at helping struggling homeowners and we are the best by a wide margin. Please take a look at page 5 of the presentation. Ocwen responsible for 49% more HAMP modifications than the next higher servicer. And we are responsible for 3x more at principal reduction modification than the next best servicer. In fact, we completed almost as many principal reductions mods as the rest of the industry combined. As we've said in the past, a borrower who has their loan service by Ocwen has a much better chance of avoiding foreclosure than if their loan was serviced by any other company.

HAMP is a great program, put in place by the President of the United States back in 2009 to help struggling families. We are proud to be such a significant part of the program and more importantly the overall housing recovery. And we are getting even better. In the second quarter, we helped almost 20,000 struggling families obtain a loan modification and avoid foreclosure. But what is really amazing is that this was a 19% increase in families helped over the first quarter. In the last six months alone, we've helped over 36,000 households. We also continue to hold successful borrower outreach event alongside our nonprofit partners such as NAACP and NID Housing council agency in California. These events take tremendous planning and resources for their well worthy efforts. I suggest you go to Ocwencare.com to find out more.

The Ocwen team is and should be proud. The news gets even better. Not only are we helping more families and other servicers, we are continuing to deliver best-in-class results to our RMBS investors. As Moody's investor services said in a June 29th publication, among the servicers we assess, Ocwen continues to have the best total cure and cash flowing metric. These are the metric Moody's uses to measure servicers overall loss mitigation performance. Again, not one of the best, the very best.

As a company we continue to make progress in resolving our legacy issue. But there is more to be done. During the second quarter, we resolved in principle the two Fisher litigation for $30 million. We spent over $414 million defending these cases including $23 million just this year. Assuming the settlement is finalized as we anticipate, this legal spend is now largely behind us.

In addition, and as we expected the long awaited Duff & Phelps report finally came out and found that the 2015 RMBS investor allegations it reviewed were baseless. We are also working to resolve other important matters. Included in our Q2 results is a $15 million reserve related to discussions with the California Department of Business Oversight to resolve our differences and terminate the existing consent order and related monitor. While there is no guarantee we will be able to settle, we are actively trying. We still have lots of work to do with all of our regulators and we are focused on eventually returning to a more normal state.

Next, market conditions for servicers' especially non bank servicers remain challenging. Rates continue to go down negatively impacting MSR value. Regulatory and monitor costs especially for us remain high. All of these and more impacted our Q2 results. But there are some bright spots. Our revenue was up quarter-over-quarter for the first time in a long time. Interest expense was down. Even though operating expenses were up, this was largely due to the Fisher settlement, the regulatory settlement reserve and increase spending on lending new initiatives and on our servicing technology.

As you would have seen in our press release, we actually would have had an operating pretax profit of $2.5 million if you strip out the large settlement and associated legal defense cost, the regulatory settlement reserve, interest rate driven MSR impact, monitor expenses and our final $4.3 million payment to new residential corp related for last year's S&P downgrade. I realized this represent a lot of different adjustments. But the point is if we can get the legacy items behind us and eventually move beyond the third party monitor costs, there appears to be a path back to profitability. This is further highlighted if you look at the trend dating back to last year adjusting for similar items in those periods.

This is laid out on slide 36 of the presentation deck. Here you can see the regression and adjusted pretax income in the second half of last year primarily driven by the rapid revenue decline from the asset sales and then the lag in reducing expenses. In a subsequent improvement in recent period as we continue our efforts to return the company to profitability. This further reinforces the view that as the company put these legacy matters behind us; we believe we can deliver positive earnings again.

Getting back to the second quarter, other highlights include the servicing segment's pretax loss was only $14.7 million and down $53.6 million from the first quarter. Origination volumes were up 35% and pretax income went from $2 million in the first quarter to $7.5 million in the second quarter. Our automotive capital services initiative more than doubled these outstanding receivables and is gaining more traction as it expands nationwide. We continue to have substantial value estimated at just under $500 million that is not reflected on our balance sheet. I recommend you focus on page 9 of the presentation to better understand this value and some of the assumptions used.

Let me close with where we are headed. Liquidity and capital is both precious, and we are focused on maintaining adequate levels of both. We have no current update on the status of our S&P servicer ranking but we remain hopeful that an upgrade is possible given the outstanding servicing performance I highlighted earlier and the upgrade we have received from Fitch earlier this year. We remain focused on compliance, risk management and service excellence. We are striving to regain approval to be able to acquire MSR again. We want to resolve our remaining legacy regulatory and legal concerns. We intend to continue reducing cost while not jeopardizing compliance or service. We intend to continue to help homeowners who are struggling or who are eligible for a better mortgage product. We intend to continue to grow and improve the profitability of our lending business and we intend to continue to invest in technology and our new initiative such as ACS.

I'd now like to pass the call over to Michael to discuss our financials results. Michael?

Michael Bourque

Thank you, Ron. In my comments today I'll focus on a few key things from the quarter. Growth, costs and liquidity and let you review the traditional slides on your own. You will note we've included the cost slides introduced last quarter as well as the usual liquidity and MSR evaluation pages we typically provide. From growth perspective, our revenue was $373 million, was an increase of 13% from the prior quarter and was the first sequential increase in quarterly revenue for Ocwen since the first quarter of 2015. Further, revenue increased across all of our major segments with servicing revenue up 6%, lending revenue up 52% and revenue from our initiatives increasing by $12 million. For a company that has been facing pressures from declining revenues for the last 18 months, this is a positive development.

In our servicing business, we are able to perform almost 11,000 HAMP modifications of which over 4,100 was part of the new streamline program. This is a US treasury program consistent with prior programs only it contains some simplifications to provide additional support for borrowers in need. The impact of this was to bring in an additional $15 million of revenue for the company while providing meaningful benefit to homeowners in distress. We also expect to see benefits from this program in the second half of the year in particular the third quarter. We currently have over 9,300 additional borrowers in varying stages of modification completion as of July 25th.

We also saw significant growth in our mortgage lending businesses. Our lending segment delivered revenues of $35 million, up over 50% from the prior quarter. This was driven by higher volumes in both the forward and reverse businesses and we are pleased with the growth here. We also continue to invest particularly in forward originations. From a growth standpoint the forward business added 104 employees in the quarter. The majority of which are focused on sales and operations to help drive future growth.

From a new business perspective, we are pleased with the trajectory of our automotive capital services business. You can see the stats on the slide deck that the business is basically doubled in size quarter-over-quarter and we are continuing on a path to rollout to 52 markets in 34 states by the end of the year. The customer feedback so far has been positive and our product has been well received. We are also in the process of establishing a warehouse line for this business which will be a key next step to enable us to continue this growth trajectory. We anticipate securing net financing sometime in the second half of the year.

Moving on to discuss expenses. Total operating expenses were $385 million, an increase of 17% from the first quarter. This was driven by the following dynamics. A $65 million increase in servicing and corporate costs, a $19 million increase in lending and new initiative spending, and $28 million decrease in uncontrollable costs.

Beginning with servicing and corporate costs, as we've stated in the past, we are actively working to reduce our servicing and corporate cost to align more efficiently with our servicing portfolio and provide a base from which to restore the company to profitability. The results this quarter were mixed. Compensation and benefit costs were unchanged from the first quarter so are other expenses. However, we saw increases in the other three primary cost categories. From headcount perspective, total headcount was down both onshore and offshore and the second quarter did include about $1 million in severance.

I'd note that in the past nine months we've eliminated about 400 onshore positions and we announced in June the reduction of about 120 onshore positions. We ended up transitioning about a third of the employees to new roles in our lending business, saving on severance and filling key open jobs. Of the remaining population, about half left the business late in Q2 and the other half are expected to depart in the third quarter. Amortization and servicing and origination cost was $76 million in the second quarter, up $7 million or about 10% from the first quarter.

On Page 18, you can see that higher costs were driven by higher MSR for value changes due to the higher CPR and Ginnie Mae losses were up related to HUD note sales which should materially reduce future servicing losses on these highly delinquent loans. We provide more detail on this program on slide 32 of the presentation.

On Slide 19, we provide details on our technology spend. Technology costs were up $6 million versus the prior quarter. The increase was primarily driven by a $5 million expense for customization and software upgrade costs which we don't expect will be recurring charge. Professional service costs were $92 million in the second quarter, up $51 million from the first quarter. Please see page 20 for details. This increase was driven by the $45 million in legal and regulatory reserves Ron already mentioned. In addition to these items, we also saw a modest increase in general and legal fees largely offset by a reduction in expenses related to third party consultants and advisors.

As Ron mentioned, we spent over $44 million defending the Fischer cases with $23 million of that in the first half of 2016. That expense is now largely behind us. From the lending and new initiative spending perspective, expenses increased as expected. As we've said on prior calls, we are incurring additional expenses to grow these businesses and we expect to show higher quarterly expenses through 2016. Versus the first quarter our lending business was up about $7 million and our new initiatives were up $12 million.

Finally, the third category is our uncontrollable costs including fair value adjustments, impairments and monitor expenses. While we did benefit from a significant decrease in this cost in the second quarter, they were still significant and we have little ability to impact these items.

Turning to liquidity. Cash flow from operating activities in the second quarter was $31 million. On the financing side, we paid down our senior secured term loan by $11 million in the second quarter and by another $26 million in July resulting in a current balance of $343 million. During the quarter, we also extended the maturity dates for our fast servicing event facility and two warehouse lines for one year into the second quarter of 2017. We continue to believe that we are maintaining adequate levels of liquidity and we are actively working to refinance our second half 2016 maturities.

In summary, we remained focused on returning the company to profitability. We are making steady progress and the success we've had thus far allowed us to report the smallest loss for Ocwen in the last three quarters and the first quarter-over-quarter increase in revenue since the first quarter of 2015. As we move forward, we will continue to look for additional opportunities to drive revenue and reduce our costs with a dual goal of providing world class customer service while restoring the company to bottom line profitability and eventually earnings growth.

I'd like to close by sharing a quote from a paper published by IO Funds; an independent firm last month provided an update to their 2015 whitepaper call in defense of Ocwen. Their uptick included with the following statement and I quote. In this update we compared the servicing strategies of SPS and Ocwen. In compared to SPS, Ocwen's modification and liquidation strategy resulted in more homeowners retaining their homes and at the same time also resulted in lower overall losses to the associated mortgage trusts. They then went on to say and I quote, we can't find another servicer that does as good of job at servicing troubled borrowers as Ocwen.

This independent feedback in conjunction with the similar positive remarks from Moody's that Ron previously mentioned, is a tremendous validation of the efforts of over 10,000 Ocwen employees and is something we are all deeply proud of as we continue to improve and evolve our company.

That completes our prepared remarks. And Tairone, can you please open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions]

First question is from Bose George of KBW. Your line is open.

Jaise Diaz

It's actually [Jaise Diaz] on for Bose. Can you give us little more color on the increase in adjusted operating expenses quarter-over-quarter given that uncontrollable cost were down by $28 million? And where you stand versus your cost initiatives at this point?

Michael Bourque

Sure. So we layout Jaise in the lot of detail kind of the explanation on costs consistent with last quarter. I think the goals remain the same. I think we had progress, a lot of progress in the first quarter. This quarter we had combination of some of the fair value mark. We also entered into kind of HUD note sale that added some additional servicer office and had some offset and amortization that kind of muddy the story a little bit. I think as we talked about the increase in legal spending were certainly significant as the company prepare to potentially go to trial on those Fischer cases. So I think that's a lot of the story. We remain committed to continuing to address the cost structure. We talked about some of the actions we announced at the end of June relative to the US workforce. And we continue to look for further opportunities there.

Jaise Diaz

Yes. On that headcount reductions that you mentioned. Is there a way for us to think about the dollar amount that might come out in 3Q and beyond given some [2000] employees are leaving in June in 3Q?

Ron Faris

Yes. I don't think -- I mean we are -- we don't -- we are not disclosing that plus you have to keep in mind as Michael said, in some areas like our new initiatives in lending we are also adding but so we don't have a projection on where compensation costs are going. But in our servicing business in particular we continue to take steps to reduce staff as the portfolio continue to run down as we continue to automate certain functions and find other areas for efficiency. But we don't have a projection for you.

Jaise Diaz

Okay. And then you mentioned the potential for a settlement also in California. Of the $28 million in monitor costs this quarter, is there a way to think about what's due to California and what's due in New York?

Ron Faris

So we are not going to break that out, although keep in mind there are three monitors. The national monitor, there is New York and there is California. As you noted, the amount was still significant in the quarter but it was down a little bit from the first quarter so it is trending in a better direction but at this point we are not breaking those numbers out.

Jaise Diaz

Okay. Then just last one. I think you guys said the contribution for the overall new initiatives. But do you have the contribution for just the automotive initiative in the quarter revenue?

Michael Bourque

So from a revenue standpoint I mean it's not a big driver in a company kind of loss a $1 million maybe a little bit more in the quarter. So it's not a significant top line contributor at this point.

Ron Faris

I mean again to remind you, the way the business work it's -- there is interest income from the loans that is putting out, I think in the past we talked about how the interest rate on those loan is 0.9 plus percent. There is also significant sort of fees that the dealers pay as cars come in and off the credit line. So as time goes on more and more fee revenue will be generated as well. But as Michael said the numbers are still relatively small on the top line side. The business doesn't have a lot of employees but it is running right now at a small loss.

Operator

Thank you. Our next question is from Kevin Barker of Piper Jaffray. Your line is open.

Kevin Barker

Thank you. And this quarter you pointed out $15 million of additional fee revenue from the streamline of HAMP. Would you expect a similar result in the third quarter and fourth quarter?

Ron Faris

So as Michael said we expect the third quarter to be strong as well. And then it will start to probably trail off after that, not completely gone but it will start to trail off so we think that the third quarter will be strong. We are not going to say exactly what that means relative to the second quarter but the third quarter is where we'll see the strongest result in the rest of the year.

Kevin Barker

So that's a function of reaching out to someone immediately being able to take advantage of the program but you can't keep doing it? Is that right but HAMP [Multiple Speakers]

Ron Faris

Yes. I mean there are opportunities -- there are opportunities to re-solicit borrowers and continue but a lot of the impact comes from the rollout of this new program by the treasury department. The initial solicitation to the eligible customers and now in this quarter we are starting to see or in the second quarter we started to see customers finally achieving the three payments, actually completing the full modification process which is really what triggers them starting to move into for us for revenue generating capacity. And so there are still a lot in the pipeline as Michael said. But as the year goes on that will start to wind down.

Kevin Barker

Was there any additional expense with the administering that program or was it clearly fees?

Ron Faris

No. So in the first -- I mean the number that we reported is the top line. In the first half of the year there were -- I mean relatively speaking significant mailing related cost for example and other things that you had to do get the solicitation out. That's probably in the $3 million or so range. Maybe a little bit higher, so that was a partial offset to the revenue that came in the first half of the year. But most of those expenses are largely behind us to the extent that we do re-solicitation, there will be some additional costs but the big spent has already occurred in the first half of the year.

Kevin Barker

Okay. And then relations to the California monitor, you mentioned that you are in talks and I quite get everything you mentioned there but could you just give us a little further detail and at what point you feel you are at with California regards to this talks? Means like you put up a regulatory settlement and you obviously cannot say whether it's actually California or not but could you just give us an idea like how far along you feel you are within this --

Ron Faris

Well, Kevin, to be clear I think we are saying that the $15 million reserve that we put up in the second quarter is related to discussion that we are having with the California Department of Business Oversight. At this point though there is no way for us to project if in fact the settlement will occur and what that settlement will look like exactly. But there are discussions going on and discussion to the point where under GAAP it make sense for us to record $15 million reserve. And we really not going into more detail on that at this point in time.

Kevin Barker

Okay. And I assume is that your only reserve related to that specific issues, is that right?

Ron Faris

Yes.

Kevin Barker

Okay. And then within the Fischer settlement for your $30 million, you got $23 million defending the case in the first half of the year. Would you expect that in higher $23 million to go away in the next quarter or are there other cases where you have legal spend as well?

Michael Bourque

Yes. So I think Kevin the $23 million -- there was $13 million I think in the first quarter, $10 million in the second quarter. The settlement actually isn't official yet so there will be some additional spend in the third quarter. We don't expect it to be of the same magnitude. I'd say the docket of ongoing legal matters is been relatively consistent this year so we would expect to see some decline in that legal spending accordingly. However, things can change and let's see what happens but that's our expectations today.

Ron Faris

Yes. But that was our more significant case, were our more significant legal spent was and as Michael said and as we said in the prepared remarks, that spent is largely behind us now. There is some additional legal works that will need to be done so just bring it to final closure and we hope that occur. And so there will be some modest spend on that particular those cases in the third quarter. But nothing like what we saw in first half of the year or in the latter part of the last year.

Kevin Barker

Okay. And then on the other expense line, I mean other revenue line went up $20 million this quarter in various segments including servicing, lending and corporate. I believe you said $12 million of NRZ interest expense; could you just talk about the moving parts that are happening there? And your expectations going forward on the other income line?

Michael Bourque

Yes. So we actually got page probably in the back on kind of other income and expense just focusing kind of sees the different drivers of that category. Just I guess simply, I guess simply as it can be I mean the way the NRZ interest expense works generally is, to the extent there is a change in the fair value of the liability. In this case it came down in the quarter. Your payment is basically a function of UPB time servicing fee. So to the extent you have a fair value decrease that actually would show up as kind of amortization of the liability. And then the offset as basically a plug in its interest expense. We saw decline in the fair value of that liability in the quarter which means you had higher kind of amortization of that liability and less interest expense kind of period to period. And that represents some other smaller pieces around kind of a changing advance balance and other things but the biggest driver of that is, is associated with the fair value of the liability change.

Ron Faris

Yes. And page 37 is where some additional detail is that on that line item.

Kevin Barker

Okay. And then one last question. Your tangible net worth to total capitalized servicing portfolio by estimate is roughly 28 basis points and FHA requires a minimum 25 basis points. Do you have any plans to address that via servicing sales or some other maneuvers within the balance sheet in order to maintain at 25 basis points required?

Michael Bourque

Yes. So, Kevin, I think the calculation is actually done at the license kind of OOS entity and I think you are kind of running the calc on the consolidated OFC basis and so we are not getting to a lot of detail. You have a much higher equity value and tangible net worth in Ocwen loan servicing and then if you think about kind of the unconsolidated OFC entity, that would be the entity where you had a lot of the buybacks that have taken place historically. And so there are some larger value than OOS, a potentially offsetting value in OS in unconsolidated OFC that would get you to kind of the $650 million of consolidated equity and I think you probably run in the calc off up, so we don't feel that we are in any jeopardy relative to any of the tangible net worth requirement from any of the federal or state regulators or any of our lenders either.

Kevin Barker

What's that number today at the segment level, at the subsidiary level?

Michael Bourque

It's nothing. We've communicated but it's I mean its north of $1 billion.

Operator

Our next question is from Fred Small of Compass Point. Your line is open.

Fred Small

Hi. How are you? Thanks for taking my question. Following up on the other revenue line the change in fair value of the liability that related to the right MSRs that NRZ now own?

Michael Bourque

That's correct.

Fred Small

And so if they mark down their right MSRs or MSR then that drives to revenue increase on that one for you?

Michael Bourque

It's related to the interest expense and we determine the change in a liability independent of the counter party using kind of third party evaluation analysis that's provided that we run on those MSRs. That's what drive the change in total other income and expense.

Fred Small

Okay. So a change in the liability for you isn't necessarily related to how they mark the mark the right to the MSR?

Michael Bourque

Yes. I can't speak to their process but we had a third party evaluation updated every quarter that assess the fair value of our liability. In the past when it was different party that activity was more closely coordinated with two separate public companies and whichever on processes.

Fred Small

Okay. Got it. And just to make -- see if I am looking at part of this right, on slide 38 the $8.4 million that's what you are saying shows up as lower interest expense?

Michael Bourque

That's correct.

Fred Small

Okay, got it. And where does it breakout the specific impact to revenue from that?

Michael Bourque

That doesn't impact revenue right. Maybe I am little confused.

Fred Small

There is no impact to other revenue on the -- on what you were saying before?

Michael Bourque

No. It's rather -- it shows up in the total other income and expense net line. There is [Multiple Speakers]

Fred Small

Okay. I got it. So I mean just on the other revenue piece, what drove -- is that sort of at sustainable run rate at $38 million or what, whether a different components that drove that broken out somewhere?

Ron Faris

Yes. So some of that other revenue is being driven by some new initiatives which there will be a little bit of disclosure about in the 10-Q that comes out. So maybe we expect to follow that so it will be available tomorrow morning. Maybe after you have a chance to look at that we can discuss that further.

Michael Bourque

The other thing I would say though independence of that Fred is you did see a pick up in the lending segment and some of the other revenue categories. I think if that business saw higher fee income and also had some favorable mark-to-market activity given some of the things happening particularly in the reverse market. And so some of that is kind of through run rate improvement.

Fred Small

It's mark-to-market but sorry so of the $38 million how much do you think is sort of mark-to-market or related to reverse or we shouldn't think about is as sort of growth of new initiative?

Michael Bourque

Yes. So the growth in new initiatives that Ron talking about is $12 million.

Fred Small

Okay, got it. And how much was then in the first quarter you think?

Michael Bourque

It was zero.

Fred Small

Okay, got it. And then somewhere in the presentation there was note about the UPB the $3.3 billion of UPB non and re-performing that you sold, should we expect to see more of that?

Ron Faris

Not necessarily. That related to a transaction where one of the GSCs wanted to re-securitize that have been modified. I think the way it works is they have to pull out of securities and put them under balance sheet. So they were looking to re-securitized those. And as part of that they were looking to consolidate servicing into a smaller group of servicers until we agree to sell them more re-servicing right effectively to the GSC to help them facilitate that transaction. So while we have the potential ability to sell additional servicing right, we are not saying now that we are going to or not going to and that particular transaction was somewhat of special circumstance where we wanted to work with our business partner to assist them in something they were trying to accomplish. And it worked out well for us, we got good value, we were able to use this proceeds to pay down the term loan. So it kind of makes sense all the way around.

Fred Small

Okay, great. And you said that was all-- both is us saying, you said that was all GSC related right?

Ron Faris

Yes.

Fred Small

That was all. Okay, got it. And then last one on the different MSR assumptions, if I look at like at 29, if I just think about maybe the first three steps that are like there will be difference between book value, fair value and international assumptions or fair value and internal assumptions. What sort of profitability is do you assume there on the servicing or is there way to think about the incremental improvement that drives that value because I guess my overall question is sort of how you think about value in the MSR relative to -- or do you relative to Ocwen's ongoing profitability as a servicer?

Michael Bourque

Yes. So I guess one thing and this has come up in the past, Fred. I mean we follow the traditional valuation, the MSR valuation models and the standard that's kind of use by the industry relative to looking at the economics here. And so it includes things like advance financing cost, it include your variable servicing cost, it include some of the I'd say maybe a small fraction of some of the risk and compliance costs for the industry. And isn't meant -- necessarily meant to reflect kind of Ocwen's overall risk compliance regulatory infrastructure and some of the changes and build out we made over recent year. So it's really more just kind of direct asset evaluation view with some of that initial cost as the industry looks at it. So I don't know that necessarily helps but that's really what kind of it needs numbers and so if I guess I don't how I can give you better clarity or --

Fred Small

Okay. I mean I guess at the end of day the value there is going to depend on how much money Ocwen can make servicing at. Is that the right way to think about it or --

Michael Bourque

So what would I say is this is the big -- this is kind of your direct cost revenue less direct expenses kind of as the industry thinks about it? And the big adjustment from fair value to internal assumptions is going to be based on our cost structure and our utilization of offshore resources and being able to service loans more cost effectively than some of our competitors. And so that's -- that persist, that's real even though some of the -- given those costs are drifted up over time as they have for the rest of the industry. That going to be the starting point for kind of the analysis and then you have to make an assessment of some of our kind of corporate overhead and how you think that can change over time. So ultimately it's adds up to our profitability.

Operator

Thank you. The next question is from [Ena Lee] of Nomura. Your line is open.

Indraneel Chatterjee

Hey, it is actually Indraneel Chatterjee speaking for Ena Lee. She is unable to take this call. I'd like to focus on slide 9 please. The deferred servicing fees, are they captured in the NRZ sub servicing contract?

Ron Faris

No. That is not captured on this slide. The deferred servicing fees that we are referencing here relate to the non agency portfolio that we own outright that's not part of the NRZ portfolio.

Indraneel Chatterjee

So as we look at this balance sheet, there are substantial pocket of value that are not recognized in your GAAP financial. Why wouldn't you make a reference to that asset on the slide?

Ron Faris

Well, to some degree Indra, I mean I guess you do have the NRZ sub servicing contract and the value that we are picking up there, reflects some of that so that might be -- that's probably part of it. I recognized where you are going and there is much more large deferred servicing asset on that particular portfolio. And much of that over time is going to accrue to the sub service or in this case us. But I think where we try to reflect that is primarily by providing this NRZ fair value estimate on this page.

Michael Bourque

The way to think about it, Indra, as we've taken kind of the base value using as fair value would be calculated from a third party evaluation firm for those -- for that sub servicing value and you can see the expansion of that $277 million on page 29 where you reflect kind of those core -- that core sub servicing in the Ocwen cost structure updating some assumptions around deferred servicing fees and discount rate. And you can see that the value of that sub servicing could be well beyond that $277 million. But we thought just to give people general sense of the concept, it was probably appropriate us to use kind of a fair value concept consistent with how we are showing the MSR valuation difference on our own agency assets.

Indraneel Chatterjee

Yes. But if I look at page 37 of your 10-Q for first quarter, you guys pooled in $160 million bucks in the NRZ deals and you set back about $77 million to NRZ. So that's $84 million a quarter I presume your servicing piece associated with that, that even if the life of that book is four or five years that itself is worth more than $300 million -$400 million buck so I guess this slide underestimates the value of deferred servicing fees because you wouldn't be recognizing deferred servicing fees on that page. Would you like -- you don't recognize on this fees on your income statement till they are actually collected or is that actually a non cash item?

Michael Bourque

No. We only recognize when they are collected.

Indraneel Chatterjee

So that clear indicating that this page understates the value of your balance sheet provide $3 million to $4 million bucks and then if you look at the master sale supplement for the HLSS deals, I can figure out the waterfall of how that money goes from you to NRZ and what is retained by you guys right?

Michael Bourque

Yes. I mean the right mechanism would be through waterfall, that's correct.

Indraneel Chatterjee

Right. Moving on, on the short-term home loan you guys got $26 million bucks of cash from sales that are closed but the cash hadn't accrued so is there anything left I mean I should just add the numbers up but forgive my laziness, are there any asset sales that have closed whose proceeds are yet to accrued to the balance sheet to pay on the short term home loan?

Michael Bourque

Yes. So we announced last year they all had their own different structures. We have about $56 million or so of receivable left on those asset sales. We've got about $15 million - $16 million reserve again some of that and so we got net kind of receivable of I think $36 million remaining to kind of collect on that. It could be the full amount but we are conservative about the time of the deals, waiting to see how some of the processes around recoveries on advances and the like would go. We expect the majority of that's coming in the second half of this year.

Indraneel Chatterjee

So I would imagine then your term loan would be down about $300 million bucks because you have 3% fees that hit the term loan balance of the March 31, 2017 right?

Michael Bourque

The fee is correct. Depending on obviously if we recover these proceeds there, we will turn around and paying downs the term loan. So it's going to be depended on those collections. But that's right.

Indraneel Chatterjee

So if did the math right you can have $300 million bucks of bank debt at $350 million or above that $750 million of debt over here and you are talking about $4 a share of additional off balance sheet asset. Assuming all different -- shots in the world as well as all the monitors want to keep going at the apple, why you are not buying back stock right now? I mean I can't imaging spending $500 million bucks in additional fees or fines over the next two three years? I mean your bond is traded down to 65 or 64, we are market makers in these and given the RP capacity you have and the fact that it stocks already trading at 2.10 in the after market, I mean I'd imagine you are being cautious because there are so many uncertainties with that fee in NRZ but you and I both know that NRZ is not going to pull the deal because it is so expensive to services elsewhere so why not buyback stock [in advance] before the bonds pop in your face?

Ron Faris

So, Indra, as I said in my prepared remarks, capital liquidity is precious to us right now. We still have some legacy issues that we are working through. You saw for example a settlement on the Fischer cases which we need to preserve for things like that. So I get your point but we are being -- we want to manage this company soundly and capital liquidity is precious and again as we said in the past we don't make forward looking statements as to whether we are or not going to repurchase debt or stock. And we are not making any here but we are saying that preserving capital is a top priority for us.

Indraneel Chatterjee

I think this is an amazing call. And I really, really thank you for giving us the details. I'd hope that you could provide another 8-K in the short -- well not the distant future that would highlight the off balance sheet assets in more details because I think there is a lot of investors won't necessarily familiar with how M&A or servicers work and if in particular the focus on the call right to deferred servicing fees I think the lot of shots will realize that there is this tremendous pocket of value in this balance sheet that could be offsetting any fees that could hit this company in the future. I can't imagine that in a California, NY DFS and National Mortgage monitor will keep on having added for the next two three years continuously but even then that would be really helpful. Thank you for your time.

Operator

Thank you. And this ends the Q&A portion. Thank you all for all attending the Ocwen Financial Corporation's second quarter earnings call. This concludes the conference. You may now disconnect. Have a wonderful day.

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