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 March 31, 2019
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 every Interactive Data File required to be submitted 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 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
 
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 Par Value
OCN
New York Stock Exchange (NYSE)
Number of shares of common stock outstanding as of May 1, 2019: 134,438,610 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, meet our MSR or other asset investment objectives and comply with our debt agreements, including the financial and other covenants contained in them;
our ability to invest in MSRs or other assets 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 execute on our cost re-engineering efforts to reduce operating costs while minimizing disruption from our human capital and site closure initiatives;
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;

2



our ability to successfully integrate PHH Corporation (PHH) and 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 integrate, maintain and enhance PHH’s servicing, subservicing and other business relationships, including its relationship with NRZ;
our ability to transition to the PHH servicing technology platform within the time and cost parameters anticipated and without significant disruptions to our customers and operations;
our ability to efficiently merge our primary licensed subsidiaries into PHH Mortgage Corporation (PMC) and reduce organizational complexity through our corporate reorganization initiatives;
the loss of the services of our senior managers and our ability to execute effective executive 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 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, 2018 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)

 
March 31, 2019
 
December 31, 2018
Assets
 

 
 

Cash
$
263,188

 
$
329,132

Restricted cash (amounts related to variable interest entities (VIEs) of $16,499 and $20,968)
63,379

 
67,878

Mortgage servicing rights, at fair value
1,400,191

 
1,457,149

Advances, net
225,360

 
249,382

Match funded advances (related to VIEs)
868,720

 
937,294

Loans held for sale ($153,140 and $176,525 carried at fair value)
222,687

 
242,622

Loans held for investment, at fair value (amounts related to VIEs of $26,237 and $26,520)
5,753,154

 
5,498,719

Receivables, net
197,043

 
198,262

Premises and equipment, net
69,316

 
33,417

Other assets ($7,639 and $7,568 carried at fair value)(amounts related to VIEs of $2,214 and $2,874)
474,172

 
379,567

Assets related to discontinued operations

 
794

Total assets
$
9,537,210

 
$
9,394,216


 
 
 
Liabilities and Equity
 

 
 

Liabilities
 

 
 

HMBS-related borrowings, at fair value
$
5,614,688

 
$
5,380,448

Match funded liabilities (related to VIEs)
649,384

 
778,284

Other financing liabilities ($975,778 and $1,057,671 carried at fair value) (amounts related to VIEs of $24,562 and $24,815)
1,043,698

 
1,127,613

Other secured borrowings, net
436,982

 
382,538

Senior notes, net
448,143

 
448,727

Other liabilities ($4,209 and $4,986 carried at fair value)
832,721

 
703,636

Liabilities related to discontinued operations

 
18,265

Total liabilities
9,025,616

 
8,839,511


 
 
 
Commitments and Contingencies (Notes 20 and 21)


 



 
 
 
Stockholders’ Equity
 

 
 

Common stock, $.01 par value; 200,000,000 shares authorized; 133,946,055 and 133,912,425 shares issued and outstanding at March 31, 2019 and December 31, 2018 respectively
1,339

 
1,339

Additional paid-in capital
555,046

 
554,056

Retained earnings (accumulated deficit)
(40,911
)
 
3,567

Accumulated other comprehensive loss, net of income taxes
(3,880
)
 
(4,257
)
Total stockholders’ equity
511,594

 
554,705

Total liabilities and stockholders’ equity
$
9,537,210

 
$
9,394,216



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 March 31,
 
2019
 
2018
Revenue
 
 
 
Servicing and subservicing fees
$
255,863

 
$
222,138

Gain on loans held for sale, net
17,595

 
19,800

Other revenue, net
30,430

 
18,319

Total revenue
303,888

 
260,257


 
 
 
Expenses
 
 
 
MSR valuation adjustments, net
108,998

 
17,129

Compensation and benefits
94,696

 
78,075

Servicing and origination
28,698

 
31,418

Technology and communications
24,435

 
22,803

Occupancy and equipment
16,589

 
12,614

Professional services
3,441

 
37,770

Other expenses
3,248

 
6,692

Total expenses
280,105

 
206,501


 
 
 
Other income (expense)
 
 
 
Interest income
4,558

 
2,700

Interest expense
(70,445
)
 
(50,810
)
Bargain purchase gain
(285
)
 

Other, net
1,305

 
(681
)
Total other expense, net
(64,867
)
 
(48,791
)

 
 
 
Income (loss) before income taxes
(41,084
)
 
4,965

Income tax expense
3,410

 
2,348

Net income (loss)
(44,494
)
 
2,617

Net income attributable to non-controlling interests

 
(69
)
Net income (loss) attributable to Ocwen stockholders
$
(44,494
)
 
$
2,548


 
 
 
Income (loss) per share attributable to Ocwen stockholders
 
 
 
Basic
$
(0.33
)
 
$
0.02

Diluted
$
(0.33
)
 
$
0.02


 
 
 
Weighted average common shares outstanding
 
 
 
Basic
133,918,986

 
133,121,465

Diluted
133,918,986

 
134,606,929


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

5


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

 
For the Three Months Ended March 31,
 
2019
 
2018
Net income (loss)
$
(44,494
)
 
$
2,617

 
 
 
 
Other comprehensive income, net of income taxes:
 

 
 

Reclassification adjustment for losses on cash flow hedges included in net income (1)
34

 
41

Change in unfunded pension plan obligation liability
337

 

Other
6

 

Comprehensive income (loss)
(44,117
)
 
2,658

Comprehensive income attributable to non-controlling interests

 
(69
)
Comprehensive income (loss) attributable to Ocwen stockholders
$
(44,117
)
 
$
2,589

(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 THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(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, 2018
133,912,425

 
$
1,339

 
$
554,056

 
$
3,567

 
$
(4,257
)
 
$

 
$
554,705

Net loss

 

 

 
(44,494
)
 

 

 
(44,494
)
Cumulative effect of adoption of FASB Accounting Standards Update No. 2016-02

 

 

 
16

 

 

 
16

Equity-based compensation and other
33,630

 

 
990

 

 

 

 
990

Other comprehensive income, net of income taxes

 

 

 

 
377

 

 
377

Balance at March 31, 2019
133,946,055

 
$
1,339

 
$
555,046

 
$
(40,911
)
 
$
(3,880
)
 
$

 
$
511,594

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
131,484,058

 
$
1,315

 
$
547,057

 
$
(2,083
)
 
$
(1,249
)
 
$
1,834

 
$
546,874

Net income

 

 

 
2,548

 

 
69

 
2,617

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
)
Issuance of common stock
1,875,000

 
19

 
5,700

 

 

 

 
5,719

Equity-based compensation and other
46,527

 

 
669

 

 

 

 
669

Other comprehensive income, net of income taxes

 

 

 

 
41

 

 
41

Balance at March 31, 2018
133,405,585

 
$
1,334

 
$
553,426

 
$
76,887

 
$
(1,208
)
 
$
1,903

 
$
632,342




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 Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities
 

 
 

Net income (loss)
$
(44,494
)
 
$
2,617

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

MSR valuation adjustments, net
108,998

 
17,129

Gain on sale of mortgage servicing rights, net
(369
)
 
(958
)
Provision for bad debts
9,170

 
15,336

Depreciation
8,551

 
6,527

Equity-based compensation expense
857

 
575

Gain on valuation of financing liability
(26,237
)
 
(16,712
)
Net gain on valuation of mortgage loans held for investment and HMBS-related borrowings
(23,487
)
 
(8,975
)
Gain on loans held for sale, net
(11,112
)
 
(8,832
)
Origination and purchase of loans held for sale
(304,182
)
 
(358,078
)
Proceeds from sale and collections of loans held for sale
305,322

 
383,734

Changes in assets and liabilities:
 

 
 

Decrease in advances and match funded assets
91,114

 
71,096

Decrease in receivables and other assets, net
23,627

 
57,949

Decrease in other liabilities
(36,755
)
 
(68,128
)
Other, net
(339
)
 
6,131

Net cash provided by operating activities
100,664

 
99,411


 
 
 
Cash flows from investing activities
 

 
 

Origination of loans held for investment
(209,264
)
 
(251,086
)
Principal payments received on loans held for investment
104,630

 
82,719

Purchase of mortgage servicing rights
(48,641
)
 

Proceeds from sale of mortgage servicing rights
868

 
123

Proceeds from sale of advances
1,070

 
4,286

Issuance of automotive dealer financing notes

 
(19,642
)
Collections of automotive dealer financing notes

 
49,756

Additions to premises and equipment
(531
)
 
(2,983
)
Other, net
525

 
916

Net cash used in investing activities
(151,343
)
 
(135,911
)

 
 
 
Cash flows from financing activities
 

 
 

Repayment of match funded liabilities, net
(128,900
)
 
(198,022
)
Proceeds from mortgage loan warehouse facilities and other secured borrowings
616,891

 
801,155

Repayment of mortgage loan warehouse facilities and other secured borrowings
(727,711
)
 
(964,104
)
Proceeds from issuance of additional senior secured term loan (SSTL)
119,100

 

Repayment of SSTL borrowings
(6,358
)
 
(4,188
)
Payment of debt issuance costs related to SSTL
(1,284
)
 

Proceeds from sale of mortgage servicing rights accounted for as a financing
577

 
279,586

Proceeds from sale of reverse mortgages (HECM loans) accounted for as a financing (HMBS-related borrowings)
210,563

 
222,825

Repayment of HMBS-related borrowings
(102,389
)
 
(80,811
)
Other, net
(253
)
 
(74
)
Net cash (used in) provided by financing activities
(19,764
)
 
56,367


 
 
 
Net increase (decrease) in cash and restricted cash
(70,443
)
 
19,867

Cash and restricted cash at beginning of year
397,010

 
302,560

Cash and restricted cash at end of period
$
326,567

 
$
322,427

 
 
 
 
Supplemental non-cash investing and financing activities
 

 
 

Issuance of common stock in connection with litigation settlement
$

 
$
5,719

Recognition of gross right-of-use asset and lease liability upon adoption of FASB Accounting Standards Update No. 2016-02:
 
 
 
Right-of-use asset
66,231

 

Lease liability
66,247

 

Transfers of loans held for sale to real estate owned
1,791

 
1,195

The following table provides a reconciliation of cash and restricted cash reported within the unaudited consolidated balance sheets that sums to the total of the same such amounts reported in the unaudited consolidated statements of cash flows:
 
March 31, 2019
 
March 31, 2018
Cash
$
263,188

 
$
285,653

Restricted cash and equivalents:
 
 
 
Debt service accounts
22,087

 
27,496

Other restricted cash
41,292

 
9,278

Total cash and restricted cash reported in the statements of cash flows
$
326,567

 
$
322,427




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
MARCH 31, 2019
(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 PHH Corporation (PHH), and directly or indirectly owns all of the outstanding stock of its other primary operating subsidiaries: Ocwen Loan Servicing, LLC (OLS), PHH Mortgage Corporation (PMC), Ocwen Financial Solutions Private Limited (OFSPL) 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 7,000 employees at March 31, 2019 of which approximately 4,000 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, nearly 80% were engaged in supporting our loan servicing operations as of March 31, 2019.
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 have significantly eroded stockholders’ equity and weakened our financial condition. Our near-term priority is to return to profitability in the shortest timeframe possible within an appropriate risk and compliance environment. We believe our acquisition of PHH provided us with the opportunity to transform into a stronger, more efficient company better able to serve our customers and clients, and positioned us for a return to growth and profitability. See Note 2 – Business Acquisition for additional information regarding the acquisition of PHH.
Now that we have consummated our acquisition of PHH, if we can execute on our five key initiatives, we believe we will drive stronger financial performance.
First, we must successfully execute on the integration of PHH’s business with ours, including a smooth transition onto the Black Knight Financial Services, Inc. (Black Knight) LoanSphere MSP® servicing system (Black Knight MSP). From the date of acquisition through April 30, 2019, we have transferred approximately 470,000 loans to Black Knight MSP. We expect to complete the transfer of the rest of the portfolio in the second quarter of 2019.
Second, we must re-engineer our cost structure to go beyond eliminating redundant costs through the integration process. Our cost re-engineering plans address organizational, process and control redesign, human capital planning, off-shore

9



utilization, strategic sourcing and facilities rationalization. As part of our cost re-engineering plans, we expect to reduce total staffing levels significantly and to close a number of our U.S. facilities. We believe these steps are necessary in order to drive stronger financial performance and, in the longer term, simplify our operations.
We anticipate that a substantial portion of our expense reductions, and the related re-engineering costs, will be realized in the second half of 2019 following the completion of the transition onto the Black Knight MSP servicing system and the completion of the mergers of our primary operating entities into PMC. We successfully completed the first phase of our entity mergers during the quarter, merging Homeward Residential Inc. into PMC, with PMC being the surviving corporation. We are planning to complete the merger of OLS into PMC, with PMC being the surviving corporation, during the second quarter of 2019.
Third, we must replenish our servicing portfolio through expanding our lending business and permissible MSR acquisitions that are prudent and well-executed with appropriate financial return targets and return to a focus on growth. During the quarter we closed MSR acquisitions with $4.9 billion unpaid principal balance (UPB) and, as of March 31, 2019, have been awarded approximately $25.5 billion UPB in connection with acquisitions that are expected to close in the second quarter of 2019, subject to negotiation and execution of purchase documentation and satisfaction of customary closing conditions. Our goal is to maintain, at a minimum, a servicing portfolio of at least $260.0 billion in UPB.
Fourth, we must ensure that we continue to manage our balance sheet to provide a solid platform for executing on our growth and other initiatives. On March 18, 2019, we increased our Senior Secured Term Loan (SSTL) by $120.0 million, providing incremental liquidity to address maturing debt assumed in the PHH acquisition. In the second quarter, we are planning to establish financing facilities secured by existing and purchased MSRs that will initially provide up to $300.0 million in committed borrowings and fund the majority of the initial capital we believe is needed to support our 2019 growth initiatives.
Finally, we must fulfill our regulatory commitments and resolve our remaining legal and regulatory matters on satisfactory terms. 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 19 – Regulatory Requirements and Note 21 – Contingencies for further information. 
Our ability to execute on our key initiatives is not certain and is dependent on the successful execution of several complex actions, including the Black Knight MSP conversion, entity mergers, U.S. facilities consolidation and organizational redesign and headcount reductions, as well as the absence of significant unforeseen costs, including regulatory or legal costs, that could negatively impact our cost re-engineering efforts. There can be no assurances that the desired strategic and financial benefits of these actions will be realized.
Regarding the current maturities of our borrowings, as of March 31, 2019 we have approximately $720.4 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 of such alleged default, we could be subject to adverse actions by our lenders that could have a material adverse impact on us. In addition, OLS, PMC 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 13 – Borrowings, Note 19 – Regulatory Requirements and Note 21 – 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

10



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 months ended March 31, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2019. 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, 2018.
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 Other income (expense) section of the unaudited statement of operations for the three months ended March 31, 2018, we reclassified Gain on sale of mortgage servicing rights, net of $1.0 million to Other, net to conform to the current year presentation.
Certain amounts in the unaudited consolidated statement of cash flows for the three months ended March 31, 2018 have been reclassified to conform to the current year presentation as follows:
Within the Cash flows from operating activities section, we reclassified Amortization of debt issuance costs of $0.7 million to Other, net.
Within the Cash flows from financing activities section, we reclassified repayments of the SSTL of $4.2 million from Repayment of mortgage loan warehouse facilities and other secured borrowings to a new separate line item (Repayment of SSTL borrowings).
These reclassifications had no impact on our consolidated cash flows from operating, investing or financing activities.
Recently Adopted Accounting Standards
Leases (Accounting Standards Update (ASU) 2016-02, ASU 2018-10, ASU 2018-11 and ASU 2019-01)
This ASU requires a lessee to recognize right-of-use (ROU) assets and lease liabilities on the balance sheet, regardless of whether the lease is classified as a finance or operating lease.
We adopted the new leasing guidance on January 1, 2019, and we elected practical expedients permitted by the new standard which provided us transition relief when assessing leases that commenced prior to the adoption date, including determining whether existing contracts are or contain leases, the classification of such leases as operating or financing, and the accounting for initial direct costs.

11



The adoption resulted in the recognition of a cumulative-effect adjustment to the opening balance of Retained earnings, the recognition of a gross ROU asset and lease liability, and the reclassification of existing balances for our leases as follows:
 
Balances as of December 31, 2018 (1)
Recognition of Gross ROU Asset and Lease Liability
Reclassification of Existing Balances
Balances
January 1, 2019 after Transition Adjustments (2)
Premises and Equipment:
 
 
 
 
Right-of-use assets
$

$
66,231

$
(21,438
)
$
44,793

Other Assets:
 
 
 
 
Prepaid expenses (rent)
977


(977
)

Other Liabilities:
 
 
 
 
Liability for lease abandonments and deferred rent
(5,498
)

5,498


Lease liability

(66,247
)
977

65,270

Liabilities related to discontinued operations:
 
 
 
 
Liability for lease abandonments (3)
(15,940
)

15,940


Retained Earnings:
 
 
 
 
Cumulative effect of adopting ASU 2016-02

16


16

(1)
Represents amounts related to leases impacted by the adoption of this ASU that were included in our December 31, 2018 consolidated balance sheet.
(2)
ROU assets as of January 1, 2019 after transition adjustments includes $30.4 million related to premises located in the U.S., $13.6 million related to premises located in India and the Philippines, and $0.7 million related to equipment.
(3)
Represents lease impairments recognized by PHH prior to the acquisition.
Our leases include non-cancelable operating leases for premises and equipment with maturities extending to 2025, exclusive of renewal option periods. At lease commencement date, we estimate the ROU assets and lease liability at present value using our estimated incremental borrowing rate of 7.5%. We elected to recognize ROU assets and lease liabilities that arise from short-term leases. A maturity analysis of our lease liability as of March 31, 2019 is summarized as follows:
Annual obligation for the twelve months ended March 31,
 
 
2020
 
$
17,914

2021
 
16,227

2022
 
15,467

2023
 
11,431

2024
 
2,400

Thereafter
 
1,235

 
 
64,674

Less: Adjustment to present value
 
(4,617
)
Total minimum lease payments, net
 
$
60,057

Restricted cash includes a $23.2 million deposit as collateral for an irrevocable standby letter of credit issued in connection with one of our leased facilities. This letter of credit requirement under the terms of the lease agreement is primarily the result of PHH not meeting certain credit rating criteria prior to the acquisition. The required amount of the letter of credit will be reduced each month beginning in January 2021 through the lease expiration on December 31, 2022.
Subsequent to the adoption, we amortize the balance of the ROU assets and interest on the lease liability and report in Occupancy and equipment expense on our unaudited consolidated statements of operations. Our lease liability is reduced as we make cash payments on our lease obligations. Our ROU lease assets will be evaluated for impairment, in accordance with ASC 360, Premises and Equipment, at each reporting date.

12




Note 2 – Business Acquisition
On October 4, 2018, we completed our acquisition of PHH, a non-bank servicer with established servicing and origination recapture capabilities. As a result of the acquisition, PHH became a wholly owned subsidiary of Ocwen.
The acquisition has been accounted for under the acquisition method of accounting pursuant to ASC 805, Business Combinations. Assets acquired and liabilities assumed are recorded at their fair value as of the date of acquisition based on management’s estimates using currently available information. The results of PHH operations are included in Ocwen’s consolidated statements of operations from the date of acquisition. For U.S. income tax purposes, the acquisition of PHH is treated as a stock purchase.
Purchase Price Allocation
The purchase price allocation provided in the table below reflects the fair value of assets acquired and liabilities assumed in the acquisition of PHH, with the excess of total identifiable net assets over total consideration paid recorded as a bargain purchase gain. Independent valuation specialists conducted analyses to assist management in determining the fair value of certain acquired assets and assumed liabilities. Management is responsible for these third-party valuations and appraisals. The methodologies that we use and key assumptions that we made to estimate the fair value of the acquired assets and assumed debt are described in Note 5 – Fair Value.
In a business combination, the initial allocation of the purchase price is considered preliminary and therefore subject to change until the end of the measurement period (not to exceed one year from the acquisition date). Because the measurement period is still open, certain fair value estimates may change once all information necessary to make a final fair value assessment has been received.
Purchase Price Allocation
October 4, 2018
 
Adjustments
 
Revised
Cash
$
423,088

 
$

 
$
423,088

Restricted cash
38,813

 

 
38,813

Mortgage servicing rights
518,127

 

 
518,127

Advances, net
96,163

 

 
96,163

Loans held for sale
42,324

 
358

 
42,682

Receivables, net
46,838

 

 
46,838

Premises and equipment, net
15,203

 

 
15,203

Real estate owned
3,289

 

 
3,289

Other assets
6,293

 

 
6,293

Assets related to discontinued operations
2,017

 

 
2,017

Financing liabilities (MSRs pledged, at fair value)
(481,020
)
 

 
(481,020
)
Other secured borrowings, net
(27,594
)
 

 
(27,594
)
Senior notes, net (Senior unsecured notes)
(120,624
)
 

 
(120,624
)
Accrued legal fees and settlements
(9,960
)
 

 
(9,960
)
Other accrued expenses
(36,889
)
 

 
(36,889
)
Loan repurchase and indemnification liability
(27,736
)
 

 
(27,736
)
Unfunded pension liability
(9,815
)
 

 
(9,815
)
Other liabilities
(34,131
)
 
(643
)
 
(34,774
)
Liabilities related to discontinued operations
(21,954
)
 

 
(21,954
)
Total identifiable net assets
422,432

 
(285
)
 
422,147

Total consideration paid to seller
(358,396
)
 

 
(358,396
)
Bargain purchase gain
$
64,036

 
$
(285
)
 
$
63,751

We acquired tax attributes, including the estimated future tax benefit of U.S. federal net operating losses (NOLs) valued at $30.2 million, state NOLs valued at $50.3 million and state tax credits of $9.2 million on the acquisition date. All of the acquired tax attributes were fully offset by a valuation allowance. All of these attributes are subject to annual limitations with regard to future utilization under Sections 382 and 383 of the Internal Revenue Code or the comparable provisions of state law. Accordingly, as of December 31, 2018, Ocwen combined had U.S. federal NOLs valued at $58.2 million, USVI NOLs valued at $3.1 million, state NOLs valued at $50.3 million and state tax credits of $9.2 million, all of which were fully offset by a valuation allowance. All of these attributes are subject to the provisions of Sections 382 and 383 of the Internal Revenue Code

13



or the comparable provisions of foreign and state law. All of the attributes are subject to further potential annual limitations in the event of additional ownership changes in the future. 
Pro Forma Results of Operations
The pro forma consolidated results presented below are not indicative of what Ocwen’s consolidated results would have been had we completed the acquisition on the date indicated due to a number of factors, including but not limited to expected reductions in servicing, origination and overhead costs through the realization of targeted cost synergies and improved economies of scale, the impact of incremental costs to integrate the two companies and differences in servicing practices and cost structures between Ocwen and PHH. In addition, the pro forma consolidated results do not purport to project combined future operating results of Ocwen and PHH nor do they reflect the expected realization of any cost savings associated with the acquisition of PHH.
The following table presents supplemental pro forma information for Ocwen for the three months ended March 31, 2018 as if the PHH Acquisition occurred on January 1, 2017. Pro forma adjustments include:
Fair value adjustments include a reduction of $5.7 million to conform the accounting for MSRs to the valuation policies of Ocwen related to acquired MSRs;
Adjust interest expense for a total net impact of $2.3 million. The pro forma adjustment primarily pertains to fair value adjustments of $2.6 million related to the assumed MSR secured liability using valuation assumptions consistent with Ocwen's methodology;
Report the bargain purchase gain of $64.0 million as if the acquisition had occurred in 2017 rather than 2018;
Report Ocwen and PHH acquisition-related charges of $3.7 million for professional services as if they had been incurred in 2017 rather than 2018;
Adjust depreciation expense to amortize internally developed software acquired from PHH on a straight-line basis for the years presented based on a useful life of three years;
Adjust revenue for a total net impact of $33.9 million which primarily includes increasing servicing and subservicing fees by $44.8 million to gross up activity related to PHH MSRs sold accounted for as secured borrowings, and reclassifying $12.4 million to MSR valuation adjustments, net in expenses, consistent with Ocwen’s presentation. The offset to these adjustments are expenses, interest income and interest expense, with no net effect on earnings.
Income tax benefit of $0.9 million based on management’s estimate of the blended applicable statutory tax rates and observing the continued need for a valuation allowance. The net income tax benefit recorded as a result of pro forma adjustments represents lower current federal tax under the new base erosion and anti-abuse tax (BEAT) provision of the 2017 Tax Cuts and Jobs Act (Tax Act) assuming Ocwen and PHH would file a consolidated federal tax return beginning January 1, 2017.  The pro forma tax adjustments contemplate the effects of the Tax Act.
Revenues
$
344,522

Net loss from continuing operations
$
(11,201
)
Note 3 – Cost Re-engineering Plan
In February 2019, we announced our intention to execute cost re-engineering opportunities in order to drive stronger financial performance and, in the longer term, simplify our operations. Our cost re-engineering plans extend beyond eliminating redundant costs through the integration process and address organizational, process and control redesign, human capital planning, off-shore utilization, strategic sourcing and facilities rationalization. Costs estimated for this plan include severance, retention and other incentive awards, facilities-related costs and other costs to execute the reorganization.
The following is a summary of expenses incurred to-date, including an estimate of remaining and total plan costs:
 
Three Months Ended March 31, 2019
 
Employee-related
 
Facility-related
 
Other
 
Total
Costs incurred in current year:
 
 
 
 
 
 
 
First quarter (1)
$
19,163

 
$

 
$
2,973

 
$
22,136

Estimate of remaining costs (2)
20,837

 
7,000

 
15,027

 
42,864

Total plan costs
$
40,000

 
$
7,000

 
$
18,000

 
$
65,000


14



(1)
The above expenses were all incurred within the Corporate Items and Other segment. Employee-related costs and facility-related costs are reported in Compensation and benefits expense and Occupancy and equipment expense, respectively, in the unaudited consolidated statements of operations.
(2)
We expect to incur the remaining plan costs within the year ending December 31, 2019.
The following table provides a summary of the aggregate activity of the liability for the re-engineering plan costs:
 
Three Months Ended March 31, 2019
 
Employee-related
 
Facility-related
 
Other
 
Total
Beginning balance
$

 
$

 
$

 
$

Charges
19,163

 

 
2,973

 
22,136

Payments
(2,600
)
 

 
(1,747
)
 
(4,347
)
Ending balance
$
16,563

 
$

 
$
1,226

 
$
17,789

Note 4 – 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 two groups: (1) securitizations of residential mortgage loans and (2) financings of advances.
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.
From time to time, we may acquire beneficial interests issued in connection with mortgage-backed securitizations where we may also be the master and or primary servicer. These beneficial interests consist of subordinate and residual interests acquired from third-parties in market transactions. We consolidate the VIE when we conclude we are the primary beneficiary.
Securitizations of Residential Mortgage Loans
We receive servicing fees based upon the 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 purchase 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 March 31,
2019
 
2018
Proceeds received from securitizations
$
242,960

 
$
377,499

Servicing fees collected
15,918

 
10,348

Purchases of previously transferred assets, net of claims reimbursed
(904
)
 
(2,170
)
 
$
257,974

 
$
385,677

In connection with these transfers, we retained MSRs of $0.8 million and $2.4 million during the three months ended March 31, 2019 and 2018, respectively, which are reported in Gain on loans held for sale, net in the unaudited consolidated statements of operations. See Note 6 – 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 guarantor for losses incurred due to material breach of contractual representations and warranties.

15



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 an estimate of our maximum exposure to loss including the UPB of the transferred loans:
 
March 31, 2019
 
December 31, 2018
Carrying value of assets
 
 
 
MSRs, at fair value
$
123,448

 
$
132,774

Advances and match funded advances
150,136

 
138,679

UPB of loans transferred (1)
15,147,575

 
15,600,971

Maximum exposure to loss
$
15,421,159

 
$
15,872,424


(1)
Represents UPB of loans we transferred for which we continue to act as servicer or subservicer. Our maximum exposure to loss from transferred loans cannot be estimated because we do not service all of the loans for which we have provided representations and warranties.
At March 31, 2019 and December 31, 2018, 8.1% and 8.3%, 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. The changes in fair value of the HECM loans and HMBS-related borrowings are included in Other revenue, net in our unaudited consolidated statements of operations.
At March 31, 2019 and December 31, 2018, Loans held for investment included $70.4 million and $68.4 million, respectively, of originated loans which had not yet been pledged as collateral. See Note 5 – Fair Value and Note 13 – Borrowings for additional information.
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 Restricted cash in our unaudited 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 advances 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.
Mortgage-Backed Securitizations
The table below presents the carrying value and classification of the assets and liabilities of two consolidated mortgage-backed securitization trusts included in our unaudited consolidated balance sheets as a result of residual securities issued by the trust that we acquired during 2018.

16



 
March 31, 2019
 
December 31, 2018
Loans held for investment, at fair value - Restricted for securitization investors
$
26,237

 
$
26,520

Financing liability - Owed to securitization investors, at fair value
24,562

 
24,815

We have concluded we are the primary beneficiary of certain residential mortgage-backed securitizations as a result of beneficial interests consisting of residual securities, which expose us to the expected losses and residual returns of the trust, and our role as master servicer, where we have the ability to direct the activities that most significantly impact the performance of the trust.
Upon consolidation of the securitization trusts, we elected to apply the measurement alternative to ASC Topic 820, Fair Value Measurement for collateralized financing entities. The measurement alternative requires a reporting entity to use the more observable of the fair value of the financial assets or the financial liabilities to measure both the financial assets and the financial liabilities of the entity. We determined that the fair value of the loans held by the trusts is more observable than the fair value of the debt certificates issued by the trusts. Through the application of the measurement alternative, the fair value of the financial liabilities of the trusts are measured as the difference between the fair value of the financial assets and the fair value of our investment in the residual securities of the trusts.
Holders of the debt issued by these entities have recourse only to the assets of the SPE for satisfaction of the debt and have no recourse against the assets of Ocwen. Similarly, the general creditors of Ocwen have no claim on the assets of the trusts. Our exposure to loss as a result of our continuing involvement is limited to the carrying values of our investments in the residual securities of the trusts, our MSRs and related advances. At March 31, 2019, MSRs of $0.2 million and our $1.7 million investment in the residual securities of the trusts were eliminated in consolidation. Advances outstanding at March 31, 2019 were $1.2 million.
Note 5 – 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.
We have elected to fair value future draw commitments for HECM loans purchased or originated after December 31, 2018. The estimated fair value is included in Loans held for investment on our unaudited consolidated balance sheets with changes in fair value recognized in Other revenue, net in our unaudited consolidated statements of operations. The value of future draw commitments for HECM loans purchased or originated before January 1, 2019 will be recognized over time as such future draws are securitized or sold.
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 measured, at fair value are as follows:
 
 
 
March 31, 2019
 
December 31, 2018
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial assets
 
 
 

 
 

 
 

 
 

Loans held for sale
 
 
 
 
 
 
 
 
 
Loans held for sale, at fair value (a)
2
 
$
153,140

 
$
153,140

 
$
176,525

 
$
176,525

Loans held for sale, at lower of cost or fair value (b)
3
 
69,547

 
69,547

 
66,097

 
66,097

Total Loans held for sale
 
 
$
222,687

 
$
222,687

 
$
242,622

 
$
242,622


17



 
 
 
March 31, 2019
 
December 31, 2018
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
 
 
 
 
 
 
 
 
 
Loans held for investment
 
 
 
 
 
 
 
 
 
Loans held for investment - Reverse mortgages (a)
3
 
$
5,726,917

 
$
5,726,917

 
$
5,472,199

 
$
5,472,199

Loans held for investment - Restricted for securitization investors (a)
3
 
26,237

 
26,237

 
26,520

 
26,520

Total loans held for investment
 
 
$
5,753,154

 
$
5,753,154

 
$
5,498,719

 
$
5,498,719

 
 
 
 
 
 
 
 
 
 
Advances (including match funded) (c)
3
 
$
1,094,080

 
$
1,094,080

 
$
1,186,676

 
$
1,186,676

Receivables, net (c)
3
 
197,043

 
197,043

 
198,262

 
198,262

Mortgage-backed securities (a)
3
 
1,786

 
1,786

 
1,502

 
1,502

U.S. Treasury notes (a)
1
 
1,068

 
1,068

 
1,064

 
1,064

Corporate bonds (a)
2
 
446

 
446

 
450

 
450

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 

 
 

 
 

 
 

Match funded liabilities (c)
3
 
$
649,384

 
$
649,121

 
$
778,284

 
$
776,485

Financing liabilities:
 
 
 
 
 
 
 
 
 
HMBS-related borrowings (a)
3
 
$
5,614,688

 
$
5,614,688

 
$
5,380,448

 
$
5,380,448

Financing liability - MSRs pledged (a)
3
 
951,216

 
951,216

 
1,032,856

 
1,032,856

Financing liability - Owed to securitization investors (a)
3
 
24,562

 
24,562

 
24,815

 
24,815

Other (c)
3
 
67,920

 
51,980

 
69,942

 
53,570

Total Financing liabilities
 
 
$
6,658,386

 
$
6,642,446

 
$
6,508,061

 
$
6,491,689

Other secured borrowings:
 
 
 
 
 
 
 
 
 
Senior secured term loan (c) (d)
2
 
$
338,943

 
$
344,710

 
$
226,825

 
$
227,449

Other (c)
3
 
98,039

 
98,039

 
155,713

 
155,713

Total Other secured borrowings
 
 
$
436,982

 
$
442,749

 
$
382,538

 
$
383,162

 
 
 
 
 
 
 
 
 
 
Senior notes:
 
 
 
 
 
 
 
 
 
Senior unsecured notes (c) (d)
2
 
$
119,224

 
$
115,657

 
$
119,924

 
$
119,258

Senior secured notes (c) (d)
2
 
328,919

 
315,261

 
328,803

 
306,889

Total Senior notes
 
 
$
448,143

 
$
430,918

 
$
448,727

 
$
426,147

 
 
 
 
 
 
 
 
 
 
Derivative financial instrument assets (liabilities)
 
 
 

 
 

 
 

 
 

Interest rate lock commitments (a)
2
 
$
3,982

 
$
3,982

 
$
3,871

 
$
3,871

Forward mortgage-backed securities (a)
1
 
(4,126
)
 
(4,126
)
 
(4,983
)
 
(4,983
)
Interest rate caps (a)
3
 
276

 
276

 
678

 
678

 
 
 
 
 
 
 
 
 
 
Mortgage servicing rights (a)
3
 
$
1,400,191

 
$
1,400,191

 
$
1,457,149

 
$
1,457,149

(a)
Measured at fair value on a recurring basis.
(b)
Measured at fair value on a non-recurring basis.
(c)
Disclosed, but not measured, at fair value. 
(d)
The carrying values are net of unamortized debt issuance costs and discount. See Note 13 – Borrowings for additional information.


18



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
 
Loans Held for Inv. - Restricted for Securitiza-
tion Investors
 
Financing Liability - Owed to Securit -
ization Investors
 
Mortgage-Backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
Three months ended March 31, 2019
Beginning balance
$
5,472,199

 
$
(5,380,448
)
 
$
26,520

 
$
(24,815
)
 
$
1,502

 
$
(1,032,856
)
 
$
678

 
$
1,457,149

Purchases, issuances, sales and settlements
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

Purchases

 

 

 

 

 
(577
)
 

 
55,920

Issuances
209,264

 
(210,563
)
 

 

 

 

 

 

Sales

 

 

 

 

 

 

 
(567
)
Settlements
(104,630
)
 
102,389

 
(283
)
 
253

 

 
50,129

 

 
(3,313
)
Transfers (to) from:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale, at fair value
(396
)
 

 

 

 

 

 

 

Other assets
(119
)
 

 

 

 

 

 

 

Receivables, net
(68
)
 

 

 

 

 

 

 

 
104,051

 
(108,174
)
 
(283
)
 
253

 

 
49,552

 

 
52,040

Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in fair value (1)
150,667

 
(126,066
)
 

 

 
284

 
26,237

 
(402
)
 
(108,998
)
Calls and other

 

 

 

 

 
5,851

 

 

Included in Other comprehensive income

 

 
 
 
 
 

 

 

 

 
150,667

 
(126,066
)
 

 

 
284

 
32,088

 
(402
)
 
(108,998
)
Transfers in and / or out of Level 3

 

 

 

 

 

 

 

Ending balance
$
5,726,917

 
$
(5,614,688
)
 
$
26,237

 
$
(24,562
)
 
$
1,786

 
$
(951,216
)
 
$
276

 
$
1,400,191


19



 
Loans Held for Investment - Reverse Mortgages
 
HMBS-Related Borrowings
 
Mortgage-Backed Securities
 
Financing Liability - MSRs Pledged
 
Derivatives
 
MSRs
Three months ended March 31, 2018
Beginning balance
$
4,715,831

 
$
(4,601,556
)
 
$
1,592

 
$
(508,291
)
 
$
2,056

 
$
671,962

Purchases, issuances, sales and settlements
 
 
 
 
 
 
 
 
 
 
 
Purchases

 

 

 

 

 
2,378

Issuances
251,086

 
(222,825
)
 

 
(279,586
)
 

 
(1,758
)
Sales

 

 

 

 

 
(131
)
Settlements
(82,719
)
 
80,811

 

 
54,547

 
(371
)
 

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

 

 

 

 

 
418,925

Loans held for sale, at fair value
(184
)
 

 

 

 

 

Other assets
(104
)
 

 

 

 

 

Receivables, net
(50
)
 

 

 

 

 

 
168,029

 
(142,014
)
 

 
(225,039
)
 
(371
)
 
419,414

Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
 
 
 
Included in earnings:
 
 
 
 
 
 
 
 
 
 
 
Change in fair value
104,291

 
(94,623
)
 
87

 
16,712

 
181

 
(17,129
)
Calls and other

 

 

 
694

 

 

Included in Other comprehensive income

 

 

 

 

 

 
104,291

 
(94,623
)
 
87

 
17,406

 
181

 
(17,129
)
Transfers in and / or out of Level 3

 

 

 

 

 

Ending balance
$
4,988,151

 
$
(4,838,193
)
 
$
1,679

 
$
(715,924
)
 
$
1,866

 
$
1,074,247

(1)
The Change in fair value adjustments on Loans held for investment for the three months ended March 31, 2019 include $2.9 million in connection with the fair value election for future draw commitments on HECM reverse mortgage loans purchased or originated after December 31, 2018.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 purchase 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 into 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

20



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
Loans Held for Investment - Reverse Mortgages
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, including future draw commitments for HECM loans purchased or originated after December 31, 2018. 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.
Significant valuation assumptions
March 31,
2019
 
December 31, 2018
Life in years
 
 
 
Range
3.2 to 7.5

 
3.0 to 7.6

Weighted average
6.0

 
5.9

Conditional repayment rate
 
 
 
Range
6.8% to 36.1%

 
6.8% to 38.4%

Weighted average
14.4
%
 
14.7
%
Discount rate
3.1
%
 
3.4
%
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.
Loans Held for Investment – Restricted for securitization investors
We have elected to measure loans held by consolidated mortgage-backed securitization trusts at fair value. The loans are secured by first liens on single family residential properties. Fair value is based on proprietary cash flow modeling processes for a third-party broker/dealer and a third-party valuation expert. Significant assumptions used in the valuation include projected monthly payments, projected prepayments and defaults, property liquidation values and discount rates.
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

21



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 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.
Significant valuation assumptions
March 31, 2019
 
December 31, 2018
Agency
 
Non-Agency
 
Agency
 
Non-Agency
Weighted average prepayment speed
9.8
%
 
15.4
%
 
8.5
%
 
15.4
%
Weighted average delinquency rate
6.5
%
 
27.2
%
 
6.6
%
 
27.1
%
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
%
 
12.7
%
 
9.1
%
 
12.8
%
Weighted average cost to service (in dollars)
$
89

 
$
297

 
$
90

 
$
297

Because the mortgages underlying these MSRs permit the borrowers to prepay the loans, the value of the MSRs generally tends to diminish in periods of declining interest rates, an improving housing market or expanded product availability (as prepayments increase) and increase in periods of rising interest rates, a deteriorating housing market or reduced product availability (as prepayments decrease). The following table summarizes the estimated change in the value of the MSRs that we carry at fair value as of March 31, 2019 given 10% and 20% hypothetical shifts in prepayment speeds and interest rate assumptions:
Adverse change in fair value
10%
 
20%
Weighted average prepayment speeds
$
(127,188
)
 
$
(245,678
)
Weighted average discount rate
(39,816
)
 
(77,754
)
The sensitivity analysis measures the potential impact on fair values based on hypothetical changes, which in the case of our portfolio at March 31, 2019 are increased prepayment speeds and an increase in the yield assumption.
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. We classify subordinate and residual securities as trading securities and account for them at fair value on a recurring basis. Changes in the fair value of our investment in subordinate and residual securities are recognized in Other, net in the unaudited consolidated statements of operations.

22



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 unaudited consolidated statements of operations.
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 assume the notes are refinanced at the end of their revolving periods, consistent with how we manage our advance facilities.
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 projected recovery of principal, interest and advances 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
March 31,
2019
 
December 31, 2018
Life in years
 
 
 
Range
3.2 to 7.5

 
3.0 to 7.6

Weighted average
6.0

 
5.9

Conditional repayment rate
 
 
 
Range
6.8% to 36.1%

 
6.8% to 38.4%

Weighted average
14.4
%
 
14.7
%
Discount rate
3.1
%
 
3.3
%
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 measure all MSRs at fair value, changes in the Financing Liability - MSRs Pledged value are partially offset by changes in the fair value of the related MSRs. See Note 10 — Rights to MSRs for additional information.

23



Significant valuation assumptions
March 31, 2019
 
December 31, 2018
Weighted average prepayment speed
14.3
%
 
13.9
%
Weighted average delinquency rate
20.3
%
 
20.3
%
Advance financing cost
5-year swap plus 0% to 2.75%

 
5-year swap plus 0% to 2.75%

Interest rate for computing float earnings
5-year swap minus 0% to 0.50%

 
5-year swap minus 0% to 0.50%

Weighted average discount rate
11.9
%
 
12.0
%
Weighted average cost to service (in dollars)
$
233

 
$
234

Significant increases or decreases in these assumptions in isolation would result in a significantly higher or lower fair value.
Secured Notes
We issued Ocwen Asset Servicing Income Series (OASIS), Series 2014-1 Notes secured by Ocwen-owned MSRs relating to Freddie Mac mortgages. We accounted for this transaction as a financing. We determine the fair value based on bid prices provided by third parties involved in the issuance and placement of the notes.
Financing Liability – Owed to Securitization Investors
Consists of securitization debt certificates due to third parties that represent beneficial ownership interests in mortgage-backed securitization trusts that we include in our consolidated financial statements. We determine fair value using the measurement alternative to ASC Topic 820, Fair Value Measurement as disclosed in Note 4 – Securitizations and Variable Interest Entities. In accordance with the measurement alternative, the fair value of the consolidated securitization debt certificates is measured as the fair value of the loans held by the trust less the fair value of the beneficial interests held by us in the form of residual securities.
Other Secured Borrowings
The carrying value of secured borrowings that bear interest at a rate that is adjusted regularly based on a market index approximates fair value. For other secured borrowings 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. For the SSTL, we based the fair value on valuation data obtained from a pricing service.
Senior Notes
We base the fair value on quoted prices in a market with limited trading activity, or on valuation data obtained from a pricing service in the absence of trading data.
Derivative Financial Instruments
Interest rate lock commitments (IRLCs) represent an agreement to purchase loans from a third-party originator or an agreement to extend credit to a mortgage applicant (locked pipeline), whereby the interest rate is set prior to funding. IRLCs are classified within Level 2 of the valuation hierarchy as the primary component of the price is obtained from observable values of mortgage forwards for loans of similar terms and characteristics. Fair value amounts of IRLCs are adjusted for expected “fallout” (locked pipeline loans not expected to close) using models that consider cumulative historical fallout rates and other factors.
We enter into forward MBS trades to provide an economic hedge against changes in the fair value of residential forward and reverse mortgage loans held for sale that we carry at fair value. Forward MBS trades are primarily used to fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. Forward contracts are actively traded in the market and we obtain unadjusted market quotes for these derivatives; thus, they are classified within Level 1 of the valuation hierarchy.
In addition, we may use interest rate caps to minimize future interest rate exposure on variable rate debt issued on servicing advance financing facilities from increases in one-month or three-month Eurodollar rate (1ML or 3 ML, respectively) interest rates. The fair value for interest rate caps is based on counterparty market prices and adjusted for counterparty credit risk.

24



Note 6 – Loans Held for Sale
Loans Held for Sale - Fair Value
Three Months Ended March 31,
2019
 
2018
Beginning balance
$
176,525

 
$
214,262

Originations and purchases
219,867

 
205,994

Proceeds from sales
(235,895
)
 
(293,063
)
Principal collections
(5,516
)
 
(804
)
Transfers from (to):
 
 
 
Loans held for investment, at fair value
396

 
184

Receivables, net
(581
)
 

Real estate owned (Other assets)
(696
)
 

Gain on sale of loans
8,191

 
4,652

Decrease in fair value of loans
(228
)
 
(3,871
)
Other
(8,923
)
 
(1,506
)
Ending balance (1)
$
153,140

 
$
125,848

(1)
At March 31, 2019 and 2018, the balances include $(7.8) million and $3.8 million, respectively, of fair value adjustments.
Loans Held for Sale - Lower of Cost or Fair Value
Three Months Ended March 31,
2019
 
2018
Beginning balance