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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 September 30, 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)
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)
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
Number of shares of common stock outstanding as of November 1, 2019: 134,771,626 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, although not all forward-looking statements contain these words. 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 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, fund and sell our loans held for sale, repay, renew and extend borrowings, borrow additional amounts as and when required, meet our asset investment objectives and comply with our debt agreements, including the financial and other covenants contained in them;
•
our ability to acquire mortgage servicing rights (MSRs) or other assets or businesses at adequate risk-adjusted returns, including our ability to negotiate and execute purchase documentation and satisfy closing conditions so as to consummate such acquisitions;
•
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 workforce reduction 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;
•
our ability to maintain our long-term relationship with New Residential Investment Corp. (NRZ), our largest servicing client and the source for a substantial portion of our advance funding for non-agency MSRs;
•
our ability to timely and cost-effectively transfer MSRs under our agreements 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 identify and address any issues arising in connection with the transfer of loans to the Black Knight Financial Services, Inc. (Black Knight) LoanSphere MSP® servicing system (Black Knight MSP) without incurring significant cost or disruption to our operations;
•
our ability to 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;
•
disruption to our capital markets or other events impacting the availability of credit that could adversely impact our ability to access capital markets and finance our business;
•
uncertainty related to our ability to adapt and grow our business, including uncertainty related to our ability to grow our lending business and increase our lending volume in a competitive market and uncertain interest rate environment;
•
our ability to correctly interpret and meet capital requirements established by, or agreed with, regulators or GSEs, Ginnie Mae or other 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)

 
September 30, 2019
 
December 31, 2018
Assets
 

 
 

Cash and cash equivalents
$
345,084

 
$
329,132

Restricted cash (amounts related to VIEs of $13,725 and $20,968)
58,661

 
67,878

Mortgage servicing rights, at fair value
1,455,553

 
1,457,149

Advances, net
212,684

 
249,382

Match funded advances (related to VIEs)
825,760

 
937,294

Loans held for sale ($207,645 and $176,525 carried at fair value)
275,579

 
242,622

Loans held for investment, at fair value (amounts related to VIEs of $24,445 and $26,520)
6,073,687

 
5,498,719

Receivables, net
152,222

 
198,262

Premises and equipment, net
43,974

 
33,417

Other assets ($8,339 and $7,568 carried at fair value)(amounts related to VIEs of $4,422 and $2,874)
513,449

 
379,567

Assets related to discontinued operations
—

 
794

Total assets
$
9,956,653

 
$
9,394,216


 
 
 
Liabilities and Equity
 

 
 

Liabilities
 

 
 

Home Equity Conversion Mortgage-Backed Securities (HMBS) related borrowings, at fair value
$
5,903,965

 
$
5,380,448

Match funded liabilities (related to VIEs)
687,497

 
778,284

Other financing liabilities ($1,009,779 and $1,057,671 carried at fair value) (amounts related to VIEs of $22,827 and $24,815)
1,069,594

 
1,127,613

Other secured borrowings, net (amounts related to VIEs $137,612 and $0)
708,929

 
382,538

Senior notes, net
310,788

 
448,727

Other liabilities ($3,319 and $4,986 carried at fair value)
894,695

 
703,636

Liabilities related to discontinued operations
—

 
18,265

Total liabilities
9,575,468

 
8,839,511


 
 
 
Commitments and Contingencies (Notes 20 and 21)


 



 
 
 
Stockholders’ Equity
 

 
 

Common stock, $.01 par value; 200,000,000 shares authorized; 134,595,798 and 133,912,425 shares issued and outstanding at September 30, 2019 and December 31, 2018 respectively
1,346

 
1,339

Additional paid-in capital
556,097

 
554,056

(Accumulated deficit) retained earnings
(173,415
)
 
3,567

Accumulated other comprehensive loss, net of income taxes
(2,843
)
 
(4,257
)
Total stockholders’ equity
381,185

 
554,705

Total liabilities and stockholders’ equity
$
9,956,653

 
$
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 September 30,
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
Servicing and subservicing fees
$
247,714

 
$
213,730

 
$
742,759

 
$
658,095

Gain on loans held for sale, net
16,013

 
16,942

 
48,683

 
61,135

Other revenue, net
19,788

 
7,606

 
70,299

 
32,886

Total revenue
283,515

 
238,278

 
861,741

 
752,116


 
 
 
 
 
 
 
Expenses
 
 
 
 
 

 
 

Compensation and benefits
73,414

 
63,307

 
250,393

 
211,220

MSR valuation adjustments, net
(134,561
)
 
41,448

 
121,705

 
91,695

Servicing and origination
36,619

 
31,758

 
86,827

 
91,452

Professional services
36,628

 
40,662

 
77,205

 
110,821

Technology and communications
16,644

 
20,597

 
61,080

 
67,306

Occupancy and equipment
17,262

 
11,896

 
52,550

 
37,369

Other expenses
(1,282
)
 
7,858

 
6,563

 
19,814

Total expenses
44,724

 
217,526

 
656,323

 
629,677


 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest income
4,129

 
3,963

 
12,524

 
10,018

Interest expense
(285,922
)
 
(61,288
)
 
(387,938
)
 
(189,601
)
Gain on repurchase of senior secured notes
5,099

 
—

 
5,099

 
—

Bargain purchase gain
—

 
—

 
(381
)
 
—

Other, net
(414
)
 
(3,700
)
 
1,544

 
(6,569
)
Total other expense, net
(277,108
)
 
(61,025
)
 
(369,152
)
 
(186,152
)

 
 
 
 
 
 
 
Loss before income taxes
(38,317
)
 
(40,273
)
 
(163,734
)
 
(63,713
)
Income tax expense
4,450

 
845

 
13,264

 
4,541

Net loss
(42,767
)
 
(41,118
)
 
(176,998
)
 
(68,254
)
Net income attributable to non-controlling interests
—

 
(29
)
 
—

 
(176
)
Net loss attributable to Ocwen stockholders
$
(42,767
)
 
$
(41,147
)
 
$
(176,998
)
 
$
(68,430
)

 
 
 
 
 
 
 
Loss per share attributable to Ocwen stockholders
 
 
 
 
 
 
 
Basic and Diluted
$
(0.32
)
 
$
(0.31
)
 
$
(1.32
)
 
$
(0.51
)

 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic and Diluted
134,595,798

 
133,912,425

 
134,329,321

 
133,632,905


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 September 30,
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(42,767
)
 
$
(41,118
)
 
$
(176,998
)
 
$
(68,254
)
 
 
 
 
 
 
 
 
Other comprehensive income, net of income taxes:
 

 
 

 
 
 
 

Reclassification adjustment for losses on cash flow hedges included in net income (1)
38

 
36

 
108

 
114

Change in unfunded pension plan obligation liability
611

 
—

 
1,285

 
—

Other
8

 
—

 
21

 
—

Comprehensive loss
(42,110
)
 
(41,082
)
 
(175,584
)
 
(68,140
)
Comprehensive income attributable to non-controlling interests
—

 
(29
)
 
—

 
(176
)
Comprehensive loss attributable to Ocwen stockholders
$
(42,110
)
 
$
(41,111
)
 
$
(175,584
)
 
$
(68,316
)
(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
(Dollars in thousands)
 
Ocwen Stockholders
 
 
 
 
 
Common Stock
 
Additional Paid-in
Capital
 
(Accumulated Deficit) Retained Earnings
 
Accumulated Other Comprehensive Loss, Net of Income Taxes
 
Non-controlling Interest in Subsidiaries
 
Total
 
Shares
 
Amount
 
 
 
 
 
Three months ended September 30, 2019 and 2018
Balance at June 30, 2019
134,595,798

 
$
1,346

 
$
555,696

 
$
(130,648
)
 
$
(3,500
)
 
$
—

 
$
422,894

Net loss
—

 
—

 
—

 
(42,767
)
 
—

 
—

 
(42,767
)
Equity-based compensation
—

 
—

 
401

 
—

 
—

 
—

 
401

Other comprehensive income, net of income taxes
—

 
—

 
—

 
—

 
657

 
—

 
657

Balance at September 30, 2019
134,595,798

 
$
1,346

 
$
556,097

 
$
(173,415
)
 
$
(2,843
)
 
$
—

 
$
381,185

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2018
133,912,425

 
$
1,339

 
$
552,800

 
$
47,056

 
$
(1,171
)
 
$
1,159

 
$
601,183

Net (loss) income
—

 
—

 
—

 
(41,147
)
 
—

 
29

 
(41,118
)
Equity-based compensation and other
—

 
—

 
643

 
—

 
—

 
—

 
643

Other comprehensive income, net of income taxes
—

 
—

 
—

 
—

 
36

 
—

 
36

Balance at September 30, 2018
133,912,425

 
$
1,339

 
$
553,443

 
$
5,909

 
$
(1,135
)
 
$
1,188

 
$
560,744



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

7


 
Ocwen Stockholders
 
 
 
 
 
Common Stock
 
Additional Paid-in
Capital
 
(Accumulated Deficit) Retained Earnings
 
Accumulated Other Comprehensive Loss, Net of Income Taxes
 
Non-controlling Interest in Subsidiaries
 
Total
 
Shares
 
Amount
 
 
 
 
 
Nine months ended September 30, 2019 and 2018
Balance at December 31, 2018
133,912,425

 
$
1,339

 
$
554,056

 
$
3,567

 
$
(4,257
)
 
$
—

 
$
554,705

Net loss
—

 
—

 
—

 
(176,998
)
 
—

 
—

 
(176,998
)
Cumulative effect of adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-02
—

 
—

 
—

 
16

 
—

 
—

 
16

Equity-based compensation
683,373

 
7

 
2,041

 
—

 
—

 
—

 
2,048

Other comprehensive income, net of income taxes
—

 
—

 
—

 
—

 
1,414

 
—

 
1,414

Balance at September 30, 2019
134,595,798

 
$
1,346

 
$
556,097

 
$
(173,415
)
 
$
(2,843
)
 
$
—

 
$
381,185

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
131,484,058

 
$
1,315

 
$
547,057

 
$
(2,083
)
 
$
(1,249
)
 
$
1,834

 
$
546,874

Net (loss) income
—

 
—

 
—

 
(68,430
)
 
—

 
176

 
(68,254
)
Issuance of common stock
1,875,000

 
19

 
5,700

 
—

 
—

 
—

 
5,719

Cumulative effect of fair value election - MSRs
—

 
—

 
—

 
82,043

 
—

 
—

 
82,043

Cumulative effect of adoption of FASB ASU No. 2016-16
—

 
—

 
—

 
(5,621
)
 
—

 
—

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

 
—

 
—

 
—

 
—

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

 
5

 
686

 
—

 
—

 
—

 
691

Other comprehensive income, net of income taxes
—

 
—

 
—

 
—

 
114

 
—

 
114

Balance at September 30, 2018
133,912,425

 
$
1,339

 
$
553,443

 
$
5,909

 
$
(1,135
)
 
$
1,188

 
$
560,744




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

8

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

 
For the Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities
 

 
 

Net loss
$
(176,998
)
 
$
(68,254
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

MSR valuation adjustments, net
121,705

 
91,695

Gain on sale of MSRs, net
(571
)
 
(303
)
Provision for bad debts
26,971

 
40,269

Depreciation
26,020

 
18,199

Gain on repurchase of senior secured notes
(5,099
)
 
—

Equity-based compensation expense
1,890

 
1,244

Loss (gain) on valuation of financing liability
123,721

 
(11,323
)
Net gain on valuation of mortgage loans held for investment and HMBS-related borrowings
(50,221
)
 
(8,057
)
Gain on loans held for sale, net
(29,820
)
 
(24,265
)
Bargain purchase gain
381

 
—

Origination and purchase of loans held for sale
(872,914
)
 
(1,234,830
)
Proceeds from sale and collections of loans held for sale
787,683

 
1,154,526

Changes in assets and liabilities:
 

 
 

Decrease in advances and match funded assets
189,876

 
243,831

Decrease in receivables and other assets, net
123,283

 
126,829

Decrease in other liabilities
(82,942
)
 
(46,767
)
Other, net
1,105

 
8,739

Net cash provided by operating activities
184,070

 
291,533


 
 
 
Cash flows from investing activities
 

 
 

Origination of loans held for investment
(675,898
)
 
(711,035
)
Principal payments received on loans held for investment
383,806

 
296,800

Purchase of MSRs
(112,417
)
 
(2,729
)
Proceeds from sale of MSRs
1,159

 
6,138

Acquisition of advances in connection with the purchase of MSRs
(1,457
)
 
—

Proceeds from sale of advances
2,876

 
7,882

Issuance of automotive dealer financing notes
—

 
(19,642
)
Collections of automotive dealer financing notes
—

 
52,598

Additions to premises and equipment
(1,342
)
 
(7,326
)
Other, net
5,992

 
5,446

Net cash used in investing activities
(397,281
)
 
(371,868
)

 
 
 
Cash flows from financing activities
 

 
 

Repayment of match funded liabilities, net
(90,787
)
 
(284,372
)
Proceeds from mortgage loan warehouse facilities and other secured borrowings
1,875,926

 
2,211,606

Repayment of mortgage loan warehouse facilities and other secured borrowings
(1,819,728
)
 
(2,522,723
)
Repayment and repurchases of Senior notes
(131,791
)
 
—

Proceeds from issuance of additional senior secured term loan (SSTL)
119,100

 
—

Repayment of SSTL borrowings
(19,074
)
 
(62,563
)
Payment of debt issuance costs related to SSTL
(1,284
)
 
—

Proceeds from sale of MSRs accounted for as a financing
1,221

 
279,586

Proceeds from sale of Home Equity Conversion Mortgages (HECM, or reverse mortgages) accounted for as a financing (HMBS-related borrowings)
665,820

 
728,745

Repayment of HMBS-related borrowings
(377,094
)
 
(290,338
)
Capital distribution to non-controlling interest
—

 
(822
)
Other, net
(2,363
)
 
(991
)
Net cash provided by financing activities
219,946

 
58,128


 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
6,735

 
(22,207
)
Cash, cash equivalents and restricted cash at beginning of year
397,010

 
302,560

Cash, cash equivalents and restricted cash at end of period
$
403,745

 
$
280,353

 
 
 
 
Supplemental non-cash investing and financing activities
 

 
 

Initial consolidation of mortgage-backed securitization trusts (VIEs):
 
 
 
Loans held for investment
$
—

 
$
28,373

Other financing liabilities
—

 
26,643

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 ASU No. 2016-02:
 
 
 
Right-of-use asset
$
66,231

 
$
—

Lease liability
66,247

 
—

Transfers of loans held for sale to real estate owned (REO)
$
4,240

 
$
3,921

The following table provides a reconciliation of cash, cash equivalents 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:
 
September 30, 2019
 
September 30, 2018
Cash and cash equivalents
$
345,084

 
$
254,843

Restricted cash and equivalents:
 
 
 
Debt service accounts
17,026

 
22,454

Other restricted cash
41,635

 
3,056

Total cash, cash equivalents and restricted cash reported in the statements of cash flows
$
403,745

 
$
280,353



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

9


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 non-bank mortgage servicer and originator providing solutions through its primary operating subsidiaries, PHH Mortgage Corporation (PMC) and Liberty Home Equity Solutions, Inc. (Liberty). We are headquartered in West Palm Beach, Florida with offices in the United States (U.S.) and the United States Virgin Islands (USVI) and operations in India and the Philippines. Ocwen is a Florida corporation organized in February 1988.
Ocwen directly or indirectly owns all of the outstanding common stock of its operating subsidiaries, including PMC since its acquisition on October 4, 2018, Liberty, Ocwen Financial Solutions Private Limited (OFSPL) and Ocwen Mortgage Servicing, Inc. (OMS).
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 generally 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, generally servicing retained. The GSEs or Ginnie Mae guarantee these mortgage securitizations. We originate HECM loans, or reverse mortgages, that are insured by the FHA and are an approved issuer of HMBS that are guaranteed by Ginnie Mae.
We had a total of approximately 5,600 employees at September 30, 2019 of which approximately 3,500 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, nearly 80% were engaged in supporting our loan servicing operations as of September 30, 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. If we execute on our key business initiatives, we believe we will drive stronger financial performance.
First, we have successfully executed the acquisition of PHH Corporation (PHH) and continue our planned integration of PHH ’s business with ours. See Note 2 - Business Acquisition for additional information regarding the acquisition of PHH.
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 and automation, human capital planning, off-shore utilization, strategic sourcing and facilities rationalization. Our initiatives are targeted at increasing the degree of automation of our processes, leveraging our single servicing platform and technology, and through innovation. We believe these steps are necessary in order to simplify our operations and drive stronger financial performance.

10


Third, we must manage the size of our servicing portfolio through expanding our lending business and permissible acquisitions of MSRs that are prudent and well-executed with appropriate financial return targets. During the first nine months of 2019, we closed MSR acquisitions with $11.9 billion unpaid principal balance (UPB).
Fourth, we must manage our balance sheet to ensure adequate liquidity and provide a solid platform for executing on our other key business initiatives. On July 1, 2019, we established a financing facility secured by MSRs that provides up to $300.0 million in committed borrowing capacity. We believe this facility will enable the funding of the majority of our near term MSR acquisition initiatives. We intend to extend, renew or replace our SSTL that matures in December 2020 and must evaluate capital structure options that we believe will most effectively allow us to execute on our business plan.
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. 
In recent periods, Ocwen has incurred significant losses as a result of declines in the fair value of our MSRs. Further interest rate decreases, prepayment speed increases and changes to other fair value inputs or assumptions could result in further fair value declines and hamper our ability to return to profitability. Starting in September 2019, we have implemented a hedging strategy to partially offset the changes in fair value of our net MSR portfolio. See Note 15 – Derivative Financial Instruments and Hedging Activities for further information.
Our ability to execute on these key initiatives is not certain and is dependent on the successful execution of several complex actions, including our ability to grow our lending business and acquire MSRs with appropriate financial return targets, and execute on further 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, and our ability to extend, renew or replace our debt agreements in the ordinary course, including our SSTL. 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 September 30, 2019 we have approximately $808.7 million of debt outstanding under facilities coming due in the next 12 months. Portions of our match funded advance 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, 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 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 nine months ended September 30, 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.

11


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 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
Certain amounts in the unaudited consolidated statement of cash flows for the nine months ended September 30, 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 $2.3 million to Other, net.
•
Within the Cash flows from financing activities section, we reclassified repayments of the SSTL of $62.6 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 (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.
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


12


(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 September 30, 2019 is summarized as follows:
Annual obligation for the twelve months ended September 30,
 
2020
$
17,534

2021
15,533

2022
14,215

2023
5,182

2024
1,089

Thereafter
829

 
54,382

Less: Adjustment to present value
(6,136
)
Total lease payments, net
$
48,246

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.
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 are evaluated for impairment, in accordance with ASC 360, Premises and Equipment, at each reporting date.
Subsequent to adoption, we made the decision to vacate four leased properties prior to the contractual maturity date of the lease agreements. As a result of our plan to vacate the office space, we accelerated the recognition of amortization on the ROU assets based on the shortened remaining useful life of the leases. We recorded total accelerated amortization of $5.4 million during the nine months ended September 30, 2019.
Accounting Standards Issued but Not Yet Adopted
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13 and ASU 2019-04)
This ASU will require more timely 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. We are currently evaluating the effect of this standard.
Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13)
This ASU modifies the disclosure requirements on fair value measurements in FASB ASC Topic 820, Fair Value Measurement. The main provisions in this update include removal of the following disclosure requirements from this ASC: 1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels and 3) the valuation processes for Level 3 fair value measurements. This standard adds disclosure requirements to report the changes in unrealized gains and losses for the period included in other comprehensive income for

13


recurring Level 3 fair value measurements held at the end of the reporting period, and for certain unobservable inputs an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
This standard will be effective for us on January 1, 2020. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty will be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments will be applied retrospectively to all periods presented upon their effective date. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.
Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15)
This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. The amendments in this ASU require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments in this ASU require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this ASU also require the entity to present the expense related to the capitalized implementation costs in the same line item in the statement of operations as the fees associated with the hosting element (service) of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element.
This standard will be effective for us on January 1, 2020. Upon adoption, we will elect to apply the amendments in this ASU prospectively to all implementation costs incurred subsequent to that date. We do not anticipate that our adoption of this standard will have a material impact on our consolidated financial statements.

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 final determination of 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.    

14


Purchase Price Allocation
October 4, 2018
 
Adjustments
 
Revised
Cash
$
423,088

 
$
—

 
$
423,088

Restricted cash
38,813

 
—

 
38,813

MSRs
518,127

 
—

 
518,127

Advances, net
96,163

 
—

 
96,163

Loans held for sale
42,324

 
358

 
42,682

Receivables, net
46,838

 
(96
)
 
46,742

Premises and equipment, net
15,203

 
—

 
15,203

REO
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

 
(381
)
 
422,051

Total consideration paid to seller
(358,396
)
 
—

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

 
$
(381
)
 
$
63,655

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 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.

15


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 table below presents supplemental pro forma information for Ocwen for the three and nine months ended September 30, 2018 as if the PHH acquisition occurred on January 1, 2017. Pro forma adjustments include the following:
Description
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Increase in MSR valuation adjustments, net for acquired MSRs to conform the accounting for MSRs to the valuation policies of Ocwen
$
23,360

 
$
24,442

Adjust interest expense for a total net decline (1)
(18,382
)
 
(30,598
)
Report Ocwen and PHH acquisition-related charges for professional services as if they had been incurred in 2017 rather than 2018
(9,384
)
 
(18,548
)
Total net increase in revenue (2)
39,156

 
120,616

Adjust depreciation expense to amortize internally developed software acquired from PHH on a straight-line basis based on a useful life of three years
245

 
735

Income tax expense (benefit) based on management’s estimate of the blended applicable statutory tax rates and observing the continued need for a valuation allowance (3)
1,158

 
(300
)
(1)
Primarily pertains to fair value adjustments of $18.6 million and $31.4 million for the three and nine months ended September 30, 2018, respectively, related to the assumed MSR secured liability using valuation assumptions consistent with Ocwen’s methodology, excluding the gross-up of PHH MSRs sold and accounted for as a secured borrowing.
(2)
Primarily pertains to an increase to revenue of $40.3 million and $127.7 million for the three and nine months ended September 30, 2018, respectively, for the gross-up of PHH MSRs sold and accounted for as a secured borrowing. The offset of the remaining adjustments are expenses, interest income and interest expense, with no net effect on earnings.
(3)
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.
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Revenues
$
314,675

 
$
995,043

Net loss from continuing operations
(65,168
)
 
(133,594
)
For purposes of determining pro forma results of operations for the three and nine months ended September 30, 2018, the bargain purchase gain is assumed to have been recorded in 2017 rather than 2018.

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 and automation, 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.

16


The following is a summary of expenses incurred to-date, including an estimate of remaining and total plan costs:
 
Nine Months Ended September 30, 2019
 
Employee-related
 
Facility-related
 
Other
 
Total
Total costs incurred (1)
 
 
 
 
 
 
 
First quarter
$
20,787

 
$
—

 
$
1,328

 
$
22,115

Second quarter
3,460

 
3,047

 
3,619

 
10,126

Third quarter
7,266

 
3,596

 
7,485

 
18,347

 
31,513

 
6,643

 
12,432

 
50,588

Estimate of remaining costs (2)
2,887


2,557

 
8,968

 
14,412

Total plan costs
$
34,400

 
$
9,200

 
$
21,400

 
$
65,000

(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. Other costs are primarily reported in Professional services expense and Other expenses.
(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:
 
Nine Months Ended September 30, 2019
 
Employee-related
 
Facility-related
 
Other
 
Total
Beginning balance
$
—

 
$
—

 
$
—

 
$
—

Charges
31,513

 
6,643

 
12,432

 
50,588

Payments / Other
(20,205
)
 
(5,324
)
 
(9,899
)
 
(35,428
)
Ending balance (1)
$
11,308

 
$
1,319

 
$
2,533

 
$
15,160

(1)
The liability for re-engineering plan costs is included in Other liabilities (Other accrued expenses).

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 three groups: (1) securitizations of residential mortgage loans, (2) financings of advances and (3) financings of MSRs.
We have determined that the special purpose entities (SPEs) created in connection with our match funded advance financing facilities are 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.

17


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 September 30,
 
Nine Months Ended September 30,
2019
 
2018
 
2019
 
2018
Proceeds received from securitizations
$
235,175

 
$
282,507

 
$
674,108

 
$
998,204

Servicing fees collected
8,866

 
9,808

 
37,610

 
30,233

Purchases of previously transferred assets, net of claims reimbursed
(2,093
)
 
(1,507
)
 
(3,140
)
 
(4,336
)
 
$
241,948

 
$
290,808

 
$
708,578

 
$
1,024,101

In connection with these transfers, we retained MSRs of $0.6 million and $2.2 million, and $1.4 million and $5.9 million, during the three and nine months ended September 30, 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.
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:
 
September 30, 2019
 
December 31, 2018
Carrying value of assets
 
 
 
MSRs, at fair value
$
93,533

 
$
132,774

Advances and match funded advances
143,083

 
138,679

UPB of loans transferred (1)
14,077,333

 
15,600,971

Maximum exposure to loss
$
14,313,949

 
$
15,872,424

(1)
Represents UPB of loans we transferred for which we continue to act as servicer or subservicer. Our estimate of maximum exposure to loss does not include loans that we do not service for which we have provided representations and warranties because we cannot estimate such amounts. Maximum exposure to loss does not consider any collateral liquidation proceeds.
At September 30, 2019 and December 31, 2018, 8.3% 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.
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

18


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. The funds are held in interest earning accounts and those amounts related to match funded advance 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 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, Restricted cash (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 MSRs
On July 1, 2019, we entered into a $300.0 million financing facility with a third-party secured by certain Fannie Mae and Freddie Mac MSRs. Two trusts were established in connection with this facility. On July 1, 2019 we entered into an MSR Excess Spread Participation Agreement under which we created a 100% participation interest in the Portfolio Excess Servicing Fees, as defined, pursuant to which the holder of the participation interest is entitled to receive certain funds collected on the related portfolio of mortgage loans (other than ancillary income and advance reimbursement amounts) with respect to such Portfolio Excess Servicing Fees. Portfolio Excess Servicing Fees are defined within the Excess Spread Participation Agreement as: (a) the portfolio collections received during the collection period, net of the base servicing fee; and (b) all other amounts payable by a loan owner or master servicer with respect to the servicing rights for the portfolio mortgage loans, including any portfolio termination payments. This participation interest has been contributed to the trusts.
In connection with this facility, we entered into repurchase agreements with a third-party pursuant to which we sold trust certificates of the trusts representing certain indirect economic interests in the MSRs and agreed to repurchase such certificates at a future date at the repurchase price set forth in the repurchase agreements. Our obligations under the facility are secured by a lien on the related MSRs. In addition, Ocwen guarantees the obligations under the facility. This facility will terminate in June 2020 unless the parties mutually agree to renew or extend.
We determined that the trusts are VIEs for which we are the primary beneficiary. Therefore, we have included the trusts in our consolidated financial statements effective July 1, 2019. We have the power to direct the activities of the VIEs that most significantly impact the VIE’s economic performance given that we are the servicer of the MSRs that result in cash flows to the trusts. In addition, we have designed the trusts at inception to facilitate the third-party funding facility under which we have the obligation to absorb the losses of the VIEs that could be potentially significant to the VIEs.
At September 30, 2019, $137.6 million was outstanding under this facility which is included in Other secured borrowings, net on our unaudited consolidated balance sheet. See Note 13 – Borrowings for additional information. The carrying value of the pledged MSRs was $192.6 million at September 30, 2019. At September 30, 2019, $1.1 million of unamortized debt issuance costs related to this facility are included in Other assets. The assets and liabilities of the trusts include amounts due to or from affiliates which 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.
 
September 30, 2019
 
December 31, 2018
Loans held for investment, at fair value - Restricted for securitization investors
$
24,445

 
$
26,520

Financing liability - Owed to securitization investors, at fair value
22,827

 
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

19


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 for satisfaction of the debt. 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. 

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:
 
 
 
September 30, 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
 
$
207,645

 
$
207,645

 
$
176,525

 
$
176,525

Loans held for sale, at lower of cost or fair value (b)
3
 
67,934

 
67,934

 
66,097

 
66,097

Total Loans held for sale
 
 
$
275,579

 
$
275,579

 
$
242,622

 
$
242,622

 
 
 
 
 
 
 
 
 
 
Loans held for investment
 
 
 
 
 
 
 
 
 
Loans held for investment - Reverse mortgages (a)
3
 
$
6,049,242

 
$
6,049,242

 
$
5,472,199

 
$
5,472,199

Loans held for investment - Restricted for securitization investors (a)
3
 
24,445

 
24,445

 
26,520

 
26,520

Total loans held for investment
 
 
$
6,073,687

 
$
6,073,687

 
$
5,498,719

 
$
5,498,719

 
 
 
 
 
 
 
 
 
 
Advances (including match funded), net (c)
3
 
$
1,038,444

 
$
1,038,444

 
$
1,186,676

 
$
1,186,676

Receivables, net (c)
3
 
152,222

 
152,222

 
198,262

 
198,262

Mortgage-backed securities (a)
3
 
2,036

 
2,036

 
1,502

 
1,502

U.S. Treasury notes (a)
1
 
—

 
—

 
1,064

 
1,064

Corporate bonds (a)
2
 
442

 
442

 
450

 
450

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 

 
 

 
 

 
 

Match funded liabilities (c)
3
 
$
687,497

 
$
688,038

 
$
778,284

 
$
776,485

Financing liabilities:
 
 
 
 
 
 
 
 
 
HMBS-related borrowings (a)
3
 
$
5,903,965

 
$
5,903,965

 
$
5,380,448

 
$
5,380,448

Financing liability - MSRs pledged (Rights to MSRs) (a)
3
 
986,952

 
986,952

 
1,032,856

 
1,032,856

Financing liability - Owed to securitization investors (a)
3
 
22,827

 
22,827

 
24,815

 
24,815

Other (c)
3
 
59,815

 
39,707

 
69,942

 
53,570

Total Financing liabilities
 
 
$
6,973,559

 
$
6,953,451

 
$
6,508,061

 
$
6,491,689

Other secured borrowings:
 
 
 
 
 
 
 
 
 
Senior secured term loan (c) (d)
2
 
$
328,119

 
$
327,855

 
$
226,825

 
$
227,449

Other (c)
3
 
380,810

 
380,810

 
155,713

 
155,713

Total Other secured borrowings
 
 
$
708,929

 
$
708,665

 
$
382,538

 
$
383,162

 
 
 
 
 
 
 
 
 
 
Senior notes:
 
 
 
 
 
 
 
 
 
Senior unsecured notes (c) (d)
2
 
$
20,973

 
$
13,246

 
$
119,924

 
$
119,258

Senior secured notes (c) (d)
2
 
289,815

 
244,868

 
328,803

 
306,889

Total Senior notes
 
 
$
310,788

 
$
258,114

 
$
448,727

 
$
426,147

 
 
 
 
 
 
 
 
 
 
Derivative financial instrument assets (liabilities)
 
 
 

 
 

 
 

 
 

Interest rate lock commitments (a)
2
 
$
4,781

 
$
4,781

 
$
3,871

 
$
3,871

Forward trades - Loans held for sale (a)
1
 
(3,126
)
 
(3,126
)
 
(4,983
)
 
(4,983
)
TBA / Forward mortgage-backed securities (MBS) trades - MSR hedging (a)
1
 
887

 
887

 
—

 
—

Interest rate caps (a)
3
 
—

 
—

 
678

 
678

 
 
 
 
 
 
 
 
 
 
MSRs (a)
3
 
$
1,455,553

 
$
1,455,553

 
$
1,457,149

 
$
1,457,149


20


(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.


21


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 September 30, 2019
Beginning balance
$
5,872,407

 
$
(5,745,383
)
 
$
25,324

 
$
(23,697
)
 
$
2,014

 
$
(844,913
)
 
$
47

 
$
1,312,633

Purchases, issuances, sales and settlements
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

Purchases
—

 
—

 
—

 
—

 
—

 
(345
)
 
—

 
11,801

Issuances
248,877

 
(240,714
)
 
—

 
—

 
—

 
—

 
—

 
—

Sales
—

 
—

 
—

 
—

 
—

 
(11
)
 
—

 
(15
)
Settlements
(151,292
)
 
149,079

 
(879
)
 
870

 
—

 
53,756

 
—

 
(3,105
)
Transfers (to) from:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale, at fair value
(521
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other assets
(211
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Receivables, net
(89
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
96,764

 
(91,635
)
 
(879
)
 
870

 
—

 
53,400

 
—

 
8,681

Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in fair value (1)
80,071

 
(66,947
)
 
—

 
—

 
22

 
(200,703
)
 
(47
)
 
134,239

Calls and other
—

 
—

 
—

 
—

 
—

 
5,264

 
—

 
—

 
80,071

 
(66,947
)
 
—

 
—

 
22

 
(195,439
)
 
(47
)
 
134,239

Transfers in and / or out of Level 3
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Ending balance
$
6,049,242

 
$
(5,903,965
)
 
$
24,445

 
$
(22,827
)
 
$
2,036

 
$
(986,952
)
 
$
—

 
$
1,455,553


22


 
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 September 30, 2018
Beginning balance
$
5,143,758

 
$
(5,040,983
)
 
$
—

 
$
—

 
$
1,732

 
$
(672,619
)
 
$
1,657

 
$
1,043,995

Purchases, issuances, sales and settlements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,924

Issuances
223,563

 
(229,169
)
 
—