Document




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from: ____________________ to ____________________
Commission File No. 1-13219
OCWEN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Florida
 
65-0039856
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1661 Worthington Road, Suite 100
West Palm Beach, Florida
 
33409
(Address of principal executive office)
 
(Zip Code)
(561) 682-8000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
 
Large Accelerated filer
o
 
 
Accelerated filer
x
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
 
Smaller reporting company
o
 
 
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o No x
Number of shares of common stock outstanding as of July 23, 2018: 133,912,425 shares







OCWEN FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1



FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact included in this report, including, without limitation, statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.
These statements include declarations regarding our management’s beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could”, “intend,” “consider,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict” or “continue” or the negative of such terms or other comparable terminology. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Our business has been undergoing substantial change, which has magnified such uncertainties. Readers should bear these factors in mind when considering forward-looking 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 from those suggested by such statements. In the past, actual results have differed from those suggested by forward-looking statements and this may happen again. Important factors that could cause actual results to differ include, but are not limited to, the risks discussed or referenced under Item 1A, Risk Factors and the following:
uncertainty related to claims, litigation, cease and desist orders and investigations brought by government agencies and private parties regarding our servicing, foreclosure, modification, origination and other practices, including uncertainty related to past, present or future investigations, litigation, cease and desist orders and settlements with state regulators, the Consumer Financial Protection Bureau (CFPB), state attorneys general, the Securities and Exchange Commission (SEC), the Department of Justice or the Department of Housing and Urban Development (HUD) and actions brought under the False Claims Act by private parties on behalf of the United States of America regarding incentive and other payments made by governmental entities;
adverse effects on our business because of regulatory investigations, litigation, cease and desist orders or settlements;
reactions to the announcement of such investigations, litigation, cease and desist orders or settlements by key counterparties or others, including lenders, the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac, and together with Fannie Mae, the GSEs) and the Government National Mortgage Association (Ginnie Mae);
our ability to reach settlements with regulatory agencies and state attorneys general on reasonable terms and to comply with the terms of our settlements;
increased regulatory scrutiny, and media attention;
any adverse developments in existing legal proceedings or the initiation of new legal proceedings;
our ability to effectively manage our regulatory and contractual compliance obligations;
our ability to comply with our servicing agreements, including our ability to comply with our agreements with, and the requirements of, Fannie Mae, Freddie Mac and Ginnie Mae and maintain our seller/servicer and other statuses with them;
the adequacy of our financial resources, including our sources of liquidity and ability to sell, fund and recover advances, repay borrowings and comply with our debt agreements, including the financial and other covenants contained in them;
our ability to invest excess liquidity at adequate risk-adjusted returns;
limits on our ability to repurchase our own stock as a result of regulatory settlements and other conditions;
our servicer and credit ratings as well as other actions from various rating agencies, including the impact of prior or future downgrades of our servicer and credit ratings;
failure of our information technology and other security measures or breach of our privacy protections, including any failure to protect customers’ data;
volatility in our stock price;
the characteristics of our servicing portfolio, including prepayment speeds along with delinquency and advance rates;
our ability to contain and reduce our operating costs;
our ability to successfully modify delinquent loans, manage foreclosures and sell foreclosed properties;
uncertainty related to legislation, regulations, regulatory agency actions, regulatory examinations, government programs and policies, industry initiatives and evolving best servicing practices;
the dependence of our business on New Residential Investment Corp. (NRZ), our largest client and the source for a substantial portion of our advance funding for non-agency mortgage servicing rights;
our ability to timely transfer mortgage servicing rights under our agreements with NRZ and our ability to maintain our long-term relationship with NRZ;
our ability to complete the proposed acquisition of PHH, to successfully integrate its business, and to realize the strategic objectives and other benefits of the acquisition at the time anticipated or at all, including our ability to

2



integrate, maintain and enhance PHH’s servicing, subservicing and other business relationships, including its relationship with NRZ;
our ability to transition to a new servicing technology platform within the time and cost parameters anticipated and without significant disruptions to our customers and operations;
the loss of the services of our senior managers, including potential impacts from the recent retirement of our former chief executive officer and the recent resignation of our former chief financial officer;
our ability to execute effective chief executive and chief financial officer leadership transitions;
uncertainty related to general economic and market conditions, delinquency rates, home prices and disposition timelines on foreclosed properties;
uncertainty related to the actions of loan owners and guarantors, including mortgage-backed securities investors, GSEs, Ginnie Mae and trustees regarding loan put-backs, penalties and legal actions;
uncertainty related to the GSEs substantially curtailing or ceasing to purchase our conforming loan originations or the Federal Housing Administration (FHA) of the Department of Housing and Urban Development (HUD) or Department of Veterans Affairs (VA) ceasing to provide insurance;
uncertainty related to the processes for judicial and non-judicial foreclosure proceedings, including potential additional costs or delays or moratoria in the future or claims pertaining to past practices;
our ability to adequately manage and maintain real estate owned (REO) properties and vacant properties collateralizing loans that we service;
uncertainty related to our ability to continue to collect certain expedited payment or convenience fees and potential liability for charging such fees;
uncertainty related to our reserves, valuations, provisions and anticipated realization of assets;
uncertainty related to the ability of third-party obligors and financing sources to fund servicing advances on a timely basis on loans serviced by us;
uncertainty related to the ability of our technology vendors to adequately maintain and support our systems, including our servicing systems, loan originations and financial reporting systems;
our ability to realize anticipated future gains from future draws on existing loans in our reverse mortgage portfolio;
our ability to effectively manage our exposure to interest rate changes and foreign exchange fluctuations;
uncertainty related to our ability to adapt and grow our business, including our new business initiatives;
our ability to meet capital requirements established by, or agreed with, regulators or counterparties;
our ability to protect and maintain our technology systems and our ability to adapt such systems for future operating environments; and
uncertainty related to the political or economic stability of foreign countries in which we have operations.
Further information on the risks specific to our business is detailed within this report and our other reports and filings with the SEC including our Annual Report on Form 10-K for the year ended December 31, 2017 and our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K since such date. Forward-looking statements speak only as of the date they were made and we disclaim any obligation to update or revise forward-looking statements whether because of new information, future events or otherwise.



3

PART I – FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

 
June 30, 2018
 
December 31, 2017
Assets
 

 
 

Cash
$
228,412

 
$
259,655

Mortgage servicing rights ($1,043,995 and $671,962 carried at fair value)
1,043,995

 
1,008,844

Advances, net
173,787

 
211,793

Match funded assets (related to variable interest entities (VIEs))
993,926

 
1,177,357

Loans held for sale ($153,906 and $214,262 carried at fair value)
209,453

 
238,358

Loans held for investment, at fair value
5,143,758

 
4,715,831

Receivables, net
178,678

 
199,529

Premises and equipment, net
30,619

 
37,006

Other assets ($8,816 and $8,900 carried at fair value)(amounts related to VIEs of $20,021 and $27,359)
417,568

 
554,791

Total assets
$
8,420,196

 
$
8,403,164


 
 
 
Liabilities and Equity
 

 
 

Liabilities
 

 
 

HMBS-related borrowings, at fair value
$
5,040,983

 
$
4,601,556

Match funded liabilities (related to VIEs)
750,694

 
998,618

Other financing liabilities ($672,619 and $508,291 carried at fair value)
747,503

 
593,518

Other secured borrowings, net
340,418

 
545,850

Senior notes, net
347,612

 
347,338

Other liabilities ($2,448 and $635 carried at fair value)
591,803

 
769,410

Total liabilities
7,819,013

 
7,856,290


 
 
 
Commitments and Contingencies (Notes 19 and 20)


 



 
 
 
Equity
 

 
 

Ocwen Financial Corporation (Ocwen) stockholders’ equity
 
 
 
Common stock, $.01 par value; 200,000,000 shares authorized; 133,912,425 and 131,484,058 shares issued and outstanding at June 30, 2018, and December 31, 2017, respectively
1,339

 
1,315

Additional paid-in capital
552,800

 
547,057

Retained earnings (accumulated deficit)
47,056

 
(2,083
)
Accumulated other comprehensive loss, net of income taxes
(1,171
)
 
(1,249
)
Total Ocwen stockholders’ equity
600,024

 
545,040

Non-controlling interest in subsidiaries
1,159

 
1,834

Total equity
601,183

 
546,874

Total liabilities and equity
$
8,420,196

 
$
8,403,164



The accompanying notes are an integral part of these unaudited consolidated financial statements

4


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue
 
 
 
 
 
 
 
Servicing and subservicing fees
$
222,227

 
$
255,801

 
$
444,365

 
$
528,303

Gain on loans held for sale, net
24,393

 
28,255

 
44,193

 
51,199

Other
6,961

 
27,244

 
25,280

 
53,662

Total revenue
253,581

 
311,300

 
513,838

 
633,164


 
 
 
 
 
 
 
Expenses
 
 
 
 
 

 
 

Compensation and benefits
69,838

 
90,411

 
147,913

 
182,212

Professional services
32,389

 
65,405

 
70,159

 
107,234

Servicing and origination
28,276

 
35,645

 
59,694

 
75,815

Technology and communications
23,906

 
24,254

 
46,709

 
51,601

MSR valuation adjustments, net
33,118

 
41,568

 
50,247

 
82,020

Occupancy and equipment
12,859

 
16,480

 
25,473

 
34,229

Other
5,264

 
6,717

 
11,956

 
23,752

Total expenses
205,650

 
280,480

 
412,151

 
556,863


 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest income
3,355

 
4,239

 
6,055

 
8,002

Interest expense
(77,503
)
 
(81,128
)
 
(128,313
)
 
(165,190
)
Gain on sale of mortgage servicing rights, net
78

 
1,033

 
1,036

 
1,320

Other, net
(2,266
)
 
3,428

 
(3,905
)
 
7,461

Total other expense, net
(76,336
)
 
(72,428
)
 
(125,127
)
 
(148,407
)

 
 
 
 
 
 
 
Loss before income taxes
(28,405
)
 
(41,608
)
 
(23,440
)
 
(72,106
)
Income tax expense
1,348

 
2,828

 
3,696

 
4,953

Net loss
(29,753
)
 
(44,436
)
 
(27,136
)
 
(77,059
)
Net income attributable to non-controlling interests
(78
)
 
(71
)
 
(147
)
 
(172
)
Net loss attributable to Ocwen stockholders
$
(29,831
)
 
$
(44,507
)
 
$
(27,283
)
 
$
(77,231
)

 
 
 
 
 
 
 
Loss per share attributable to Ocwen stockholders
 
 
 
 
 
 
 
Basic
$
(0.22
)
 
$
(0.36
)
 
$
(0.20
)
 
$
(0.62
)
Diluted
$
(0.22
)
 
$
(0.36
)
 
$
(0.20
)
 
$
(0.62
)

 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
133,856,132

 
124,582,280

 
133,490,828

 
124,300,171

Diluted
133,856,132

 
124,582,280

 
133,490,828

 
124,300,171


The accompanying notes are an integral part of these unaudited consolidated financial statements

5


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(29,753
)
 
$
(44,436
)
 
$
(27,136
)
 
$
(77,059
)
 
 
 
 
 
 
 
 
Other comprehensive income, net of income taxes:
 

 
 

 
 
 
 

Reclassification adjustment for losses on cash flow hedges included in net income (1)
37

 
45

 
78

 
112

Total other comprehensive income, net of income taxes
37

 
45

 
78

 
112

 
 
 
 
 
 
 
 
Comprehensive loss
(29,716
)
 
(44,391
)
 
(27,058
)
 
(76,947
)
Comprehensive income attributable to non-controlling interests
(78
)
 
(71
)
 
(147
)
 
(172
)
Comprehensive loss attributable to Ocwen stockholders
$
(29,794
)
 
$
(44,462
)
 
$
(27,205
)
 
$
(77,119
)
(1)
These losses are reclassified to Other, net in the unaudited consolidated statements of operations.



The accompanying notes are an integral part of these unaudited consolidated financial statements

6



OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(Dollars in thousands)
 
Ocwen Stockholders
 
 
 
 
 
Common Stock
 
Additional Paid-in
Capital
 
Retained Earnings (Accumulated Deficit)
 
Accumulated Other Comprehensive Income (Loss), Net of Taxes
 
Non-controlling Interest in Subsidiaries
 
Total
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2017
131,484,058

 
$
1,315

 
$
547,057

 
$
(2,083
)
 
$
(1,249
)
 
$
1,834

 
$
546,874

Net income (loss)

 

 

 
(27,283
)
 

 
147

 
(27,136
)
Issuance of common stock
1,875,000

 
19

 
5,700

 

 

 

 
5,719

Cumulative effect of fair value election - Mortgage servicing rights

 

 

 
82,043

 

 

 
82,043

Cumulative effect of adoption of FASB Accounting Standards Update No. 2016-16

 

 

 
(5,621
)
 

 

 
(5,621
)
Capital distribution to non-controlling interest

 

 

 

 

 
(822
)
 
(822
)
Equity-based compensation and other
553,367

 
5

 
43

 

 

 

 
48

Other comprehensive income, net of income taxes

 

 

 

 
78

 

 
78

Balance at June 30, 2018
133,912,425

 
$
1,339

 
$
552,800

 
$
47,056

 
$
(1,171
)
 
$
1,159

 
$
601,183

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
123,988,160

 
$
1,240

 
$
527,001

 
$
126,167

 
$
(1,450
)
 
$
2,325

 
$
655,283

Net income (loss)

 

 

 
(77,231
)
 

 
172

 
(77,059
)
Cumulative effect of adoption of FASB Accounting Standards Update No. 2016-09

 

 
284

 
(284
)
 

 

 

Equity-based compensation and other
790,388

 
8

 
1,903

 

 

 

 
1,911

Other comprehensive income, net of income taxes

 

 

 

 
112

 

 
112

Balance at June 30, 2017
124,778,548

 
$
1,248

 
$
529,188

 
$
48,652

 
$
(1,338
)
 
$
2,497

 
$
580,247




The accompanying notes are an integral part of these unaudited consolidated financial statements

7


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

 
For the Six Months Ended June 30,
 
2018
 
2017
Cash flows from operating activities
 

 
 

Net loss
$
(27,136
)
 
$
(77,059
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

MSR valuation adjustments, net
50,247

 
82,020

Gain on sale of mortgage servicing rights, net
(1,036
)
 
(1,320
)
Provision for bad debts
25,879

 
31,918

Depreciation
12,640

 
13,439

Amortization of debt issuance costs
1,662

 
1,334

Equity-based compensation expense
772

 
3,263

Gain on valuation of financing liability
(8,642
)
 

Net gain on valuation of mortgage loans held for investment and HMBS-related borrowings
(7,930
)
 
(11,381
)
Gain on loans held for sale, net
(16,744
)
 
(29,512
)
Origination and purchase of loans held for sale
(838,581
)
 
(2,243,475
)
Proceeds from sale and collections of loans held for sale
800,982

 
2,217,259

Changes in assets and liabilities:
 

 
 

Decrease in advances and match funded assets
182,481

 
226,742

Decrease in receivables and other assets, net
86,606

 
89,437

Decrease in other liabilities
(68,556
)
 
(28,053
)
Other, net
3,926

 
8,013

Net cash provided by operating activities
196,570

 
282,625


 
 
 
Cash flows from investing activities
 

 
 

Origination of loans held for investment
(487,472
)
 
(698,473
)
Principal payments received on loans held for investment
186,216

 
192,569

Purchase of mortgage servicing rights

 
(1,657
)
Proceeds from sale of mortgage servicing rights
224

 
1,464

Proceeds from sale of advances
4,726

 
3,719

Issuance of automotive dealer financing notes
(19,642
)
 
(85,076
)
Collections of automotive dealer financing notes
52,581

 
76,264

Additions to premises and equipment
(6,398
)
 
(7,243
)
Other, net
3,577

 
2,277

Net cash used in investing activities
(266,188
)
 
(516,156
)

 
 
 
Cash flows from financing activities
 

 
 

Repayment of match funded liabilities, net
(247,924
)
 
(172,620
)
Proceeds from mortgage loan warehouse facilities and other secured borrowings
1,546,226

 
4,216,466

Repayments of mortgage loan warehouse facilities and other secured borrowings
(1,870,943
)
 
(4,299,411
)
Proceeds from sale of mortgage servicing rights accounted for as a financing
279,586

 

Proceeds from sale of reverse mortgages (HECM loans) accounted for as a financing (HMBS-related borrowings)
499,576

 
664,453

Repayment of HMBS-related borrowings
(181,548
)
 
(176,231
)
Capital distribution to non-controlling interest
(822
)
 

Other, net
(991
)
 
(2,314
)
Net cash provided by financing activities
23,160

 
230,343


 
 
 
Net decrease in cash and restricted cash
(46,458
)
 
(3,188
)
Cash and restricted cash at beginning of year
302,560

 
302,398

Cash and restricted cash at end of period
$
256,102

 
$
299,210

 
 
 
 
Supplemental non-cash investing and financing activities
 

 
 

Issuance of common stock in connection with litigation settlement
$
5,719

 
$

The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets that sums to the total of the same such amounts reported in the unaudited consolidated statements of cash flows:
 
June 30, 2018
 
June 30, 2017
Cash
$
228,412

 
$
251,472

Restricted cash and equivalents included in Other assets:
 
 
 
Debt service accounts
24,278

 
40,968

Other restricted cash
3,412

 
6,770

Total cash and restricted cash reported in the statements of cash flows
$
256,102

 
$
299,210




The accompanying notes are an integral part of these unaudited consolidated financial statements

8



OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(Dollars in thousands, except per share data and unless otherwise indicated)
 
Note 1 – Organization, Business Environment and Basis of Presentation
Organization
Ocwen Financial Corporation (NYSE: OCN) (Ocwen, we, us and our) is a financial services holding company which, through its subsidiaries, originates and services loans. We are headquartered in West Palm Beach, Florida with offices located throughout the United States (U.S.) and in the United States Virgin Islands (USVI) and with operations located in India and the Philippines. Ocwen is a Florida corporation organized in February 1988.
Ocwen owns all of the common stock of its primary operating subsidiary, Ocwen Mortgage Servicing, Inc. (OMS), and directly or indirectly owns all of the outstanding stock of its other primary operating subsidiaries: Ocwen Loan Servicing, LLC (OLS), Ocwen Financial Solutions Private Limited (OFSPL), Homeward Residential, Inc. (Homeward) and Liberty Home Equity Solutions, Inc. (Liberty).
We perform servicing activities on behalf of other servicers (subservicing), the largest being New Residential Investment Corp. (NRZ), and investors (primary and master servicing), including the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the GSEs), the Government National Mortgage Association (Ginnie Mae) and private-label securitizations (non-Agency). As a subservicer or primary servicer, we may be required to make advances for certain property tax and insurance premium payments, default and property maintenance payments and principal and interest payments on behalf of delinquent borrowers to mortgage loan investors before recovering them from borrowers. Most, but not all, of our subservicing agreements provide for us to be reimbursed for any such advances by the owner of the servicing rights. Advances made by us as primary servicer are recovered from the borrower or the mortgage loan investor. As master servicer, we collect mortgage payments from primary servicers and distribute the funds to investors in the mortgage-backed securities. To the extent the primary servicer does not advance the scheduled principal and interest, as master servicer we are responsible for advancing the shortfall, subject to certain limitations.
We originate, sell and securitize conventional (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans) and government-insured (Federal Housing Administration (FHA) or Department of Veterans Affairs (VA)) forward mortgages. The GSEs or Ginnie Mae guarantee these mortgage securitizations. We originate Home Equity Conversion Mortgages (HECM, or reverse mortgages) that are insured by the FHA and are an approved issuer of Home Equity Conversion Mortgage-Backed Securities (HMBS) that are guaranteed by Ginnie Mae.
We had a total of approximately 6,600 employees at June 30, 2018 of which approximately 4,500 were located in India and approximately 500 were based in the Philippines. Our operations in India and the Philippines primarily provide internal support services, principally to our loan servicing business and our corporate functions. Of our foreign-based employees, more than 80% were engaged in supporting our loan servicing operations as of June 30, 2018.
Business Environment
We are facing certain challenges and uncertainties that could have significant adverse effects on our business, financial condition, liquidity and results of operations. The ability of management to appropriately address these challenges and uncertainties in a timely manner is critical to our ability to operate our business successfully.
Losses in prior years have significantly eroded stockholders’ equity and weakened our financial condition. In order to drive stronger financial performance, we are focusing our operations on mortgage servicing, on retail forward lending, primarily servicing portfolio recapture, and on our reverse mortgage business. In addition, we have significantly strengthened our cash position through the receipt of a lump-sum fee payment of $279.6 million from NRZ in January 2018 in connection with our rights to mortgage servicing rights agreements. See Note 8 — Rights to MSRs for further information.
On February 27, 2018, we entered into a Merger Agreement pursuant to which PHH Corporation (PHH) will become a wholly owned subsidiary of Ocwen. We believe our acquisition of PHH will enable us to obtain the following key strategic and financial benefits:
Accelerate our transition to the Black Knight Financial Services, Inc. LoanSphere MSP® servicing platform;
Improve servicing and origination margin through better economies of scale;
Reduce fixed costs (on a combined basis) through reductions of redundant corporate overhead and other costs; and,
Provide a foundation to enable the combined servicing platform to resume new business and growth activities to offset portfolio runoff.

9



Our business, operating results and financial condition have been significantly impacted in recent periods by regulatory actions against us and by significant litigation matters. Should the number or scope of regulatory or legal actions against us increase or expand or should we be unable to reach reasonable resolutions in existing regulatory and legal matters, our business, reputation, financial condition, liquidity and results of operations could be materially and adversely affected, even if we are successful in our ongoing efforts to drive stronger financial performance. See Note 18 – Regulatory Requirements and Note 20 – Contingencies for further information. 
Regarding the current maturities of our borrowings, as of June 30, 2018 we have approximately $642.2 million of debt outstanding under facilities coming due in the next 12 months. Portions of our match funded facilities and all of our mortgage loan warehouse facilities have 364-day terms consistent with market practice. We have historically renewed these facilities on or before their expiration in the ordinary course of financing our business. We expect to renew, replace or extend all such borrowings to the extent necessary to finance our business on or prior to their respective maturities consistent with our historical experience.
Our debt agreements contain various qualitative and quantitative events of default provisions that include, among other things, noncompliance with covenants, breach of representations, or the occurrence of a material adverse change. If a lender were to allege an event of default and we are unable to avoid, remedy or secure a waiver, we could be subject to adverse actions by our lenders that could have a material adverse impact on us. In addition, OLS, Homeward and Liberty are parties to seller/servicer agreements and/or subject to guidelines and regulations (collectively, seller/servicer obligations) with one or more of the GSEs, the Department of Housing and Urban Development (HUD), FHA, VA and Ginnie Mae. To the extent these requirements are not met or waived, the applicable agency may, at its option, utilize a variety of remedies including requirements to provide certain information or take actions at the direction of the applicable agency, requirements to deposit funds as security for our obligations, sanctions, suspension or even termination of approved seller/servicer status, which would prohibit future originations or securitizations of forward or reverse mortgage loans or servicing for the applicable agency. Any of these actions could have a material adverse impact on us. See Note 11 – Borrowings, Note 18 – Regulatory Requirements and Note 20 – Contingencies for further information.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions of the Securities and Exchange Commission (SEC) to Form 10-Q and SEC Regulation S-X, Article 10, Rule 10-01 for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The results of operations and other data for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2018. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions include, but are not limited to, those that relate to fair value measurements, income taxes, the provision for potential losses that may arise from litigation proceedings, and our going concern evaluation. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ from those estimates and assumptions.
Reclassifications
Within the expenses section of the unaudited statement of operations for the three and six months ended June 30, 2017, we reclassified impairment charges and fair value gains and losses on mortgage servicing rights (MSRs), both previously included in the Servicing and origination line item, and Amortization of MSRs to a new line item titled MSR valuation adjustments, net.
As a result of our adoption on January 1, 2018 of FASB Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, debt service accounts and other restricted cash which are included in Other assets on the consolidated balance sheets have been classified as Cash and restricted cash in our consolidated statements of cash flows. Our revision of the unaudited consolidated statement of cash flows for the six months ended June 30, 2017 to conform to the new standard resulted in an increase in net cash provided by operating activities of $1.9 million (reduction in the Decrease in receivables and other assets, net line item).

10



Certain amounts in the unaudited consolidated statement of cash flows for the six months ended June 30, 2017 have been reclassified to conform to the current year presentation as follows:
Within the operating activities section, we reclassified Amortization of MSRs, Loss on valuation of MSRs, at fair value, and Impairment of MSRs to a new line item. In addition, we reclassified Realized and unrealized gains on derivative financial instruments to Other, net.
Within the financing activities section, we reclassified Repayments of HMBS-related borrowings from Repayments of mortgage loan warehouse facilities and other secured borrowings to a separate line item. We also reclassified Payment of debt issuance costs to Other, net. These reclassifications had no impact on our consolidated cash flows from operating, investing or financing activities.
Recently Adopted Accounting Standards
Revenue from Contracts with Customers (Accounting Standards Update (ASU) 2014-09)
This ASU clarifies the principles for recognizing revenue and creates a common revenue standard. Under this ASU, an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity will recognize revenue through a five-step process. The guidance in this standard does not apply to financial instruments and other contractual rights or obligations within the scope of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 860, Transfers and Servicing, among other ASC topics. As a result, our adoption of this standard on a modified retrospective basis on January 1, 2018 did not have a material impact on our consolidated financial statements.
Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01)
This ASU provides users with more useful information regarding the recognition, measurement, presentation, and disclosure of financial instruments and also improves the accounting model to better meet the requirements of today’s complex economic environment. Most changes in this ASU require the same information, but some changes will revise the geography of that information on the financial statements. Our adoption of this standard on January 1, 2018 did not have a material impact on our consolidated financial statements.
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15)
This ASU clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows under FASB ASC Topic 230, Statement of Cash Flows (ASC 230). Our adoption of this standard on January 1, 2018 did not have a material impact on our consolidated financial statements.
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16)
This ASU requires an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. Previously, recognition of current and deferred income taxes for an intra-entity transfer was prohibited until the asset had been sold to an outside party. We adopted this standard on a modified retrospective basis on January 1, 2018 by recording a cumulative-effect reduction of $5.6 million to retained earnings.
Statement of Cash Flows: Restricted Cash (ASU 2016-18)
This ASU clarifies how changes in restricted cash are classified and presented in the statement of cash flows under ASC 230. This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Our adoption of this standard on January 1, 2018 did not have a material impact on our consolidated financial statements. The amendments in this update have been applied using a retrospective transition method to each period presented. We have revised the unaudited consolidated statement of cash flows for the six months ended June 30, 2017 to conform to the new standard.
Business Combinations: Clarifying the Definition of a Business (ASU 2017-01)
This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. Our adoption of this standard on January 1, 2018 did not have a material impact on our consolidated financial statements.
Compensation: Stock Compensation (ASU 2017-09)
This ASU reduces both diversity in practice as well as cost and complexity when applying the modification accounting guidance in FASB ASC Topic 718, Compensation -- Stock Compensation, to a change to the terms or conditions of a share-based payment award. Our adoption of this standard on January 1, 2018 did not have a material impact on our consolidated financial statements.


11



Financial Instruments: Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10) (ASU 2018-03)
This ASU provides clarification of areas in ASU 2016-01 by improving the measurement and reporting of certain financial assets and liabilities. Our adoption of this standard on July 1, 2018 will not have a material impact on our consolidated financial statements.
Income Taxes: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (ASU 2018-05)
This ASU adds various SEC paragraphs pursuant to the issuance of SEC Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act (Tax Act) in the period of enactment. We adopted the now codified guidance in SAB 118 as of December 31, 2017 and continue to rely on the guidance in these interim financial statements.
Accounting Standards Issued but Not Yet Adopted
Leases (ASU 2016-02)
This ASU will require a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months, regardless of whether the lease is classified as a finance or operating lease. Additional disclosures of the amount, timing and uncertainty of cash flows arising from leases will be required. This standard will be effective for us on January 1, 2019, with early application permitted. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13)
This ASU will require timelier recording of credit losses on loans and other financial instruments. This standard aligns the accounting with the economics of lending by requiring banks and other lending institutions to immediately record the full amount of credit losses that are expected in their loan portfolios. The new guidance requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This standard requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. Additionally, the new guidance amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. This standard will be effective for us on January 1, 2020, with early application permitted. We are currently evaluating the effect of adopting this standard.
Receivables: Nonrefundable Fees and Other Costs (ASU 2017-08)
This ASU amends the amortization period for certain purchased callable debt securities held at a premium. This standard shortens the amortization period for the premium to the earliest call date, rather than generally amortizing the premium as an adjustment of yield over the contractual life of the instrument. This standard will be effective for us on January 1, 2019. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.
Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02)
This ASU provides entities with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. This standard will be effective for us on January 1, 2019. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.

Note 2 – Securitizations and Variable Interest Entities
We securitize, sell and service forward and reverse residential mortgage loans and regularly transfer financial assets in connection with asset-backed financing arrangements. We have aggregated these securitizations and asset-backed financing arrangements into three groups: (1) securitizations of residential mortgage loans, (2) financings of advances and (3) financings of automotive dealer financing notes.
We have determined that the special purpose entities (SPEs) created in connection with our match funded advance financing facilities are variable interest entities (VIEs) for which we are the primary beneficiary.
Securitizations of Residential Mortgage Loans
We securitize forward and reverse residential mortgage loans involving the GSEs and loans insured by the FHA or VA through Ginnie Mae. To the extent we retain the right to service these loans, we receive servicing fees based upon the

12



securitized loan balances and certain ancillary fees, all of which are reported in Servicing and subservicing fees in the unaudited consolidated statements of operations.
Transfers of Forward Loans
We sell or securitize forward loans that we originate or purchased from third parties, generally in the form of mortgage-backed securities guaranteed by the GSEs or Ginnie Mae. Securitization typically occurs within 30 days of loan closing or purchase. We act only as a fiduciary and do not have a variable interest in the securitization trusts. As a result, we account for these transactions as sales upon transfer.
The following table presents a summary of cash flows received from and paid to securitization trusts related to transfers accounted for as sales that were outstanding:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
Proceeds received from securitizations
$
338,199

 
$
1,022,152

 
$
715,698

 
$
2,024,149

Servicing fees collected
10,077

 
9,843

 
20,425

 
19,950

Purchases of previously transferred assets, net of claims reimbursed
(659
)
 
(1,737
)
 
(2,829
)
 
(2,724
)
 
$
347,617

 
$
1,030,258

 
$
733,294

 
$
2,041,375

In connection with these transfers, we retained MSRs of $2.1 million and $4.5 million, and $6.9 million and $15.0 million, during the three and six months ended June 30, 2018 and 2017, respectively, which are reported in Gain on loans held for sale, net in the unaudited consolidated statements of operations. See Note 4 – Loans Held for Sale for additional information regarding gains or losses on the transfer of loans held for sale.
Certain obligations arise from the agreements associated with our transfers of loans. Under these agreements, we may be obligated to repurchase the loans, or otherwise indemnify or reimburse the investor or insurer for losses incurred due to material breach of contractual representations and warranties.
The following table presents the carrying amounts of our assets that relate to our continuing involvement with forward loans that we have transferred with servicing rights retained as well as our maximum exposure to loss including the unpaid principal balance (UPB) of the transferred loans:
 
June 30, 2018
 
December 31, 2017
Carrying value of assets
 
 
 
MSRs, at fair value
$
113,329

 
$
227

MSRs, at amortized cost

 
97,832

Advances and match funded advances
60,350

 
57,636

UPB of loans transferred
11,288,337

 
12,077,635

Maximum exposure to loss
$
11,462,016

 
$
12,233,330

At June 30, 2018 and December 31, 2017, 7.4% and 8.9%, respectively, of the transferred residential loans that we service were 60 days or more past due.
Transfers of Reverse Mortgages
We pool HECM loans into HMBS that we sell into the secondary market with servicing rights retained or we sell the loans to third parties with servicing rights released. We have determined that loan transfers in the HMBS program do not meet the definition of a participating interest because of the servicing requirements in the product that require the issuer/servicer to absorb some level of interest rate risk, cash flow timing risk and incidental credit risk. As a result, the transfers of the HECM loans do not qualify for sale accounting, and therefore, we account for these transfers as financings. Under this accounting treatment, the HECM loans are classified as Loans held for investment, at fair value, on our unaudited consolidated balance sheets. Holders of participating interests in the HMBS have no recourse against the assets of Ocwen, except with respect to standard representations and warranties and our contractual obligation to service the HECM loans and the HMBS.
At June 30, 2018 and December 31, 2017, Loans held for investment included $81.2 million and $83.8 million, respectively, of originated loans which had not yet been pledged as collateral. See Note 3 – Fair Value and Note 11 – Borrowings for additional information on HMBS-related borrowings and Loans held for investment.

13



Financings of Advances
Match funded advances result from our transfers of residential loan servicing advances to SPEs in exchange for cash. We consolidate these SPEs because we have determined that Ocwen is the primary beneficiary of the SPE. These SPEs issue debt supported by collections on the transferred advances, and we refer to this debt as Match funded liabilities.
We make transfers to these SPEs in accordance with the terms of our advance financing facility agreements. Debt service accounts require us to remit collections on pledged advances to the trustee within two days of receipt. Collected funds that are not applied to reduce the related match funded debt until the payment dates specified in the indenture are classified as debt service accounts within Other assets in our consolidated balance sheets. The balances also include amounts that have been set aside from the proceeds of our match funded advance facilities to provide for possible shortfalls in the funds available to pay certain expenses and interest, as well as amounts set aside as required by our warehouse facilities as security for our obligations under the related agreements. The funds are held in interest earning accounts and those amounts related to match funded facilities are held in the name of the SPE created in connection with the facility.
We classify the transferred advances on our unaudited consolidated balance sheets as a component of Match funded assets and the related liabilities as Match funded liabilities. The SPEs use collections of the pledged advances to repay principal and interest and to pay the expenses of the SPE. Holders of the debt issued by these entities have recourse only to the assets of the SPE for satisfaction of the debt. The assets and liabilities of the advance financing SPEs are comprised solely of Match funded advances, Debt service accounts, Match funded liabilities and amounts due to affiliates. Amounts due to affiliates are eliminated in consolidation in our unaudited consolidated balance sheets.
Financings of Automotive Dealer Financing Notes
Match funded automotive dealer financing notes resulted from our transfers of short-term, inventory-secured loans to car dealers to an SPE in exchange for cash. We consolidated this SPE because we determined that Ocwen is the primary beneficiary of the SPE. In January 2018, we decided to exit the independent used car dealer floor plan lending business conducted through Automotive Capital Services, Inc. (ACS). We made transfers to the SPE in accordance with the terms of the automotive capital asset receivables financing facility agreement, which we terminated in January 2018 in connection with our decision to exit the business. We classified the transferred loans on our consolidated balance sheets as a component of Match funded assets and the related liabilities as Match funded liabilities. Holders of the debt issued by the SPE had recourse only to the assets of the SPE for satisfaction of the debt.
Note 3 – Fair Value
Fair value is estimated based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs.
Level 1:
Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2:
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3:
Unobservable inputs for the asset or liability.
We classify assets in their entirety based on the lowest level of input that is significant to the fair value measurement.
The carrying amounts and the estimated fair values of our financial instruments and certain of our nonfinancial assets measured at fair value on a recurring or non-recurring basis or disclosed, but not carried, at fair value are as follows:
 
 
 
June 30, 2018
 
December 31, 2017
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial assets
 
 
 

 
 

 
 

 
 

Loans held for sale
 
 
 
 
 
 
 
 
 
Loans held for sale, at fair value (a)
2
 
$
153,906

 
$
153,906

 
$
214,262

 
$
214,262

Loans held for sale, at lower of cost or fair value (b)
3
 
55,547

 
55,547

 
24,096

 
24,096


14



 
 
 
June 30, 2018
 
December 31, 2017
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Total Loans held for sale
 
 
$
209,453

 
$
209,453

 
$
238,358

 
$
238,358

 
 
 
 
 
 
 
 
 
 
Loans held for investment (a)
3
 
$
5,143,758

 
$
5,143,758

 
$
4,715,831

 
$
4,715,831

Advances (including match funded) (c)
3
 
1,167,713

 
1,167,713

 
1,356,393

 
1,356,393

Automotive dealer financing notes (including match funded) (c)
3
 
22

 
22

 
32,757

 
32,590

Receivables, net (c)
3
 
178,678

 
178,678

 
199,529

 
199,529

Mortgage-backed securities, at fair value (a)
3
 
1,732

 
1,732

 
1,592

 
1,592

U.S. Treasury notes (a)
1
 
1,560

 
1,560

 
1,567

 
1,567

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 

 
 

 
 

 
 

Match funded liabilities (c)
3
 
$
750,694

 
$
745,539

 
$
998,618

 
$
992,698

Financing liabilities:
 
 
 
 
 
 
 
 
 
HMBS-related borrowings, at fair value (a)
3
 
$
5,040,983

 
$
5,040,983

 
$
4,601,556

 
$
4,601,556

Financing liability - MSRs pledged, at fair value (a)
3
 
672,619

 
672,619

 
508,291

 
508,291

Other (c)
3
 
74,884

 
59,608

 
85,227

 
65,202

Total Financing liabilities
 
 
$
5,788,486

 
$
5,773,210

 
$
5,195,074

 
$
5,175,049

Other secured borrowings:
 
 
 
 
 
 
 
 
 
Senior secured term loan (c) (d)
2
 
$
233,786

 
$
240,475

 
$
290,068

 
$
299,741

Other (c)
3
 
106,632

 
106,632

 
255,782

 
255,782

Total Other secured borrowings
 
 
$
340,418

 
$
347,107

 
$
545,850

 
$
555,523

 
 
 
 
 
 
 
 
 
 
Senior notes:
 
 
 
 
 
 
 
 
 
Senior unsecured notes (c) (d)
2
 
$
3,122

 
$
3,138

 
$
3,122

 
$
2,872

Senior secured notes (c) (d)
2
 
344,490

 
356,987

 
344,216

 
355,550

Total Senior notes
 
 
$
347,612

 
$
360,125

 
$
347,338

 
$
358,422

 
 
 
 
 
 
 
 
 
 
Derivative financial instrument assets (liabilities), at fair value (a)
 
 
 

 
 

 
 

 
 

Interest rate lock commitments
2
 
$
3,315

 
$
3,315

 
$
3,283

 
$
3,283

Forward mortgage-backed securities
1
 
(2,422
)
 
(2,422
)
 
(545
)
 
(545
)
Interest rate caps
3
 
1,657

 
1,657

 
2,056

 
2,056

 
 
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
 
 
 
 
 
 
 
 
Mortgage servicing rights, at fair value (a)
3
 
$
1,043,995

 
$
1,043,995

 
$
671,962

 
$
671,962

Mortgage servicing rights, at amortized cost (c) (e)
3
 

 

 
336,882

 
418,745

Total Mortgage servicing rights
 
 
$
1,043,995

 
$
1,043,995

 
$
1,008,844

 
$
1,090,707

(a)
Measured at fair value on a recurring basis.
(b)
Measured at fair value on a non-recurring basis.
(c)
Disclosed, but not carried, at fair value. 
(d)
The carrying values are net of unamortized debt issuance costs and discount. See Note 11 – Borrowings for additional information.
(e)
Effective January 1, 2018, we elected fair value accounting for our MSRs previously accounted for using the amortization method, which included Agency MSRs and government-insured MSRs. The balance at December 31, 2017 includes the impaired government-insured stratum of amortization method MSRs, which was measured at fair value on a non-recurring basis and reported net of the valuation allowance. At December 31, 2017, the carrying value of this stratum was $158.0 million before applying the valuation allowance of $24.8 million.

15



The following tables present a reconciliation of the changes in fair value of Level 3 assets and liabilities that we measure at fair value on a recurring basis:
 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-Backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
 
Total
Three months ended June 30, 2018
Beginning balance
$
4,988,151

 
$
(4,838,193
)
 
$
1,679

 
$
(715,924
)
 
$
1,866

 
$
1,074,247

 
$
511,826

Purchases, issuances, sales and settlements
 
 
 
 
 
 
 
 
 

 
 

 
 

Purchases

 

 

 

 
95

 
3,507

 
3,602

Issuances
236,386

 
(276,751
)
 

 

 

 
(617
)
 
(40,982
)
Sales

 

 

 

 

 
(24
)
 
(24
)
Settlements
(103,497
)
 
100,737

 

 
49,962

 

 

 
47,202

Transfers (to) from:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale, at fair value
(257
)
 

 

 

 

 

 
(257
)
Other assets
(33
)
 

 

 

 

 

 
(33
)
Receivables, net
(22
)
 

 

 

 

 

 
(22
)
 
132,577

 
(176,014
)
 

 
49,962

 
95

 
2,866

 
9,486

Total realized and unrealized gains (losses) included in earnings
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in fair value
23,030

 
(26,776
)
 
53

 
(8,069
)
 
(304
)
 
(33,118
)
 
(45,184
)
Calls and other

 

 

 
1,412

 

 

 
1,412

 
23,030

 
(26,776
)
 
53

 
(6,657
)
 
(304
)
 
(33,118
)
 
(43,772
)
Transfers in and / or out of Level 3

 

 

 

 

 

 

Ending balance
$
5,143,758

 
$
(5,040,983
)
 
$
1,732

 
$
(672,619
)
 
$
1,657

 
$
1,043,995

 
$
477,540


16



 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-Backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
 
Total
Three months ended June 30, 2017
Beginning balance
$
3,916,387

 
$
(3,739,265
)
 
$
8,658

 
$
(459,187
)
 
$
2,262

 
$
651,987

 
$
380,842

Purchases, issuances, sales and settlements
 
 
 
 
 
 
 
 
 
 
 
 
 

Purchases

 

 

 

 

 

 

Issuances
351,392

 
(357,704
)
 

 

 

 
(711
)
 
(7,023
)
Sales

 

 

 

 

 
(2
)
 
(2
)
Settlements
(112,279
)
 
101,132

 

 
16,194

 
(42
)
 

 
5,005

Transfers (to) from:
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets
(1,423
)
 

 

 

 

 

 
(1,423
)
 
237,690

 
(256,572
)
 

 
16,194

 
(42
)
 
(713
)
 
(3,443
)
Total realized and unrealized gains (losses) included in earnings
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in fair value
69,699

 
(65,789
)
 
328

 
1,986

 
(283
)
 
(25,624
)
 
(19,683
)
Transfers in and / or out of Level 3

 

 

 

 

 

 

Ending balance
$
4,223,776

 
$
(4,061,626
)
 
$
8,986

 
$
(441,007
)
 
$
1,937

 
$
625,650

 
$
357,716


17



 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
 
Total
Six months ended June 30, 2018
Beginning balance
$
4,715,831

 
$
(4,601,556
)
 
$
1,592

 
$
(508,291
)
 
$
2,056

 
$
671,962

 
$
281,594

Purchases, issuances, sales and settlements
 
 
 
 
 
 
 
 
 

 
 

 
 

Purchases

 

 

 

 
95

 
5,885

 
5,980

Issuances
487,472

 
(499,576
)
 

 
(279,586
)
 

 
(2,375
)
 
(294,065
)
Sales

 

 

 

 

 
(155
)
 
(155
)
Settlements
(186,216
)
 
181,548

 

 
104,509

 
(371
)
 

 
99,470

Transfers (to) from:
 
 
 
 
 
 
 
 
 
 
 
 
 
MSRs carried at amortized cost, net of valuation allowance

 

 

 

 

 
418,925

 
418,925

Loans held for sale, at fair value
(441
)
 

 

 

 

 

 
(441
)
Other assets
(137
)
 

 

 

 

 

 
(137
)
Receivables, net
(72
)
 

 

 

 

 

 
(72
)
 
300,606

 
(318,028
)
 

 
(175,077
)
 
(276
)
 
422,280

 
229,505

Total realized and unrealized gains (losses) included in earnings
 
 
 
 
 
 
 
 
 
 
 
 


Change in fair value
127,321

 
(121,399
)
 
140

 
8,642

 
(123
)
 
(50,247
)
 
(35,666
)
Calls and other

 

 

 
2,107

 

 

 
2,107

 
127,321

 
(121,399
)
 
140

 
10,749

 
(123
)
 
(50,247
)
 
(33,559
)
Transfers in and / or out of Level 3

 

 

 

 

 

 

Ending Balance
$
5,143,758

 
$
(5,040,983
)
 
$
1,732

 
$
(672,619
)
 
$
1,657

 
$
1,043,995

 
$
477,540


18



 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
 
Total
Six months ended June 30, 2017
Beginning balance
$
3,565,716

 
$
(3,433,781
)
 
$
8,342

 
$
(477,707
)
 
$
1,836

 
$
679,256

 
$
343,662

Purchases, issuances, sales and settlements
 
 
 
 
 
 
 
 
 

 
 

 
 

Purchases

 

 

 

 

 

 

Issuances
698,473

 
(664,453
)
 

 

 

 
(1,417
)
 
32,603

Sales

 

 

 

 

 
(230
)
 
(230
)
Settlements
(192,569
)
 
176,231

 

 
33,193

 
(42
)
 

 
16,813

Transfers (to) from:
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets
(1,423
)
 

 

 

 

 

 
(1,423
)
 
504,481

 
(488,222
)
 

 
33,193

 
(42
)
 
(1,647
)
 
47,763

Total realized and unrealized gains (losses) included in earnings
 
 
 
 
 
 
 
 
 
 
 
 


Change in fair value
153,579

 
(139,623
)
 
644

 
3,507

 
143

 
(51,959
)
 
(33,709
)
Transfers in and / or out of Level 3

 

 

 

 

 

 

Ending balance
$
4,223,776

 
$
(4,061,626
)
 
$
8,986

 
$
(441,007
)
 
$
1,937

 
$
625,650

 
$
357,716

The methodologies that we use and key assumptions that we make to estimate the fair value of financial instruments and other assets and liabilities measured at fair value on a recurring or non-recurring basis and those disclosed, but not carried, at fair value are described below.
Loans Held for Sale
Residential forward and reverse mortgage loans that we intend to sell are carried at fair value as a result of a fair value election. Such loans are subject to changes in fair value due to fluctuations in interest rates from the closing date through the date of the sale of the loan into the secondary market. These loans are classified within Level 2 of the valuation hierarchy because the primary component of the price is obtained from observable values of mortgage forwards for loans of similar terms and characteristics. We have the ability to access this market, and it is the market into which conventional and government-insured mortgage loans are typically sold.
We repurchase certain loans from Ginnie Mae guaranteed securitizations in connection with loan modifications and loan resolution activity as part of our contractual obligations as the servicer of the loans. These loans are classified as loans held for sale at the lower of cost or fair value, in the case of modified loans, as we expect to redeliver (sell) the loans to new Ginnie Mae guaranteed securitizations. The fair value of these loans is estimated using published forward Ginnie Mae prices. Loans repurchased in connection with loan resolution activities are modified or otherwise remediated through loss mitigation activities or are reclassified to receivables. Because these loans are insured or guaranteed by the FHA or VA, the fair value of these loans represents the net recovery value taking into consideration the insured or guaranteed claim.
For all other loans held for sale, which we report at the lower of cost or fair value, market illiquidity has reduced the availability of observable pricing data. When we enter into an agreement to sell a loan or pool of loans to an investor at a set price, we value the loan or loans at the commitment price. We base the fair value of loans for which we have no agreement to sell on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows.
Loans Held for Investment
We measure these loans at fair value based on the expected future cash flows discounted over the expected life of the loans at a rate commensurate with the risk of the estimated cash flows. Significant assumptions include expected prepayment and delinquency rates and cumulative loss curves. The discount rate assumption for these assets is primarily based on an assessment of current market yields on newly originated reverse mortgage loans, expected duration of the asset and current market interest rates.

19



Significant valuation assumptions
June 30,
2018
 
December 31, 2017
Life in years
 
 
 
Range
3.3 to 9.0

 
4.4 to 8.1

Weighted average
5.9

 
6.4

Conditional repayment rate
 
 
 
Range
6.1% to 45.8%

 
5.4% to 51.9%

Weighted average
14.4
%
 
13.1
%
Discount rate
3.5
%
 
3.2
%
Significant increases or decreases in any of these assumptions in isolation could result in a significantly lower or higher fair value, respectively. The effects of changes in the assumptions used to value the loans held for investment are largely offset by the effects of changes in the assumptions used to value the HMBS-related borrowings that are associated with these loans.
Mortgage Servicing Rights
The significant components of the estimated future cash inflows for MSRs include servicing fees, late fees, float earnings and other ancillary fees. Significant cash outflows include the cost of servicing, the cost of financing servicing advances and compensating interest payments.
Third-party valuation experts generally utilize: (a) transactions involving instruments with similar collateral and risk profiles, adjusted as necessary based on specific characteristics of the asset or liability being valued; and/or (b) industry-standard modeling, such as a discounted cash flow model, in arriving at their estimate of fair value. The prices provided by the valuation experts reflect their observations and assumptions related to market activity, including risk premiums and liquidity adjustments. The models and related assumptions used by the valuation experts are owned and managed by them and, in many cases, the significant inputs used in the valuation techniques are not reasonably available to us. However, we understand the processes and assumptions used to develop the prices based on our ongoing due diligence, which includes regular discussions with the valuation experts. We believe that the procedures executed by the valuation experts, supported by our verification and analytical procedures, provide reasonable assurance that the prices used in our unaudited consolidated financial statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.
We evaluate the reasonableness of our third-party experts’ assumptions using historical experience adjusted for prevailing market conditions. Assumptions used in the valuation of MSRs include:
Mortgage prepayment speeds
Delinquency rates
Cost of servicing
Interest rate used for computing float earnings
Discount rate
Compensating interest expense
Interest rate used for computing the cost of financing servicing advances
Collection rate of other ancillary fees
Fair Value MSRs
MSRs carried at fair value are classified within Level 3 of the valuation hierarchy. The fair value is equal to the mid-point of the range of prices provided by third-party valuation experts, without adjustment, except in the event we have a potential or completed sale, including transactions where we have executed letters of intent, in which case the fair value of the MSRs is disclosed at the estimated sale price. Fair value reflects actual Ocwen sale prices for orderly transactions where available in lieu of independent third-party valuations. Our valuation process includes discussions of bid pricing with the third-party valuation experts and presumably are contemplated along with other market-based transactions in their model validation.
A change in the valuation inputs utilized by the valuation experts might result in a significantly higher or lower fair value measurement. Changes in market interest rates tend to impact the fair value for Agency MSRs via prepayment speeds by altering the borrower refinance incentive and the non-Agency MSRs via a market rate indexed cost of advance funding. Other key assumptions used in the valuation of these MSRs include delinquency rates and discount rates.

20



Significant valuation assumptions
June 30, 2018
 
December 31, 2017
Agency (1)
 
Non-Agency
 
Agency
 
Non-Agency
Weighted average prepayment speed
8.0
%
 
15.8
%
 
8.1
%
 
16.6
%
Weighted average delinquency rate
10.3
%
 
27.6
%
 
1.0
%
 
28.5
%
Advance financing cost
5-year swap

 
5-yr swap plus 2.75%

 
5-year swap

 
5-yr swap plus 2.75%

Interest rate for computing float earnings
5-year swap

 
5-yr swap minus 0.50%

 
5-year swap

 
5-yr swap minus 0.50%

Weighted average discount rate
9.0
%
 
12.9
%
 
9.0
%
 
13.0
%
Weighted average cost to service (in dollars)
$
106

 
$
301

 
$
64

 
$
305

(1)
Valuation assumptions for Agency MSRs at June 30, 2018 include assumptions for MSRs we carried at amortized cost at December 31, 2017. Effective January 1, 2018, we elected fair value accounting for our remaining MSRs that we had previously carried at amortized cost.
Amortized Cost MSRs
Prior to our fair value election on January 1, 2018 for our remaining portfolio of MSRs carried at amortized cost, we estimated the fair value using a process that involved either actual sale prices obtained or the use of independent third-party valuation experts, supported by commercially available discounted cash flow models and analysis of current market data. To provide greater price transparency to investors, we disclosed actual Ocwen sale prices for orderly transactions where available in lieu of third-party valuations.
Significant valuation assumptions
December 31, 2017
Weighted average prepayment speed
8.8
%
Weighted average delinquency rate
10.9
%
Advance financing cost
5-year swap

Interest rate for computing float earnings
5-year swap

Weighted average discount rate
9.2
%
Weighted average cost to service (in dollars)
$
108

We performed an impairment analysis based on the difference between the carrying amount and fair value after grouping the underlying loans into the applicable strata, which we defined as conventional and government-insured.
Advances
We value advances at their net realizable value, which generally approximates fair value, because advances have no stated maturity, are generally realized within a relatively short period of time and do not bear interest.
Receivables
The carrying value of receivables generally approximates fair value because of the relatively short period of time between their origination and realization.
Mortgage-Backed Securities (MBS)
Our subordinate and residual securities are not actively traded, and therefore, we estimate the fair value of these securities using a process based upon the use of an independent third-party valuation expert. Where possible, we consider observable trading activity in the valuation of our securities. Key inputs include expected prepayment rates, delinquency and cumulative loss curves and discount rates commensurate with the risks. Where possible, we use observable inputs in the valuation of our securities. However, the subordinate and residual securities in which we have invested trade infrequently and therefore have few or no observable inputs and little price transparency. Additionally, during periods of market dislocation, the observability of inputs is further reduced.
U.S. Treasury Notes
We classify U.S. Treasury notes as trading securities and account for them at fair value on a recurring basis. We base the fair value on quoted prices in active markets to which we have access. Changes in the fair value of our investment in U.S. Treasury notes are recognized in Other, net in the consolidated statements of operations.

21



Match Funded Liabilities
For match funded liabilities that bear interest at a rate that is adjusted regularly based on a market index, the carrying value approximates fair value. For match funded liabilities that bear interest at a fixed rate, we determine fair value by discounting the future principal and interest repayments at a market rate commensurate with the risk of the estimated cash flows. We estimate principal repayments of match funded liabilities during the amortization period based on our historical advance collection rates and taking into consideration any plans to refinance the notes.
Financing Liabilities
HMBS-Related Borrowings
We have elected to measure these borrowings at fair value. These borrowings are not actively traded, and therefore, quoted market prices are not available. We determine fair value by discounting the future principal and interest repayments over the estimated life of the borrowing at a market rate commensurate with the risk of the estimated cash flows. Significant assumptions include prepayments, discount rate and borrower mortality rates. The discount rate assumption for these liabilities is based on an assessment of current market yields for newly issued HMBS, expected duration and current market interest rates.
Significant valuation assumptions
June 30,
2018
 
December 31, 2017
Life in years
 
 
 
Range
3.3 to 9.0

 
4.4 to 8.1

Weighted average
5.9

 
6.4

Conditional repayment rate
 
 
 
Range
6.1% to 45.8%

 
5.4% to 51.9%

Weighted average
14.4
%
 
13.1
%
Discount rate
3.4
%
 
3.1
%
Significant increases or decreases in any of these assumptions in isolation would result in a significantly higher or lower fair value.
MSRs Pledged (Rights to MSRs)
We have elected to measure these borrowings at fair value. We recognize the proceeds received in connection with Rights to MSRs transactions as a secured borrowing that we account for at fair value. Fair value for the portion of the borrowing attributable to the MSRs underlying the Rights to MSRs is determined using the mid-point of the range of prices provided by third-party valuation experts. Fair value for the portion of the borrowing attributable to any lump sum payments received in connection with the transfer of MSRs underlying such Rights to MSRs to the extent such transfer is accounted for as a financing is determined by discounting the relevant future cash flows that were altered through such transfer using assumptions consistent with the mid-point of the range of prices provided by third-party valuation experts for the related MSR. Because we have elected fair value for our portfolio of non-Agency MSRs, fair value changes in the Financing Liability - MSRs Pledged are partially offset by changes in the fair value of the related MSRs. See Note 8 — Rights to MSRs for additional information.