Ocwen Financial Corporation
OCWEN FINANCIAL CORP (Form: 10-Q, Received: 11/09/2009 07:30:35)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended September 30, 2009

 

 

 

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 Number: 1-13219

 

Ocwen Financial Corporation

(Exact name of registrant as specified in its charter)


 

 

 

 

 

 

Florida

 

65-0039856

 

 

 

 

 

(State or other jurisdiction

 

(I.R.S. Employer

 

 

of incorporation or organization)

 

Identification No.)

 

 

1661 Worthington Road, Suite 100, West Palm Beach, Florida 33409

(Address of principal executive offices) (Zip Code)

 

(561) 682-8000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

Large accelerated filer o

 

Accelerated filer x

 

 

Non-accelerated filer   o (Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No x

Number of shares of Common Stock, $0.01 par value, outstanding as of October 30, 2009: 99,835,097 shares.


OCWEN FINANCIAL CORPORATION
FORM 10-Q

INDEX

 

 

 

 

       

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

Interim Consolidated Financial Statements (Unaudited)

 

3

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2009 and December 31, 2008

 

3

 

 

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008

 

4

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2009 and 2008

 

5

 

 

 

 

 

Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2009

 

6

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008

 

7

 

 

 

 

 

Notes to Interim Consolidated Financial Statements

 

9

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

36

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

60

 

 

 

 

Item 4.

Controls and Procedures

 

61

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

Item 1.

Legal Proceedings

 

61

 

 

 

 

Item 1A.

Risk Factors

 

61

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

61

 

 

 

 

Item 6.

Exhibits

 

62

 

 

 

 

Signatures

 

 

63

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, including, but not limited to the following:

 

 

assumptions related to the sources of liquidity, our ability to fund advances and the adequacy of financial resources;

 

 

estimates regarding prepayment speeds, float balances, delinquency rates, advances and other servicing portfolio characteristics;

 

 

projections as to the performance of our fee-based loan processing business and our asset management vehicles;

 

 

assumptions about our ability to grow our business;

 

 

our plans to continue to sell our non-core assets;

 

 

our ability to establish additional asset management vehicles;

 

 

our ability to reduce our cost structure;

 

 

our analysis in support of the decision to spin Ocwen Solutions as a separate company;

 

 

our continued ability to successfully modify delinquent loans and sell foreclosed properties;

 

 

estimates regarding our reserves, valuations and anticipated realization on assets; and

 

 

expectations as to the effect of resolution of pending legal proceedings on our financial condition.

          Forward-looking statements are not guarantees of future performance and involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. Important factors that could cause actual results to differ include, but are not limited to, the risks discussed in “Risk Factors” below and the following:

 

 

availability of adequate and timely sources of liquidity;

 

 

delinquencies, advances and availability of servicing;

 

 

general economic and market conditions;

 

 

uncertainty related to government programs, regulations and policies; and

 

 

uncertainty related to dispute resolution and litigation.

          Further information on the risks specific to our business are detailed within this report and our other reports and filings with the Securities and Exchange Commission, including our Annual report on Form 10-K for the year ended December 31, 2008, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Forward-looking statements speak only as of the date they are made and should not be relied upon. Ocwen Financial Corporation undertakes no obligation to update or revise forward-looking statements.

2


P ART I – FINANCIAL INFORMATION
I TEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
C ONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

September 30,
2009

 

December 31,
2008

 

 

 

 

 

 

 

 

 

 

 

(As Adjusted)

 

Assets

 

 

 

 

 

 

 

Cash

 

$

195,854

 

$

201,025

 

Trading securities, at fair value

 

 

 

 

 

 

 

Auction rate

 

 

250,099

 

 

239,301

 

Subordinates and residuals

 

 

4,417

 

 

4,369

 

Loans held for resale, at lower of cost or fair value

 

 

36,618

 

 

49,918

 

Advances

 

 

131,360

 

 

102,085

 

Match funded advances

 

 

879,444

 

 

1,100,555

 

Mortgage servicing rights

 

 

124,989

 

 

139,500

 

Receivables, net

 

 

33,135

 

 

42,798

 

Deferred tax assets, net

 

 

129,116

 

 

175,145

 

Intangibles, including goodwill

 

 

 

 

46,227

 

Premises and equipment, net

 

 

3,954

 

 

12,926

 

Investments in unconsolidated entities

 

 

18,764

 

 

25,663

 

Other assets

 

 

67,303

 

 

97,588

 

 

 

   

 

   

 

Total assets

 

$

1,875,053

 

$

2,237,100

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Match funded liabilities

 

$

529,779

 

$

961,939

 

Lines of credit and other secured borrowings

 

 

54,665

 

 

116,870

 

Investment line

 

 

167,168

 

 

200,719

 

Servicer liabilities

 

 

59,457

 

 

135,751

 

Debt securities

 

 

109,814

 

 

133,367

 

Income taxes payable, net

 

 

18,940

 

 

 

Other liabilities

 

 

77,770

 

 

78,813

 

 

 

   

 

   

 

Total liabilities

 

 

1,017,593

 

 

1,627,459

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 24)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

Ocwen Financial Corporation stockholders’ equity

 

 

 

 

 

 

 

Common stock, $.01 par value; 200,000,000 shares authorized; 99,835,097 and 62,716,530 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

 

 

998

 

 

627

 

Additional paid-in capital

 

 

458,822

 

 

201,831

 

Retained earnings

 

 

395,809

 

 

404,901

 

Accumulated other comprehensive income, net of income taxes

 

 

1,569

 

 

1,876

 

 

 

   

 

   

 

Total Ocwen Financial Corporation stockholders’ equity

 

 

857,198

 

 

609,235

 

Non-controlling interest in subsidiaries

 

 

262

 

 

406

 

 

 

   

 

   

 

Total equity

 

 

857,460

 

 

609,641

 

 

 

   

 

   

 

Total liabilities and equity

 

$

1,875,053

 

$

2,237,100

 

 

 

   

 

   

 

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

3


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
C ONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the periods ended September 30,

 

Three months

 

Nine months

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(As Adjusted)

 

 

 

(As Adjusted)

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing and subservicing fees

 

$

57,534

 

$

91,298

 

$

201,832

 

$

290,200

 

Process management fees

 

 

23,735

 

 

27,453

 

 

97,513

 

 

81,794

 

Other revenues

 

 

2,083

 

 

2,510

 

 

7,776

 

 

8,743

 

 

 

   

 

   

 

   

 

   

 

Total revenue

 

 

83,352

 

 

121,261

 

 

307,121

 

 

380,737

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

18,959

 

 

33,727

 

 

74,758

 

 

96,567

 

Amortization of servicing rights

 

 

7,159

 

 

12,106

 

 

25,743

 

 

40,712

 

Servicing and origination

 

 

7,804

 

 

11,540

 

 

36,277

 

 

37,589

 

Technology and communications

 

 

4,206

 

 

6,022

 

 

13,495

 

 

17,713

 

Professional services

 

 

6,378

 

 

5,973

 

 

21,772

 

 

27,058

 

Occupancy and equipment

 

 

4,192

 

 

5,131

 

 

15,056

 

 

17,471

 

Other operating expenses

 

 

4,675

 

 

2,959

 

 

11,188

 

 

9,689

 

 

 

   

 

   

 

   

 

   

 

Total operating expenses

 

 

53,373

 

 

77,458

 

 

198,289

 

 

246,799

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

29,979

 

 

43,803

 

 

108,832

 

 

133,938

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1,992

 

 

3,448

 

 

6,411

 

 

11,492

 

Interest expense

 

 

(16,145

)

 

(19,334

)

 

(50,108

)

 

(66,513

)

Gain (loss) on trading securities

 

 

8,291

 

 

(621

)

 

13,346

 

 

(22,366

)

Gain (loss) on debt redemption

 

 

1,600

 

 

 

 

2,134

 

 

(86

)

Loss on loans held for resale, net

 

 

(1,242

)

 

(674

)

 

(8,783

)

 

(11,112

)

Equity in losses of unconsolidated entities

 

 

(1,059

)

 

(2,928

)

 

(1,608

)

 

(10,628

)

Other, net

 

 

42

 

 

(284

)

 

2,843

 

 

214

 

 

 

   

 

   

 

   

 

   

 

Other expense, net

 

 

(6,521

)

 

(20,393

)

 

(35,765

)

 

(98,999

)

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

 

23,458

 

 

23,410

 

 

73,067

 

 

34,939

 

Income tax expense

 

 

65,294

 

 

8,330

 

 

82,803

 

 

11,693

 

 

 

   

 

   

 

   

 

   

 

Income (loss) from continuing operations

 

 

(41,836

)

 

15,080

 

 

(9,736

)

 

23,246

 

Income (loss) from discontinued operations, net of income taxes

 

 

(231

)

 

(186

)

 

633

 

 

(5,572

)

 

 

   

 

   

 

   

 

   

 

Net income (loss)

 

 

(42,067

)

 

14,894

 

 

(9,103

)

 

17,674

 

Net loss (income) attributable to non-controlling interest in subsidiaries

 

 

36

 

 

82

 

 

11

 

 

(143

)

 

 

   

 

   

 

   

 

   

 

Net income (loss) attributable to Ocwen Financial Corporation (OCN)

 

$

(42,031

)

$

14,976

 

$

(9,092

)

$

17,531

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to OCN common shareholders

 

$

(0.51

)

$

0.24

 

$

(0.14

)

$

0.37

 

Income (loss) from discontinued operations attributable to OCN common shareholders

 

 

 

 

 

 

0.01

 

 

(0.09

)

 

 

   

 

   

 

   

 

   

 

Net income (loss) attributable to OCN common shareholders

 

$

(0.51

)

$

0.24

 

$

(0.13

)

$

0.28

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to OCN common shareholders

 

$

(0.51

)

$

0.23

 

$

(0.14

)

$

0.37

 

Income (loss) from discontinued operations attributable to OCN common shareholders

 

 

 

 

 

 

0.01

 

 

(0.09

)

 

 

   

 

   

 

   

 

   

 

Net income (loss) attributable to OCN common shareholders

 

$

(0.51

)

$

0.23

 

$

(0.13

)

$

0.28

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

82,614,456

 

 

62,715,551

 

 

70,966,393

 

 

62,655,655

 

Diluted

 

 

82,614,456

 

 

69,750,889

 

 

70,966,393

 

 

62,897,271

 

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

4


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
C ONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the periods ended September 30,

 

Three months

 

Nine months

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(As Adjusted)

 

 

 

(As Adjusted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(42,067

)

$

14,894

 

$

(9,103

)

$

17,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized foreign currency translation adjustment (1)

 

 

(80

)

 

(88

)

 

(307

)

 

456

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in deferred loss on cash flow hedge arising during the period (2)

 

 

 

 

 

 

 

 

(194

)

Reclassification adjustment for loss on cash flow hedge included in net income (3)

 

 

 

 

 

 

 

 

345

 

 

 

   

 

   

 

   

 

   

 

Net change in deferred loss on cash flow hedge

 

 

 

 

 

 

 

 

151

 

 

 

   

 

   

 

   

 

   

 

 

 

 

(80

)

 

(88

)

 

(307

)

 

607

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

 

(42,147

)

 

14,806

 

 

(9,410

)

 

18,281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss (income) attributable to non-controlling interest in subsidiaries

 

 

47

 

 

148

 

 

144

 

 

(145

)

 

 

   

 

   

 

   

 

   

 

Comprehensive income (loss) attributable to OCN

 

$

(42,100

)

$

14,954

 

$

(9,266

)

$

18,136

 

 

 

   

 

   

 

   

 

   

 


 

 

(1)

Net of income tax benefit (expense) of $47 and $63 for the three months ended September 30, 2009 and 2008, respectively, and $180 and $(268) for the nine months ended September 30, 2009 and 2008, respectively.

 

 

(2)

Net of income tax expense of $114 for the nine months ended September 30, 2008.

 

 

(3)

Net of income tax expense of $202 for the nine months ended September 30, 2008.

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

5


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
C ONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OCN Shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated
Other
Comprehensive
Income,
Net of Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-
controlling
interest in
subsidiaries

 

 

 

 

 

 

Common Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2008 (As Adjusted – See Note 3)

 

 

62,716,530

 

$

627

 

$

201,831

 

$

404,901

 

$

1,876

 

$

406

 

$

609,641

 

Net loss

 

 

 

 

 

 

 

 

(9,092

)

 

 

 

(11

)

 

(9,103

)

Net assets distributed in connection with the spin-off of Altisource Portfolio Solutions S.A. (formerly Ocwen Solutions) (Note 2)

 

 

 

 

 

 

(71,448

)

 

 

 

 

 

 

 

(71,448

)

Issuance of common stock

 

 

37,671,500

 

 

377

 

 

334,790

 

 

 

 

 

 

 

 

335,167

 

Repurchase of common stock

 

 

(1,000,000

)

 

(10

)

 

(10,990

)

 

 

 

 

 

 

 

(11,000

)

Repurchase of 3.25% Convertible Notes

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

(4

)

Issuance of common stock awards to employees

 

 

29,907

 

 

 

 

(138

)

 

 

 

 

 

 

 

(138

)

Exercise of common stock options

 

 

405,013

 

 

4

 

 

2,964

 

 

 

 

 

 

 

 

2,968

 

Excess tax benefits related to share-based awards

 

 

 

 

 

 

362

 

 

 

 

 

 

 

 

362

 

Employee compensation – Share-based awards

 

 

 

 

 

 

1,373

 

 

 

 

 

 

 

 

1,373

 

Directors’ compensation – Common stock

 

 

12,147

 

 

 

 

82

 

 

 

 

 

 

 

 

82

 

Other comprehensive loss, net of income taxes

 

 

 

 

 

 

 

 

 

 

(307

)

 

(133

)

 

(440

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Balance at September 30, 2009

 

 

99,835,097

 

$

998

 

$

458,822

 

$

395,809

 

$

1,569

 

$

262

 

$

857,460

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

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

6


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
C ONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

For the nine months ended
September 30,

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

(As Adjusted)

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income (loss)

 

$

(9,103

)

$

17,674

 

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

 

 

 

 

 

 

 

Amortization of mortgage servicing rights

 

 

25,743

 

 

40,712

 

Premium amortization and discount accretion

 

 

1,735

 

 

2,924

 

Depreciation and other amortization

 

 

6,025

 

 

9,599

 

Provision for bad debts

 

 

1,138

 

 

872

 

Provision for (reversal of) impairment of mortgage servicing assets

 

 

(374

)

 

1,401

 

Provision for (reversal of) impairment of discontinued operations

 

 

(1,227

)

 

4,980

 

Loss (gain) on trading securities

 

 

(13,346

)

 

22,366

 

Loss on loans held for resale, net

 

 

8,783

 

 

11,112

 

Equity in losses of unconsolidated entities

 

 

1,608

 

 

10,628

 

Loss (gain) on debt redemption

 

 

(2,134

)

 

86

 

Excess tax benefits related to share-based awards

 

 

(362

)

 

(3

)

Net cash provided (used) by trading activities

 

 

2,500

 

 

(238,303

)

Net cash provided by loans held for resale activities

 

 

3,605

 

 

5,641

 

Decrease in advances and match funded advances

 

 

187,669

 

 

207,405

 

Decrease in deferred tax assets

 

 

44,325

 

 

4,974

 

Decrease in receivables and other assets, net

 

 

27,222

 

 

19,780

 

Decrease in servicer liabilities

 

 

(76,294

)

 

(94,187

)

Increase (decrease) in other liabilities

 

 

23,012

 

 

(10,241

)

Other, net

 

 

(996

)

 

3,808

 

 

 

   

 

   

 

Net cash provided by operating activities

 

 

229,529

 

 

21,228

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of mortgage servicing rights

 

 

(10,241

)

 

(3,638

)

Proceeds from the sale of mortgage servicing rights

 

 

 

 

5,985

 

Distributions of capital from unconsolidated entities

 

 

4,496

 

 

32,748

 

Investment in unconsolidated entities

 

 

(62

)

 

(1,250

)

Additions to premises and equipment

 

 

(3,429

)

 

(4,566

)

Proceeds from sales of real estate

 

 

1,689

 

 

6,003

 

Other

 

 

396

 

 

154

 

 

 

   

 

   

 

Net cash provided (used) by investing activities

 

 

(7,151

)

 

35,436

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Distribution of cash in connection with the spin-off of Altisource Portfolio Solutions S.A. (formerly Ocwen Solutions) (Note 2)

 

 

(20,028

)

 

 

Repayment of match funded liabilities, net

 

 

(427,328

)

 

(17,313

)

Repayment of lines of credit and other secured borrowings, net

 

 

(49,870

)

 

(195,717

)

Proceeds from investment line

 

 

 

 

299,964

 

Repayment of investment line

 

 

(33,551

)

 

(84,744

)

Repurchase of debt securities

 

 

(24,612

)

 

(10,797

)

Exercise of common stock options

 

 

2,587

 

 

3

 

Repurchase of common stock

 

 

(11,000

)

 

 

Issuance of common stock

 

 

335,167

 

 

 

Excess tax benefits related to share-based awards

 

 

362

 

 

3

 

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

 

 

724

 

 

 

 

 

   

 

   

 

Net cash used by financing activities

 

 

(227,549

)

 

(8,601

)

 

 

   

 

   

 

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

7


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

 

 

 

 

 

 

 

 

 

 

For the nine months ended
September 30,

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

(5,171

)

 

48,063

 

Cash at beginning of period

 

 

201,025

 

 

114,243

 

 

 

   

 

   

 

Cash at end of period

 

$

195,854

 

$

162,306

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

Net assets distributed in connection with the spin-off of Altisource Portfolio Solutions S.A. (formerly Ocwen Solutions), excluding cash (Note 2)

 

$

51,420

 

 

 

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

8


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Dollars in thousands, except share data)

 

 

Note 1

Summary of Significant Accounting Policies

Organization

          Ocwen Financial Corporation (NYSE: OCN) (Ocwen or OCN), through its subsidiaries, is a leading provider of residential and commercial mortgage loan servicing, special servicing and asset management services. Ocwen is headquartered in West Palm Beach, Florida with offices in California, the District of Columbia, Florida, Georgia and New York and global operations in India and Uruguay.

          At September 30, 2009, OCN owned all of the outstanding stock of its primary subsidiaries: Ocwen Loan Servicing, LLC (OLS); Ocwen Financial Solutions, Private Limited (OFSPL); and Investors Mortgage Insurance Holding Company. OCN owns 70% of Global Servicing Solutions, LLC (GSS) with the remaining 30% minority interest held by ML IBK Positions, Inc.

          OCN also holds a 45% interest in BMS Holdings, Inc. (BMS Holdings), a 25% interest in Ocwen Structured Investments, LLC (OSI) and approximately a 25% interest in Ocwen Nonperforming Loans, LLC (ONL) and Ocwen REO, LLC (OREO).

          On August 10, 2009, we completed the previously announced distribution of our Ocwen Solutions line of business, except for BMS Holdings and GSS, via the spin-off of a separate publicly-traded company, Altisource Portfolio Solutions S.A. (NASDAQ:ASPS) (Altisource). See Note 2.

Basis of Presentation

          Certain amounts included in our 2008 consolidated financial statements have been reclassified to conform to the 2009 presentation, including retrospective application of new accounting pronouncements adopted January 1, 2009. See Note 3 for information regarding our adoption of recent accounting pronouncements.

          The accompanying unaudited interim 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 financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation. The results of operations and other data for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for any other interim period or for the entire year ending December 31, 2009. The unaudited interim 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, 2008.

          The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. Actual results could differ from those estimates. Material estimates that are particularly significant in the near or medium term relate to our determination of the valuation of securities, loans held for resale, mortgage servicing rights (MSRs) and deferred tax assets.

Principles of Consolidation

Securitizations or Asset Backed Financing Arrangements

          OCN or its subsidiaries have been the transferor in connection with a number of securitizations or asset-backed financing arrangements. As of September 30, 2009, we have continuing involvement with the financial assets of eleven of these securitizations or asset-backed financing arrangements. We have aggregated these securitizations or asset-backed financing arrangements into two groups: (1) securitizations of residential mortgage loans that were accounted for as sales and (2) financings of advances on loans serviced for others that were accounted for as secured borrowings.

Securitizations of Residential Mortgage Loans

          The following table provides information regarding seven securitization trusts where we have continuing involvement with the transferred assets. Our continuing involvement typically includes acting as servicer or sub-servicer for the mortgage loans held by the trust and holding beneficial interests in the trust. The beneficial interests held consist of both subordinate and residual securities that either were retained at the time of the securitization transaction or were acquired subsequent to the securitization. Because each of the securitization trusts is a “qualifying special purpose entity” (QSPE), we exclude the trusts from our consolidated financial statements. Summary information for these trusts is provided below.

9



 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the periods ended September 30

 

Three months

 

Nine months

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Total cash received on beneficial interests held

 

$

407

 

$

583

 

$

1,840

 

$

2,546

 

Total servicing and subservicing fee revenues

 

 

1,000

 

 

1,328

 

 

3,415

 

 

4,326

 


 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

September 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Total collateral balance

 

$

629,194

 

$

740,477

 

Non-performing collateral (1)

 

 

214,481

 

 

219,613

 

Total certificate balance

 

 

628,454

 

 

740,121

 

Total servicing advances

 

 

23,929

 

 

30,683

 

Total beneficial interests held at fair value (2)

 

 

2,095

 

 

2,216

 

Total mortgage servicing rights at amortized cost

 

 

1,773

 

 

2,066

 


 

 

(1)

Non-performing collateral includes loans past due 90 days or more, loans in foreclosure, loans in bankruptcy and foreclosed real estate.

 

 

(2)

Includes investments in subordinate and residual securities that we retained in connection with the loan securitization transactions completed in prior years (primarily 2006). These retained interests had a fair value of $90 and $167 at September 30, 2009 and December 31, 2008, respectively.

          We have no obligation to provide financial support to the trusts and have provided no such support. Our exposure to loss as a result of our continuing involvement in the trusts is limited to the carrying values of our investments in the residual and subordinate securities of the trusts, our mortgage servicing rights that are related to the trusts and our advances to the trusts. We consider the probability of loss arising from our advances to be remote because of their position ahead of most of the other liabilities of the trusts. See Notes 6, 7, 8 and 9 for additional information regarding trading securities, advances, match funded advances and mortgage servicing rights.

Match Funded Advances on Loans Serviced for Others

          Match funded advances on loans serviced for others result from our transfers of residential loan servicing advances to special purpose entities (SPEs) in exchange for cash. These four SPEs issue debt supported by collections on the transferred advances. We made these transfers under the terms of four advance facility agreements. These transfers do not qualify for sales accounting because we retain control over the transferred assets. As a result, we account for these transfers as financings and classify the transferred advances on our balance sheet as match funded advances and the related liabilities as match funded liabilities. Collections on the advances pledged to the special purpose entities are used to repay principal and interest and to pay the expenses of the entity. Holders of the debt issued by these entities can look only to the assets of the entities themselves for satisfaction of the debt and have no recourse against OCN. However, OLS has guaranteed the payment by one of the entities, Ocwen Servicer Advance Funding (Wachovia), LLC (OSAFW), of its obligations under the securitization documents. The maximum amount payable under the guarantee is limited to 10% of the notes outstanding at the end of the facility’s revolving period in May 2010. As of September 30, 2009, OSAFW had notes outstanding of $109,668. The following table summarizes the assets and liabilities of the four special purpose entities formed in connection with our match funded advance facilities:

 

 

 

 

 

 

 

 

 

 

September 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Total assets

 

$

922,281

 

$

1,122,404

 

Match funded advances

 

 

879,444

 

 

1,100,555

 

Total liabilities

 

 

596,238

 

 

994,244

 

Match funded liabilities

 

 

529,779

 

 

961,939

 

Variable Interest Entities

          We evaluate each SPE for classification as a QSPE. We do not consolidate QSPEs in our financial statements. Where we determine that an SPE is not classified as a QSPE, we further evaluate it for classification as a variable interest entity (VIE). When an SPE meets the definition of a VIE, and we determine that OCN is the primary beneficiary, we include the SPE in our consolidated financial statements.

          We have determined that the special purpose entities created in connection with the match funded financing facilities that are discussed above are VIEs and that we are the primary beneficiary of those VIEs. The accounts of those special purpose entities are included in our consolidated financial statements.

          We apply the equity method of accounting to investments in which we have less than 50% of the voting securities, yet we are able to exercise significant influence over the policies and procedures of the entity. We have eliminated all material intercompany accounts and transactions in consolidation.

10


Mortgage Servicing Fees and Advances

          We earn fees for servicing mortgage loans. We collect servicing fees, generally expressed as a percent of unpaid principal balance, from the borrowers’ payments. We also include late fees, prepayment penalties, float earnings and other ancillary fees in servicing income. We recognize servicing fees when the fees are earned which is generally when the borrowers’ payments are collected.

          During any period in which the borrower does not make payments, most of our servicing agreements require that we advance our own funds to meet contractual principal and interest remittance requirements for the investors, pay property taxes and insurance premiums and process foreclosures. We also advance funds to maintain, repair and market foreclosed real estate properties on behalf of investors. These advances are made pursuant to the terms of each servicing contract. Each servicing contract is associated with specific loans, identified as a pool.

          When we make an advance on a loan under each servicing contract, we are entitled to recover that advance from either the borrower, for reinstated and performing loans, or from investors, for foreclosed loans. Most of our servicing contracts provide that the advances made under the respective agreement have priority over all other cash payments from the proceeds of the loan, and in the majority of cases, the proceeds of the pool of loans, which are the subject of that servicing contract. As a result, we are entitled to repayment from loan proceeds before any interest or principal is paid on the bonds, and in the majority of cases, advances in excess of loan proceeds may be recovered from pool level proceeds.

          We record a charge to earnings to the extent that advances are uncollectible under the provisions of each servicing contract taking into consideration historical loss and delinquency experience, length of delinquency and the amount of the advance. However, we are generally only obligated to advance funds to the extent that we believe the advances are recoverable from expected proceeds from the loan. We assess collectibility using proprietary cash flow projection models which incorporate a number of different factors, depending on the characteristics of the mortgage loan or pool, including, for example, time to a foreclosure sale, estimated costs of foreclosure action, future property tax payments and the value of the underlying property net of carrying costs, commissions and closing costs.

 

 

Note 2

Altisource (formerly Ocwen Solutions) Separation Transaction

          On August 10, 2009, we completed the separation of Altisource by distributing all of the shares of Altisource common stock to OCN’s shareholders of record as of August 4, 2009 (the Separation). Altisource consists of the operations of our former Ocwen Solutions line of business and related assets comprising the Mortgage Services, Financial Services and Technology Products segments except for BMS Holdings and GSS. OCN shareholders received a tax-free pro rata distribution of one share of Altisource common stock for every three shares of OCN common stock held and received cash in lieu of fractional shares.

          As a consequence of the Separation and related transactions, Ocwen will incur income taxes to the extent that the fair market value of Altisource assets exceeded Ocwen’s tax basis in such assets in accordance with Section 367 of the Internal Revenue Code. Ocwen has recognized $50,631 of income tax expense, of which $26,371 is current expense and $24,260 is deferred expense. Additional disclosure of the impact of the Separation on our deferred tax assets is included in Note 19.

          For accounting purposes, we eliminated the assets and liabilities of Altisource from our consolidated balance sheet effective at the close of business on August 9, 2009. Beginning August 10, 2009, the operating results of Altisource are no longer included in our operating results. We do not report the historical operating results of Altisource as a discontinued operation because of the significance of the continuing involvement between Altisource and OCN under the long-term services agreements described in Note 23. Accordingly, for periods prior to August 10, 2009, the historical operating results of Altisource continue to be included in continuing operations.

          In connection with the Separation, we recognized $520 and $3,501 of advisory expenses for the three and nine months ended September 30, 2009, respectively.

          A summary of the carrying values of the net assets that we transferred to Altisource in the Separation is as follows:

 

 

 

 

 

Assets:

 

 

 

 

Cash

 

$

20,028

 

Receivables

 

 

13,592

 

Goodwill and intangibles, net

 

 

45,794

 

Premises and equipment, net

 

 

8,615

 

Other assets

 

 

2,179

 

 

 

   

 

 

 

 

90,208

 

 

 

   

 

Liabilities

 

 

 

 

Deferred tax liability

 

 

2,473

 

Accrued expenses and other liabilities

 

 

16,287

 

 

 

   

 

 

 

 

18,760

 

 

 

   

 

 

 

 

 

 

Reduction in Additional paid-in capital

 

$

71,448

 

 

 

   

 

11


          OCN stock options outstanding under Ocwen’s various equity compensation plans have been adjusted to reflect the value of Altisource stock distributed to OCN shareholders. At the date of the Separation, all holders of OCN stock awards, including Altisource employees and those who remained with Ocwen after the Separation, received the following:

 

 

 

 

New Altisource stock options (issued by Altisource) to acquire the number of shares of Altisource common stock equal to the product of (a) the number of OCN stock options held on the date of the Separation and (b) the distribution ratio of one share of Altisource common stock for every three shares of OCN common stock; and

 

 

 

 

Adjusted OCN stock options for the same number of shares of OCN common stock with a reduced exercise price per stock option.

          We determined the exercise price of the new Altisource options and the adjusted OCN options based on the exercise price ratio. We calculated the exercise price ratio for each individual stock option based on the ratio of the grant-date exercise price of the individual stock option to the trading value of the OCN stock immediately prior to the Separation. We then applied this exercise price ratio to the trading value of the OCN stock and the Altisource stock on the date the Altisource stock began regular-way trading on the NASDAQ market to determine the exercise price of the new Altisource stock option and the adjusted OCN stock option.

          Similarly, each holder of OCN restricted stock retained his or her unvested shares and received one unvested Altisource restricted stock share for every three OCN unvested shares held.

          Consequently, the fair value of the adjusted OCN stock award and the new Altisource stock award immediately following the Separation was equivalent to the fair value of such OCN stock award immediately prior to the Separation.

          As of September 30, 2009, the following OCN stock incentive awards were outstanding:

 

 

 

 

 

 

 

 

 

 

OCN Stock Options

 

OCN Restricted
Stock

 

 

 

 

 

 

 

Held by current and former OCN employees

 

 

7,092,220

 

 

7,484

 

Held by Altisource employees

 

 

2,203,097

 

 

2,381

 

 

 

   

 

   

 

Total

 

 

9,295,317

 

 

9,865

 

 

 

   

 

   

 

          In addition, as of September 30, 2009, our current and former employees held 2,380,784 options to purchase Altisource common stock.

          We are responsible for fulfilling all stock incentive awards related to OCN common stock, and Altisource is responsible for fulfilling all stock incentive awards related to Altisource common stock regardless of whether such stock incentive awards are held by our or Altisource’s employees. Notwithstanding the foregoing, based on the requirements of SFAS 123(R), our stock-based compensation expense, resulting from awards outstanding at the Separation date, is based on the stock incentive awards held by our employees regardless of whether such awards were issued by OCN or Altisource. Accordingly, stock-based compensation that we recognize as expense with respect to Altisource stock incentive awards is included in “Additional paid-in capital” on our Consolidated Balance Sheet.

 

 

Note 3

Recent Accounting Pronouncements

          In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles . This establishes the FASB Accounting Standards Codification (ASC) as the only source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP, with the exception of Statements of Financial Accounting Standards not yet included in the Codification. We adopted the FASB ASC as required for the period ended September 30, 2009.

          ASC 820, Fair Value Measures. In April 2009, the FASB issued FASB FSP FAS 157-4 (Codified within ASC 820) which provides additional guidance for estimating fair value when the level of activity for the asset or liability has significantly decreased. The standard is effective for interim and annual reporting periods ending after June 15, 2009. Our initial adoption of this standard during the second quarter of 2009 did not have a material effect on our consolidated financial statements.

          ASC 805, Business Combinations. The FASB issued SFAS No. 141R (Codified within ASC 805) which modifies certain elements of the acquisition method of accounting used for all business combinations. The statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at the full amounts of their fair values, with limited exceptions specified in the statement. If the business combination is achieved in stages (a step acquisition), an acquirer is also required to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values. The statement requires the acquirer to recognize restructuring and acquisition costs separately from the business combination. The statement also requires the disclosure of information necessary to understand the nature and effect of the business combination. The adoption of this standard on January 1, 2009 did not have an impact on our consolidated balance sheets or statements of operations.

12


          ASC 810, Consolidations . The FASB issued SFAS No. 160 (Codified within ASC 810) on December 4, 2007. The statement establishes new accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements separate from the parent’s equity. The amount of net income attributable to the non-controlling interest is included in consolidated net income on the face of the income statement. The statement clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, when a subsidiary is deconsolidated, this statement requires that a parent recognize a gain or loss in net income based on the fair value of the entire entity, irrespective of any retained ownership, on the deconsolidation date. Such a gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. We adopted this standard on January 1, 2009 by retrospectively applying the provisions of the new guidance to all prior periods. Because the outstanding non-controlling interests in consolidated subsidiaries are not significant, the implementation of this standard did not have a material effect on our consolidated balance sheets or statements of operations.

          ASC 320, Investments . The FASB issued FSP No. APB 14-1 (Codified within ASC 320) . which clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), and specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Upon adoption of this standard on January 1, 2009, we recognized a discount to reduce the carrying value of the 3.25% Convertible Notes and an offsetting increase to stockholders’ equity. The cumulative effect of adoption resulted in: (1) a reduction of retained earnings of $19,838 due to the retrospective accretion of the resulting debt discount to interest expense over the expected life of the notes; (2) adjustments to debt issue cost amortization and gains or losses recognized on previous redemptions; and (3) an increase in additional paid-in capital of $21,293. The adjustment to additional paid-in capital includes the recognized debt discount, adjusted for note redemptions, and the effect of deferred taxes, as well as net gains or losses attributable to redemptions of the equity component. Interest expense for the three and nine months ended September 30, 2008 has been adjusted to include amortization of debt discount of $948 and $2,918, respectively, and a reduction in the amortization of debt issue costs of $32 and $103, respectively. The gain previously recognized on the redemption of debt securities during the quarter ended June 30, 2008 of $3,595 has been adjusted to reflect a loss of $86 on the debt component of the convertible notes in the statement of operations and a gain of $2,800 in additional paid in capital for the equity component.

          ASC 320 , Investments. The FASB issued FSP No. FAS 115-2 and FAS 124-2 (Codified within ASC 320) which amends the other-than-temporary impairment guidance for debt securities and improves the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This standard does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. Because our current investments in debt securities are classified as trading securities and therefore measured at fair value on a recurring basis, this standard did not have a material effect on our consolidated financial statements upon adoption during the second quarter of 2009.

          ASC 855, Subsequent Events. This statement, which we adopted during the quarter ended June 30, 2009, introduces the concept of financial statements being available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. A public entity is required to evaluate subsequent events through the date that the financial statements are issued. This statement did not result in changes in the subsequent events that we report, either through recognition or disclosure, in our financial statements upon adoption. We have evaluated subsequent events through November 9, 2009 as disclosed in Note 25.

          SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. This statement clarifies that the objective of the standard is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. That determination must consider the transferor’s continuing involvements in the transferred financial asset, including all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. This statement modifies the financial-components approach currently used and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset.

          This statement defines the term participating interest to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. If the transfer does not meet those conditions, a transferor should account for the transfer as a sale only if it transfers an entire financial asset or a group of entire financial assets and surrenders control over the entire transferred asset(s). This statement requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. Enhanced disclosures are required to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets.

          The provisions in for guaranteed mortgage securitizations are removed to require those securitizations to be treated the same as any other transfer of financial assets within the scope of the standard. If such a transfer does not meet the requirements for sale accounting, the securitized mortgage loans should continue to be classified as loans in the transferor’s statement of financial position.

          We must adopt this statement as of January 1, 2010 and all reporting periods thereafter. Earlier application is prohibited. This statement must be applied to transfers occurring on or after the effective date. Additionally, the disclosure provisions of this statement should be applied to transfers that occurred both before and after the effective date of this standard. We are evaluating the potential impact of this standard. 

13


           SFAS No. 167, Amendments to FASB Interpretation No. 46(R). This standard will require an enterprise to perform ongoing periodic assessments to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics:

 

 

 

 

a.

The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance

 

 

 

 

b.

The obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.

          In addition to reintroducing the concept of control into the determination of the primary beneficiary of a VIE, this statement makes numerous other amendments to the current standards to primarily reflect the elimination of the concept of a QSPE. This statement also amends the current standards to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The enhanced disclosures are required for any enterprise that holds a variable interest in a VIE. The additional disclosures required by this statement are included in Note 1—Principles of Consolidation.

          This standard will become effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited.

          As disclosed in Note 1—Securitizations of Residential Mortgage Loans, we currently exclude certain loan securitization trusts from our consolidated financial statements because each is a QSPE. Once this statement becomes effective, we will be required to reevaluate these QSPEs as well as all other potentially significant interests in other unconsolidated entities, such as our asset management vehicles and the securitization trusts underlying our servicing portfolio, to determine if we should include them in our consolidated financial statements. We are evaluating the potential impact of this statement.

 

 

Note 4

Fair Value of Financial Instruments

          The carrying amounts and the estimated fair values of our financial instruments are as follows at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2009

 

December 31, 2008

 

 

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

$

250,099

 

$

250,099

 

$

239,301

 

$

239,301

 

Subordinates and residuals

 

 

4,417

 

 

4,417

 

 

4,369

 

 

4,369

 

Loans held for resale

 

 

36,618

 

 

36,618

 

 

49,918

 

 

49,918

 

Advances

 

 

1,010,804

 

 

1,010,804

 

 

1,202,640

 

 

1,202,640

 

Receivables

 

 

33,135

 

 

33,135

 

 

42,798

 

 

42,798

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Match funded liabilities

 

$

529,779

 

$

529,779

 

$

961,939

 

$

965,233

 

Lines of credit and other secured borrowings

 

 

54,665

 

 

54,665

 

 

116,870

 

 

116,870

 

Investment line

 

 

167,168

 

 

167,168

 

 

200,719

 

 

200,719

 

Servicer liabilities

 

 

59,457

 

 

59,457

 

 

135,751

 

 

135,751

 

Debt securities

 

 

109,814

 

 

101,258

 

 

133,367

 

 

112,764

 

Derivative financial instruments, net

 

$

631

 

$

631

 

$

(533

)

$

(533

)

          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 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. The three broad categories are:

 

 

 

 

Level 1:

Quoted prices in active markets for identical assets or liabilities.

 

 

 

 

Level 2:

Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly for substantially the full term of the financial instrument.

 

 

 

 

Level 3:

Unobservable inputs for the asset or liability.

14


          Where available, we utilize quoted market prices or observable inputs rather than unobservable inputs to determine fair value. We classify assets in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth assets and liabilities measured at fair value categorized by input level within the fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying value

 

Level 1

 

Level 2

 

Level 3

 

At September 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

Measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

$

250,099

 

$

 

$

 

$

250,099

 

Subordinates and residuals

 

 

4,417

 

 

 

 

 

 

4,417

 

Derivative financial instruments, net (2)

 

 

631

 

 

(252

)

 

 

 

883

 

Measured at fair value on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for resale (3)

 

 

36,618

 

 

 

 

 

 

36,618

 

Mortgage servicing rights (4)

 

 

361

 

 

 

 

 

 

361

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

Measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

$

239,301

 

$

 

$

 

$

239,301

 

Subordinates and residuals

 

 

4,369

 

 

 

 

 

 

4,369

 

Derivative financial instruments, net (2)

 

 

(533

)

 

(726

)

 

 

 

193

 

Measured at fair value on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for resale (3)

 

 

49,918

 

 

 

 

 

 

49,918

 

Mortgage servicing rights (4)

 

 

 

 

 

 

 

 

 


 

 

(1)

Because our internal valuation model requires significant use of unobservable inputs, we classified these securities within Level 3 of the fair value hierarchy.

 

 

(2)

Derivative financial instruments consist of interest rate caps that we use to protect against our exposure to rising interest rates on two of our match funded variable funding notes and foreign currency futures contracts that we use to hedge our net investment in Bankhaus Oswald Kruber GmbH & Co. KG (BOK), our wholly-owned German banking subsidiary, against adverse changes in the value of the Euro versus the U.S. Dollar. We classified the interest rate caps within Level 3 of the fair value hierarchy and the futures contracts within Level 1. See Note 21 for additional information on our derivative financial instruments.

 

 

(3)

Loans held for resale are measured at fair value on a non-recurring basis. At September 30, 2009 and December 31, 2008, the carrying value of loans held for resale is net of a valuation allowance of $16,468 and $17,491, respectively. Current market illiquidity has reduced the availability of observable pricing data. Consequently, we classify these loans within level 3 of the fair value hierarchy.

 

 

(4)

The carrying value of MSRs at September 30, 2009 and December 31, 2008 is net of a valuation allowance for impairment of $3,250. The valuation allowance, which relates exclusively to the high-loan-to-value stratum of our residential MSRs, reduced the carrying value of the stratum to $361 at September 30, 2009. The estimated fair value exceeded amortized cost for all other strata. See Note 9 for additional information on MSRs.

15


          The following table sets forth a reconciliation of the changes in fair value of our Level 3 assets that we measure at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value at
beginning of
period

 

Purchases,
collections and
settlements,
net (1)

 

Total realized
and unrealized
gains and
(losses) (2)

 

Transfers in
and/or out of
Level 3

 

Fair value at
September 30

 

For the three months ended September 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

$

243,285

 

$

(500

)

$

7,314

 

$

 

$

250,099

 

Subordinates and residuals

 

 

3,440

 

 

 

 

977

 

 

 

 

4,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

957

 

 

 

 

(74

)

 

 

 

883

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

$

254,745

 

$

(801

)

$

 

$

 

$

253,944

 

Subordinates and residuals

 

 

4,860

 

 

 

 

(621

)

 

 

 

4,239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

1,326

 

 

 

 

(163

)

 

 

 

1,163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

$

239,301

 

$

(2,500

)

$

13,298

 

$

 

$

250,099

 

Subordinates and residuals

 

 

4,369

 

 

 

 

48

 

 

 

 

4,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

193

 

 

 

 

690

 

 

 

 

883

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

$

 

$

270,313

 

$

(16,369

)

$

 

$

253,944

 

Subordinates and residuals

 

 

7,362

 

 

22

 

 

(3,145

)

 

 

 

4,239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

4,867

 

 

(7,063

)

 

3,359

 

 

 

 

1,163

 


 

 

(1)

Purchases, collections and settlements, net, related to trading securities exclude interest received.

 

 

(2)

Total gains on auction rate securities for the third quarter include unrealized gains of $7,314 on auction rate securities held at September 30, 2009. We did not record any unrealized gains or losses on auction rate securities during the three months ended September 30, 2008. For the year to date periods, unrealized gains (losses) on auction rate securities held at September 30, 2009 and 2008 were $13,298 and $(15,707), respectively. The total losses attributable to subordinates and residuals and derivative financial instruments were comprised exclusively of unrealized losses on assets held at September 30, 2009 and 2008.

          The methodologies that we use and key assumptions that we make to estimate the fair value of instruments are described in more detail by instrument below:

Trading Securities

           Auction Rate Securities. We estimated the fair value of the auction rate securities based on a combination of observable market inputs provided by actual orderly sales of similar auction rate securities and a discounted cash flow analysis. This discounted cash flow analysis incorporates expected future cash flows based on our best estimate of market participant assumptions. In periods of market illiquidity, the fair value of auction rate securities is determined after consideration of the credit quality of the securities held and the underlying collateral, market activity and general market conditions affecting auction rate securities.

          The discounted cash flow analysis included the following range of assumptions at September 30, 2009:

 

 

 

 

 

 

Expected term

27 months

 

 

Illiquidity premium

1.0% –1.5%

 

 

Discount rate

3.1% – 14.3%

 

16


          The expected term was based upon our best estimate of market participants’ expectations of future successful auctions. The discount rate and illiquidity premium are consistent with prevailing rates for similar securities. Other significant assumptions that we considered in our analysis included the credit risk profiles of the issuers, the impact on the issuers of the increased debt service costs associated with the payment of penalty interest rates and the collateralization of the securitization trusts. We do not assume defaults in our valuation due to the high credit quality of both the securities we hold and the underlying collateral.

          Subordinates and Residuals. Our subordinate and residual securities are not actively traded, and, therefore, we estimate the fair value of these securities based on the present value of expected future cash flows from the underlying mortgage pools. We use our best estimate of the key assumptions we believe are used by market participants. We calibrate our internally developed discounted cash flow models for trading activity when appropriate to do so in light of market liquidity levels. 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 invest typically 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.

          Discount rates for the subordinate and residual securities range from 21% to 22% and are determined based upon an assessment of prevailing market conditions and prices for similar assets. We project the delinquency, loss and prepayment assumptions based on a comparison to actual historical performance curves adjusted for prevailing market conditions. Peak delinquency assumptions range from 20% to 30%, and loss assumptions on current balances range from 19% to 28%. Average prepayment assumptions range from 5% to 6%.

          At September 30, 2009, securities amounting to $254,516 were carried at their fair value as determined by using valuations based on internally developed discounted cash flow models. These models are calibrated for observable liquid market trading activity.

Derivative Financial Instruments

          Exchange-traded derivative financial instruments are valued based on quoted market prices. If quoted market prices or other observable inputs are not available, fair value is based on estimates provided by third-party pricing sources.

Loans Held for Resale

          Loans held for resale are reported at the lower of cost or fair value. We account for the excess of cost over fair value as a valuation allowance with changes in the valuation allowance included in gain (loss) on loans held for resale, net, in the period in which the change occurs. All loans held for resale were measured at fair value because the cost of $53,086 exceeded the estimated fair value of $36,618 at September 30, 2009.

          When we enter into an agreement to sell a loan to an investor at a set price, the loan is valued at the commitment price. The fair value of loans for which we do not have a firm commitment to sell is based upon a discounted cash flow analysis. We stratify our fair value estimate of uncommitted loans held for resale based upon the delinquency status of the loans. We base the fair value of our performing loans on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows. Significant assumptions include collateral and loan characteristics, prevailing market conditions and the creditworthiness of the borrower. The fair value of our non-performing loans is determined based upon the underlying collateral of the loan and the estimated period and cost of disposition.

Mortgage Servicing Rights

          We estimate the fair value of our MSRs by calculating the present value of expected future cash flows utilizing assumptions that we believe are used by market participants. The most significant assumptions used in our internal valuation are the speed at which mortgages prepay and delinquency experience, both of which we derive from our historical experience and available market data. Other assumptions used in our internal valuation are:

 

 

 

 

Cost of servicing

 

 

 

 

Discount rate

 

 

 

 

Interest rate used for computing the cost of servicing advances

 

 

 

 

Interest rate used for computing float earnings

 

 

 

 

Compensating interest expense

          The significant components of the estimated future cash inflows for MSRs include servicing fees, late fees, prepayment penalties, float earnings and other ancillary fees. Significant cash outflows include the cost of servicing, the cost of financing servicing advances and compensating interest payments. We derive prepayment speeds and delinquency assumptions from historical experience adjusted for prevailing market conditions. We develop the discount rate internally, and we consider external market-based assumptions in determining the interest rate for the cost of financing advances, the interest rate for float earnings and the cost of servicing. The more significant assumptions used in the September 30, 2009 valuation include prepayment speeds ranging from 19.3% to 25.7% (depending on loan type) and delinquency rates ranging from 18.0% to 26.1% (depending on loan type). Other assumptions include an interest rate of 1-month LIBOR plus 5% for computing the cost of financing advances, an interest rate of 1-month LIBOR for computing float earnings and a discount rate of 20%.

17


          We perform an impairment analysis based on the difference between the carrying amount and fair value after grouping our loans into the applicable strata based on one or more of the predominant risk characteristics of the underlying loans. The risk factors used to assign loans to strata include the credit score (FICO) of the borrower, the loan to value ratio and the default risk. Our strata include:

 

 

 

 

Subprime

 

 

 

 

ALT A

 

 

 

 

High-loan-to-value

 

 

 

 

Re-performing

 

 

 

 

Special servicing

 

 

 

 

Other

Advances

          We value advances that we make on loans that we service for others at their carrying amounts because they have no stated maturity, generally are 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. We carry long-term receivables with an implicit fixed rate or floating rate at a discounted value or approximate face value, respectively, which we believe approximates fair value.

Servicer Liabilities

          The carrying value of servicer liabilities approximates fair value due to the short period of time the funds are held until they are deposited in collection accounts, paid directly to an investment trust or refunded to borrowers.

 

 

Note 5

Discontinued Operations

          In the fourth quarter of 2007, management of OCN approved and committed to a plan to sell its investment in BOK. Management has concluded that BOK met and continues to meet the definition of a discontinued operation. Accordingly, the results of BOK are classified as discontinued in the accompanying consolidated financial statements. For segment reporting purposes, the operations of BOK are included in Corporate Items and Other.

          In the second quarter of 2008, we recorded a charge of $4,980 that included the impairment of the remaining $3,423 carrying value of goodwill and intangibles, a $1,377 write-down of receivables and a $180 write-down of premises and equipment.

          On June 15, 2009, we entered into an agreement to sell our investment in BOK, subject to regulatory approvals. Based on the terms of this new agreement, we recognized a gain of $1,227 in the second quarter of 2009 to partially reflect the increased sales price for our investment. This gain relates to a previously recorded valuation adjustment .

          Results of BOK’s operations for the periods ended September 30 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

Nine Months

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

25

 

$

68

 

$

64

 

$

339

 

Operating expenses

 

 

414

 

 

593

 

 

18

 

 

6,891

 

 

 

   

 

   

 

   

 

   

 

Income (loss) from operations

 

 

(389

)

 

(525

)

 

46

 

 

(6,552

)

Other income, net

 

 

158

 

 

339

 

 

587

 

 

980

 

 

 

   

 

   

 

   

 

   

 

Income (loss) before income taxes

 

 

(231

)

 

(186

)

 

633

 

 

(5,572

)

Income tax expense (benefit)

 

 

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

   

 

Net income (loss)

 

$

(231

)

$

(186

)

$

633

 

$

(5,572

)

 

 

   

 

   

 

   

 

   

 

The following table presents BOK’s assets and liabilities at the dates indicated:

 

 

 

 

 

 

 

 

 

 

September 30,
2009

 

December 31,
2008

 

 

 

 

 

 

 

Cash

 

$

9,482

 

$

4,613

 

Receivables

 

 

7,224

 

 

10,250

 

Other

 

 

56

 

 

33

 

 

 

   

 

   

 

Total assets

 

$

16,762

 

$

14,896

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Total liabilities (including customer deposits of $6,784 and $5,820)

 

$

7,087

 

$

6,280

 

 

 

   

 

   

 

18



 

 

Note 6

Trading Securities

          Trading securities consisted of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

September 30,
2009

 

December 31,
2008

 

 

 

 

 

 

 

Auction rate (Corporate Items and Other)

 

$

250,099

 

$

239,301

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Subordinates and residuals:

 

 

 

 

 

 

 

Loans and Residuals

 

$

4,327

 

$

4,204

 

Corporate Items and Other

 

 

90

 

 

165

 

 

 

   

 

   

 

 

 

$

4,417

 

$

4,369

 

 

 

   

 

   

 

          Gain (loss) on trading securities for the periods ended September 30 was comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

Nine months

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) (1)

 

$

8,291

 

$

(621

)

$

13,346

 

$

(20,670

)

Realized losses (2)

 

 

 

 

 

 

 

 

(1,696

)

 

 

   

 

   

 

   

 

   

 

 

 

$

8,291

 

$

(621

)

$

13,346

 

$

(22,366

)

 

 

   

 

   

 

   

 

   

 


 

 

(1)

Unrealized gains on auction rate securities were $7,314 for the three months ended September 30, 2009. We did not record any unrealized gains or losses on auction rate securities during the three months ended September 30, 2008. Year to date, the unrealized gains (losses) on auction rate securities were $13,298 and $(15,707) for 2009 and 2008, respectively.

 

 

(2)

Realized losses for 2008 include a loss of $662 on the sale of auction rate securities in the second quarter.

Auction Rate Securities

          During the first quarter of 2008, we invested investment line borrowings (see Note 15) in AAA-rated auction rate securities backed by student loans originated under the U. S. Department of Education’s Federal Family Education Loan Program (FFELP). Auction rate securities are long-term variable rate bonds tied to short-term interest rates that reset through an auction process that historically occurred every 7 to 35 days. The student loans underlying the auction rate securities carry a U.S Government guarantee of at least 97% of the unpaid principal balance in the event of default. The auction rate securities that we hold are in the senior-most position and are smaller in amount than the federally guaranteed portion of the underlying loans. Historically, the par value of auction rate securities approximated fair value due to the frequent auctions of these securities at par. In the first quarter of 2008, the auction rate security market began experiencing illiquidity, and auctions began to fail because there were not enough orders to purchase all of the securities being offered at the auction. Within the context of a failed auction, the issuer pays the investor a “fail rate” penalty interest until the auction returns to clearing status, the notes mature at par or the notes are called or redeemed.

          On January 21, 2009, Fitch Ratings announced that it had downgraded several tranches of auction rate securities from ‘AAA’ to ‘BBB’. Auction rate securities we hold, with a par value of $70,350 at September 30, 2009, were affected by this ratings action. On January 28, 2009 and February 19, 2009, respectively, Moody’s Investors Services, Inc. announced that it had downgraded several tranches of auction rate securities from ‘BBB’ to ‘B’ and from ‘AAA’ to ‘A’. Auction rate securities we hold, with a par value of $70,350 and $6,400 at September 30, 2009, were affected by the ratings actions from ‘BBB’ to ‘B’ and from ‘AAA’ to ‘A’, respectively. The AAA rating from Standard and Poor’s Ratings Services has not been revised. To date we have received all interest payments when due.

          We did not sell any of our auction rate securities during the first nine months of 2009. During this same period, issuers redeemed, at par, auction rate securities we held with a face value of $2,500, including $500 during the third quarter. We recognized an $8,291 unrealized gain in the third quarter of 2009. This gain was due to the increased probability of a near term liquidity solution for approximately $70,350 principal amount of the auction rate securities and continued improvement in the underlying FFELP student loan market since December 31, 2008. See Note 25 for a subsequent event related to auction rate securities.

Subordinates and Residuals

          Through our investment in subordinate and residual securities, we support senior classes of securities. Principal from the underlying mortgage loans generally is allocated first to the senior classes with the most senior class having a priority right to the cash flow from the mortgage loans until its payment requirements are satisfied. To the extent that there are defaults and unrecoverable losses on the underlying mortgage loans, resulting in reduced cash flows, the most subordinate security will be the first to bear this loss.

19



 

 

Note 7

Advances

          Advances, representing payments made on behalf of borrowers or on foreclosed properties, as more fully described in Note 1—Mortgage Servicing Fees and Advances, consisted of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

September 30,
2009

 

December 31,
2008

 

 

 

 

 

 

 

Servicing:

 

 

 

 

 

 

 

Principal and interest

 

$

51,368

 

$

36,183

 

Taxes and insurance

 

 

42,377

 

 

32,812

 

Foreclosure and bankruptcy costs

 

 

25,860

 

 

23,122

 

Real estate servicing costs

 

 

287

 

 

225

 

Other

 

 

6,894

 

 

4,756

 

 

 

   

 

   

 

 

 

 

126,786

 

 

97,098

 

Loans and Residuals

 

 

4,432

 

 

4,867

 

Corporate Items and Other

 

 

142

 

 

120

 

 

 

   

 

   

 

 

 

$

131,360

 

$

102,085

 

 

 

   

 

   

 


 

 

Note 8

Match Funded Advances

           Match funded advances on residential loans we service for others, as more fully described in Note 1—Mortgage Servicing Fees and Advances, are comprised of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

September 30,
2009

 

December 31,
2008

 

 

 

 

 

 

 

Principal and interest

 

$

410,641

 

$

615,344

 

Taxes and insurance

 

 

319,855

 

 

324,605

 

Foreclosure and bankruptcy costs

 

 

75,525

 

 

70,142

 

Real estate servicing costs

 

 

51,091

 

 

70,658

 

Other

 

 

22,332

 

 

19,806

 

 

 

   

 

   

 

 

 

$

879,444

 

$

1,100,555

 

 

 

   

 

   

 

          See also Note 1—Principles of Consolidation—Match Funded Advances on Loans Serviced for Others.

 

 

Note 9

Mortgage Servicing Rights


 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

Commercial

 

Total

 

 

 

 

 

 

 

 

 

Carrying value of MSRs:

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2008

 

$

139,500

 

$

 

$

139,500

 

Purchases

 

 

10,241

 

 

 

 

10,241

 

Servicing transfers and adjustments

 

 

(8

)

 

 

 

(8

)

Reduction in impairment valuation allowance

 

 

374

 

 

 

 

374

 

Amortization

 

 

(25,118

)

 

 

 

(25,118

)

 

 

   

 

   

 

   

 

Balance at September 30, 2009

 

$

124,989

 

$

 

$

124,989

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Estimated fair value of MSRs:

 

 

 

 

 

 

 

 

 

 

September 30, 2009

 

$

131,327

 

$

 

$

131,327

 

December 31, 2008

 

$

148,135

 

$

 

$

148,135

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance of assets serviced:

 

 

 

 

 

 

 

 

 

 

September 30, 2009:

 

 

 

 

 

 

 

 

 

 

Servicing

 

$

27,039,067

 

$

 

$

27,039,067

 

Subservicing (1)

 

 

13,254,631

 

 

154,031

 

 

13,408,662

 

 

 

   

 

   

 

   

 

 

 

$

40,293,698

 

$

154,031

 

$

40,447,729

 

 

 

   

 

   

 

   

 

December 31, 2008:

 

 

 

 

 

 

 

 

 

 

Servicing

 

$

29,830,654

 

$

 

$

29,830,654

 

Subservicing

 

 

10,340,878

 

 

1,319,175

 

 

11,660,053

 

 

 

   

 

   

 

   

 

 

 

$

40,171,532

 

$

1,319,175

 

$

41,490,707

 

 

 

   

 

   

 

   

 


 

 

(1)

Includes non-performing loans serviced for Freddie Mac.

20


          We service residential mortgage loans and real estate that we do not own under contractual servicing agreements. We generally obtain MSRs by purchasing them from the owners of the mortgages. We also enter into subservicing agreements with entities that own the servicing rights. Residential assets serviced consist almost entirely of mortgage loans, primarily subprime, but also include real estate. An agreement between the various parties to a mortgage securitization transaction typically specifies the rights and obligations of the holder of the servicing rights which include guidelines and procedures for servicing the loans including remittance and reporting requirements, among other provisions. Assets serviced for others are excluded from our balance sheet. Custodial accounts, which hold funds representing collections of principal and interest that we have received from borrowers, are escrowed with an unaffiliated bank and excluded from our balance sheet. Custodial accounts amounted to approximately $283,600 and $370,200 at September 30, 2009 and December 31, 2008, respectively.

          During 2008, we established a valuation allowance for impairment of $3,624 on the high-loan-to-value stratum of our mortgage servicing rights as the external valuation that we consider in our impairment analysis fell below the carrying value due primarily to the declining fair value for rights to service second liens. The external valuation reflects industry averages for delinquencies on loans in the second lien position that are higher than those currently experienced by our servicing portfolio. During the third quarter of 2009, the valuation increased, and we reduced the valuation allowance by $374. Net of the valuation allowance of $3,250, the carrying value of this stratum was $361 at September 30, 2009. For all other strata, the fair value was above the carrying value at September 30, 2009.

          We have recognized a servicing liability for those agreements that are not expected to adequately compensate us for performing the servicing. Servicing liabilities were $3,864 and $3,239 at September 30, 2009 and December 31, 2008, respectively, and are included in other liabilities on the balance sheet. During the nine months ended September 30, 2009, the amount of charges we recognized to increase our servicing liability obligations exceeded amortization by $625, and we have reported this net expense as amortization of servicing rights in the statement of operations.

 

 

Note 10

Receivables

          Receivables consisted of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

September 30,
2009

 

December 31,
2008

 

 

 

 

 

 

 

Accounts receivable by segment:

 

 

 

 

 

 

 

Servicing, net (1)

 

$

8,140

 

$

6,495

 

Loans and Residuals

 

 

1,145

 

 

1,169

 

Asset Management Vehicles

 

 

464

 

 

1,171

 

Mortgage Services

 

 

71

 

 

2,668

 

Financial Services

 

 

 

 

5,747

 

Technology Products

 

 

 

 

975

 

Corporate Items and Other, net (2)

 

 

9,715

 

 

13,593

 

 

 

   

 

   

 

 

 

 

19,535

 

 

31,818

 

Other receivables:

 

 

 

 

 

 

 

Term note (3)

 

 

7,000

 

 

 

Security deposits

 

 

4,144

 

 

4,645

 

Income taxes

 

 

 

 

5,386

 

Other

 

 

2,456

 

 

949

 

 

 

   

 

   

 

 

 

$

33,135

 

$

42,798

 

 

 

   

 

   

 


 

 

(1)

The balances primarily include reimbursable expenses due from investors. The total balance of receivables for this segment is net of reserves of $2,398 and $1,604 at September 30, 2009 and December 31, 2008, respectively.

 

 

(2)

The balances at September 30, 2009 and December 31, 2008 include $5,384 and $8,286, respectively, of mortgage loans originated by BOK. These loans were net of allowances of $197 and $1,392, respectively. The balances at September 30, 2009 and December 31, 2008 also include receivables totaling $1,698 and $3,324, respectively, that primarily represent payments to be received in future years (through June 2014) of proceeds from the sales of investments in affordable housing properties. These affordable housing receivables are net of reserves for doubtful accounts of $6,517 and $6,400, respectively.

 

 

(3)

In March 2009, we issued a note receivable, maturing on April 1, 2014, in connection with advances funded by the Ocwen Servicer Advance Funding, LLC (OSAF) term note pledged as collateral, as described in Note 14. We receive 1-Month LIBOR plus 300 basis points under the terms of this note receivable. We are obligated to pay 1-Month LIBOR plus 350 basis points under the terms of a five-year note payable to the same counterparty. We do not have a contractual right to offset these payments.

21



 

 

Note 11

Investment in Unconsolidated Entities


 

 

 

 

 

 

 

 

 

 

September 30,
2009

 

December 31,
2008

 

 

 

 

 

 

 

Asset Management Vehicles:

 

 

 

 

 

 

 

Investment in OSI (1)

 

$

10,140

 

$

15,410

 

Investment in ONL and affiliates (2)

 

 

8,545

 

 

10,174

 

 

 

   

 

   

 

 

 

 

18,685

 

 

25,584

 

Corporate Items and Other

 

 

79

 

 

79

 

 

 

   

 

   

 

 

 

$

18,764

 

$

25,663

 

 

 

   

 

   

 

          Equity in earnings (losses) of unconsolidated entities was as follows for the periods ended September 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

Nine months

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

OSI (1) (3)

 

$

(956

)

$

(1,864

)

$

(599

)

$

(3,411

)

ONL and affiliates (2) (3)

 

 

(103

)

 

(1,064

)

 

(1,009

)

 

(1,551

)

BMS Holdings (4)

 

 

 

 

 

 

 

 

(5,666

)

 

 

   

 

   

 

   

 

   

 

 

 

$

(1,059

)

$

(2,928

)

$

(1,608

)

$

(10,628

)

 

 

   

 

   

 

   

 

   

 


 

 

(1)

Our investment in OSI represents a 25% equity interest. OSI invests in the lower tranches and residuals of residential mortgage-backed securities, the related mortgage servicing rights and other similar assets. During the first nine months of 2009, we received distributions from OSI totaling $4,000. We have no remaining commitment to invest in OSI.

 

 

(2)

Our investment in ONL and affiliates represent equity interests of approximately 25%. ONL resolves non-performing loans purchased at a discount. An affiliate purchases real estate for sale, including real estate that ONL may obtain through foreclosure. During the first nine months of 2009, we received distributions totaling $496 from ONL and affiliates and invested an additional $62 in these entities. We have a remaining commitment that expires in September 2010, to invest up to an additional $33,840 in ONL and affiliates, collectively.

 

 

(3)

We earn loan servicing and management fees from OSI and from ONL and affiliates. In determining the amount of consolidated equity in earnings to recognize, we add back our share of the loan servicing and management fee expense recognized by OSI, ONL and affiliates. For the first nine months of 2009 and 2008, OLS earned fees of $3,401 and $5,539, respectively, from OSI and from ONL and affiliates. On a consolidated basis, we have recognized approximately 75% of the loan servicing and management fee revenue.

 

 

(4)

During the second quarter of 2008, our share of the losses of BMS Holdings reduced our investment to zero. Our investment in BMS Holdings represents an equity interest of approximately 45%. Because we are not required to advance funds to BMS Holdings to finance operations and we are not a guarantor of any obligations of BMS Holdings, we suspended the recognition of losses from our investment in BMS Holdings. We will not resume recording income or losses until our share of BMS Holdings’ earnings exceeds our share of their losses that we did not recognize during the period when the equity method was suspended.


 

 

Note 12

Other Assets

          Other assets consisted of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

September 30,
2009

 

December 31,
2008

 

 

 

 

 

 

 

Debt service accounts (1)

 

$

39,738

 

$

58,468

 

Deferred debt related costs, net

 

 

9,122

 

 

14,758

 

Real estate

 

 

8,556

 

 

7,771

 

Interest earning collateral deposits

 

 

7,612

 

 

9,684

 

Prepaid expenses and other

 

 

2,275

 

 

6,907

 

 

 

   

 

   

 

 

 

$

67,303

 

$

97,588

 

 

 

   

 

   

 


 

 

(1)

Under our four advance funding facilities, we are contractually required to remit collections on pledged advances to the trustee within two days of receipt. The collected funds are not applied to reduce the related match funded debt until the payment dates specified in the indenture. The balance also includes amounts that have been set aside from the proceeds of our four match funded advance facilities to provide for possible shortfalls in the funds available to pay certain expenses and interest. These funds are held in interest earning accounts.

22



 

 

Note 13

Match Funded Liabilities

          Match funded liabilities, representing obligations secured by related match funded advances and repaid through the cash proceeds arising from those assets, as more fully described in Note 1—Mortgage Servicing Fees and Advances, consisted of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unused
Borrowing
Capacity (2)

 

Balance Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Borrowing Type

 

Interest Rate (1)

 

Maturity

 

Amortization
Date

 

 

September 30,
2009

 

December 31,
2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Funding Note Series 2007-1

 

Commercial paper rate + 200 basis points (3)

 

December 2014

 

December 2009

 

$

75,514

 

$

224,486

 

$

219,722

 

Term Note Series 2006 -1

 

5.335%

 

November 2015 (4)

 

December 2009

 

 

 

 

 

 

165,000

 

Variable Funding Note (5)

 

Commercial paper rate + 150 basis points (5)

 

December 2013

 

December 2010

 

 

133,595

 

 

116,405

 

 

192,520

 

Advance Receivable Backed Notes

 

1-Month LIBOR + 400 basis points (6)

 

January 2019 (6)

 

January 2010 (6)

 

 

120,780

 

 

79,220

 

 

142,361

 

Advance Receivable Backed Notes

 

1-Month LIBOR + 275 basis points (7)

 

May 2011 (7)

 

May 2010 (7)

 

 

390,332

 

 

109,668

 

 

237,504

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

720,221

 

 

529,779

 

 

957,107

 

Basis adjustment (4)

 

 

 

 

 

 

 

 

 

 

 

 

4,832

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

$

720,221

 

$

529,779

 

$

961,939

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 


 

 

(1)

1-Month LIBOR was 0.25% and 0.44% at September 30, 2009 and December 31, 2008, respectively.

 

 

(2)

At September 30, 2009, all eligible advances are pledged as collateral to a facility. Our unused borrowing capacity is available to us provided that we have additional eligible collateral to pledge. Collateral may only be pledged to one facility.

 

 

(3)

The interest rate for this note is determined using a commercial paper rate that reflects the borrowing costs of the lender plus a margin of 200 basis points that has generally approximated 1-Month LIBOR plus 200 basis points.

 

 

(4)

On August 11, 2009, we repaid this note and transferred the majority of the borrowing to the Variable Funding Note Series 2007-1. We previously carried this note on the balance sheet at fair value as the result of a designated fair value hedging relationship that we established in December 2006 using an interest rate swap. We terminated the swap agreement in February 2008 and began amortizing the basis adjustment to earnings over the expected remaining term of the note. In connection with the repayment of this note, we recognized a gain on debt redemption of $1,600, representing the reversal of the fair value hedging basis adjustment less early termination fees and the write-off of unamortized debt issue costs.

 

 

(5)

The interest rate for this note is determined using a commercial paper rate that reflects the borrowing costs of the lender plus a margin of 150 basis points that has generally approximated 1-Month LIBOR plus 150 basis points.

 

 

(6)

In January 2009, the lender agreed to renew this facility and to extend the amortization date from February 2009 to January 2010. The interest rate was increased from 1-Month LIBOR plus 200 basis points to 1-Month LIBOR plus 400 basis points.

 

 

(7)

In May 2009, we negotiated an increase in the maximum borrowing capacity from $300,000 to $500,000 and extended the amortization date from April 2009 to May 2010. Under the terms of the new facility, we pay interest on drawn balances at 1-Month LIBOR plus 275 basis points. The previous interest rate was 1-Month LIBOR plus 250 basis points. In addition, we pay, in twelve monthly installments, a facility fee of 2.25% of the maximum borrowing capacity of $500,000.

23



 

 

Note 14

Lines of Credit and Other Secured Borrowings

          Secured lines of credit from various unaffiliated financial institutions are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unused
Borrowing
Capacity

 

Balance Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,
2009

 

December 31,
2008

 

Borrowings

 

Collateral

 

Interest Rate (1)

 

Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee reimbursement advance

 

Term note (2)

 

See (2) below

 

March 2014

 

$

 

$

60,000

 

$

 

Term note (3)

 

Advances

 

1-Month LIBOR + 350 basis points

 

March 2014

 

 

 

 

7,000

 

 

 

Senior secured credit agreement - Term note

 

MSRs

 

1-Month LIBOR +187.5 basis points (4)

 

February 2010

 

 

 

 

 

 

97,987

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

67,000

 

 

97,987

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

Loans and Residuals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A-1 notes (5)

 

Loans held for resale and real estate

 

1-Month LIBOR + 600 basis points

 

April 2037

 

 

 

 

 

 

17,760

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

Financial Services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving note (6)

 

Receivables

 

1, 3, 6 or 12-Month LIBOR + 200 basis points or Prime plus 125 basis points

 

(6)

 

 

 

 

 

 

1,123

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

67,000

 

 

116,870

 

Discount (2)

 

 

 

 

 

 

 

 

 

 

(12,335

)

 

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

$

 

$

54,665

 

$

116,870

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 


 

 

(1)

1-Month LIBOR was 0.25% and 0.44% at September 30, 2009 and December 31, 2008, respectively.

 

 

(2)

This advance is secured by the pledge to the lender of our interest in a $60,000 term note issued by OSAF on March 31, 2009. The OSAF note, in turn, is secured by advances on loans serviced for others, similar to match funded advances and liabilities. The fee reimbursement advance is payable annually in five installments of $12,000. The advance does not carry a stated rate of interest. However, we are compensating the lender for the advance of funds by forgoing the receipt of fees due from the lender over the five-year term of the advance. Accordingly, we recorded the advance as a zero-coupon bond issued at an initial implied discount of $14,627. We used an implicit market rate to compute the discount that we are amortizing to interest expense over the five-year term of the advance.

 

 

(3)

This note was issued by OSAF and is secured by advances on loans serviced for others, similar to match funded advances and liabilities. The lender has pledged its interest in this note to us as collateral against the $7,000 term note receivable due on April 1, 2014.

 

 

(4)

The interest incurred on this facility is based on 1-Month LIBOR plus 187.5 basis points but could be reduced to as low as 0.10% to the extent that we have available balances on deposit with the lender. We repaid this note in full on August 21, 2009.

 

 

(5)

In 2007, we issued A-rated securities in connection with the transfer of loan and real estate collateral to OREALT, a bankruptcy remote VIE that we consolidate. In August 2008, we sold a portion of these A-rated securities with a face value of $23,200 to a third party. The notes were sold net of an original discount of $928 that was amortized to interest expense over the estimated life of the notes. On September 23, 2009, we repaid the remaining principal balance of the notes held by a third party and retired the notes.

 

 

(6)

We terminated this agreement in June 2009. There were no borrowings outstanding at the time that we terminated the agreement.


 

 

Note 15

Investment Line

          Under this agreement, we borrowed funds each month under a revolving demand note equal to the projected average float balance and invested those funds in certain permitted investments, including auction rate securities. The custodial funds comprising most of the float balance remained on deposit in bank accounts that meet the requirements of each trust. The terms of the investment line required that we sell the investments and repay the associated borrowings prior to the end of each quarter.

          As a result of failed auctions in the first quarter of 2008, we were unable to liquidate our investment in auction rate securities. On March 28, 2008, we executed an amendment to the investment line that eliminated the requirement that borrowings be repaid at quarter end, increased the annual interest rate from 0.1% to 0.35% and limited borrowings to $350,000. We recognized these securities and a corresponding liability on our balance sheet in the first quarter of 2008. On June 30, 2008, we executed an extension of this agreement through July 13, 2008.

24


          On July 10, 2008, in addition to further reducing the borrowing limit under the revolving demand note to $120,000, we executed another amendment to the investment line that created a new term note maturing on June 30, 2009 that was secured by our investment in the auction rate securities. Interest on the term note was 0.35% to the extent that we had available balances on deposit with the lender. For any portion of the outstanding balance of the term note that was in excess of the available balances, the interest rate was 1-month LIBOR plus 35 basis points. In the event that the 0.35% rate did not fairly reflect the cost to the lender in providing the funds, the lender could, with notice, adjust the rate upward to a rate not exceeding 3.35%.

          The revolving demand note expired on September 30, 2008. At that time, we repaid the borrowings in full using proceeds received from the liquidation of the investments.

          Under the term note, we receive the interest on the auction rate securities while the proceeds from the redemption or sale of auction rate securities are applied to the outstanding balance. If the proceeds are below the then-effective maximum borrowing percentage, we are required to make up the shortfall. On April 30, 2009, we negotiated a one-year extension of the term note maturity to June 30, 2010. This agreement was renewed under terms substantially similar to the previous agreement. However, in lieu of quarterly advance rate reductions, we now make monthly amortization payments of $3,000 per month. During the first nine months of 2009, we made payments totaling $33,551 that reduced the investment line obligation to $167,168.

 

 

Note 16

Servicer Liabilities

          Servicer liabilities represent amounts we have collected, primarily from residential borrowers, whose loans we service, that will be deposited in custodial accounts and paid directly to an investment trust or refunded to borrowers. The following table sets forth the components of servicer liabilities at the dates indicated:

 

 

 

 

 

 

 

 

 

 

September 30,
2009

 

December 31,
2008

 

Borrower payments due to custodial accounts

 

$

32,944

 

$

67,227

 

Escrow payments due to custodial accounts

 

 

2,540

 

 

5,488

 

Partial payments and other unapplied balances

 

 

23,973

 

 

63,036

 

 

 

$

59,457

 

$

135,751

 


 

 

Note 17

Debt Securities

          Our debt securities consisted of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

September 30,
2009

 

December 31,
2008

 

3.25% Contingent Convertible Unsecured Senior Notes due August 1, 2024

 

$

56,435

 

$

79,988

 

10.875% Capital Trust Securities due August 1, 2027

 

 

53,379

 

 

53,379

 

 

 

$

109,814

 

$

133,367

 

          Each of our debt securities contain qualitative and quantitative covenants that establish, among other things, the maintenance of specified net worth and restrictions on future indebtedness as well as the monitoring and reporting of various specified transactions or events. We believe that we are currently in compliance with these covenants.

          Convertible Notes. In July 2004, OCN issued $175,000 aggregate principal amount of 3.25% Contingent Convertible Unsecured Senior Notes due 2024 (the Convertible Notes). The Convertible Notes are senior general unsecured obligations not guaranteed by any of our subsidiaries and bear interest at the rate of 3.25% per year. Interest is payable on February 1 and August 1 of each year. The Convertible Notes mature on August 1, 2024. We recognized a discount on the Convertible Notes. We amortized the debt discount over the period from the date of issuance to August 1, 2009, the first date at which holders could require us to repurchase their notes.

          The principal outstanding on December 31, 2008 of $82,355 is reported net of the unamortized debt discount of $2,367. Interest expense on the Convertible Notes for the first nine months of 2009 and 2008, respectively, includes amortization of debt discount of $1,735 and $2,918 and cash interest expense at the contractual rate of $1,489 and $2,155. We recognized interest on the debt at an effective annual rate of 8.25% over the period from the date of issuance to August 1, 2009.

           In February 2009, we repurchased $25,910 of our 3.25% Convertible Notes in the open market at a price equal to 95% of the principal amount. We recognized a gain of $534 on these repurchases, net of the write-off of unamortized issuance costs and debt discount.

          Holders may convert all or a portion of their notes into shares of our common stock under the following circumstances: (1) at any time during any calendar quarter (and only during such calendar quarter) if the closing sale price of our common stock for at least 20 consecutive trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than 125% of the conversion price per share of common stock on such last day; (2) subject to certain exceptions, during the five business day period after any five-consecutive-trading-day period in which the trading price per $1,000 (actual dollars) principal amount of the notes for each day of the five-consecutive-trading-day period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 (actual dollars) principal amount of the notes; (3) if the notes have been called for redemption; or (4) upon the occurrence of specified corporate transactions.

25


          The conversion rate is 82.1693 shares of our common stock per $1,000 (actual dollars) principal amount of the notes, subject to adjustment. Events that may cause the conversion rate to be adjusted primarily relate to cash dividends or other distributions to holders of our common stock. Upon conversion, we may at our option choose to deliver, in lieu of our common stock, cash or a combination of cash and common stock. At September 30, 2009 and December 31, 2008, the if-converted value of the Convertible Notes was $52,493 and $62,106 respectively.

          On June 26, 2009, we provided notice to holders of the Convertible Notes of their right to request that we repurchase all or a portion of their notes for cash on August 3, 2009 at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest, if any. There were no material redemptions on August 3, 2009. Holders that did not choose to exercise their repurchase right on August 3, 2009 will receive the same right to request that we repurchase all or a portion of their notes for cash on August 1, 2014 and August 1, 2019. A similar right is also available to holders of the Convertible Notes in the event of a “fundamental change.” A “fundamental change” is a change of control or a termination of trading in our common stock.

          Beginning August 1, 2009, we may redeem all or a portion of the notes for cash for a price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest, if any.

          On July 23, 2009, we provided notice that all holders of the Convertible Notes as of the close of business on August 4, 2009 would participate in the distribution of Altisource shares based on the conversion ratio of the Convertible Notes, consistent with the pro rata distribution ratio of one share of Altisource common stock for every three shares of OCN common stock, without conversion of the Convertible Notes into common shares of OCN. Accordingly, upon the Separation of Altisource and OCN, there were no adjustments to the conversion ratio of the Convertible Notes.

           Capital Trust Securities . In August 1997, Ocwen Capital Trust (OCT) issued $125,000 of 10.875% Capital Securities (the Capital Trust Securities). OCT invested the proceeds from issuance of the Capital Trust Securities in 10.875% Junior Subordinated Debentures issued by OCN. The Junior Subordinated Debentures, which represent the sole assets of OCT, will mature on August 1, 2027. For financial reporting purposes, we treat OCT as a consolidated subsidiary.

          Holders of the Capital Trust Securities are entitled to receive cumulative cash distributions accruing from the date of original issuance and payable semiannually in arrears on February 1 and August 1 of each year at an annual rate of 10.875% of the liquidation amount of $1,000 (actual dollars) per Capital Security. OCN guarantees payment of distributions out of moneys held by OCT and payments on liquidation of OCT or the redemption of Capital Trust Securities to the extent OCT has funds available. If OCN does not make principal or interest payments on the Junior Subordinated Debentures, OCT will not have sufficient funds to make distributions on the Capital Trust Securities in which event the guarantee shall not apply to such distributions until OCT has sufficient funds available.

          We have the right to defer payment of interest on the Junior Subordinated Debentures at any time or from time to time for a period not exceeding 10 consecutive semiannual periods with respect to each deferral period provided that no extension period may extend beyond the stated maturity of the Junior Subordinated Debentures. Upon the termination of any such extension period and the payment of all amounts then due on any interest payment date, we may elect to begin a new extension period. Accordingly, there could be multiple extension periods of varying lengths throughout the term of the Junior Subordinated Debentures. If we defer interest payments on the Junior Subordinated Debentures, distributions on the Capital Trust Securities will also be deferred, and we may not, nor may any of our subsidiaries, (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, their capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities that rank pari passu with or junior to the Junior Subordinated Debentures. During an extension period, interest on the Junior Subordinated Debentures will continue to accrue at the rate of 10.875% per annum, compounded semiannually.

          We may redeem the Junior Subordinated Debentures before maturity at our option subject to the receipt of any necessary prior regulatory approval, in whole or in part at the redemption prices (expressed as a percentage of the principal amount) set forth below, plus accrued interest thereon, if redeemed during the twelve-month period beginning on August 1 of the years indicated below:

 

 

 

 

 

 

 

 

 

Percentages

 

 

2009

 

 

104.350

%

 

2010

 

 

103.806

 

 

2011

 

 

103.263

 

 

2012

 

 

102.719

 

 

2013

 

 

102.175

 

 

2014

 

 

101.631

 

 

2015

 

 

101.088

 

 

2016

 

 

100.544

 

          On or after August 1, 2017, the redemption price will be 100%, plus accrued interest to the redemption date.

          We may also redeem the Junior Subordinated Debentures at any time upon the occurrence and continuation of a special event (defined as a tax event, regulatory capital event or an investment company event) at 100%. The Capital Trust Securities are subject to mandatory redemption upon repayment of the Junior Subordinated Debentures in an amount equal to the amount of the related Junior Subordinated Debentures maturing or being redeemed and at a redemption price equal to the redemption price of the Junior Subordinated Debentures, plus accumulated and unpaid distributions thereon to the date of redemption.

26



 

 

Note 18

Basic and Diluted Earnings per Share

          Basic EPS excludes common stock equivalents and is calculated by dividing net income (loss) attributable to OCN by the weighted average number of common shares outstanding during the period. We calculate diluted EPS by dividing net income (loss) attributable to OCN, as adjusted to add back interest expense net of income tax on the Convertible Notes, by the weighted average number of common shares outstanding including the potential dilutive common shares related to outstanding stock options, restricted stock awards and the Convertible Notes. The following is a reconciliation of the calculation of basic EPS to diluted EPS for the three and nine months ended September 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

Nine months

 

 

 

2009

 

2008

 

2009

 

2008

 

Basic EPS :

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to OCN

 

$

(42,031

)

$

14,976

 

$

(9,092

)

$

17,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock

 

 

82,614,456

 

 

62,715,551

 

 

70,966,393

 

 

62,655,655

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

$

(0.51

)

$

0.24

 

$

(0.13

)

$

0.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS (1) :

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to OCN

 

$

(42,031

)

$

14,976

 

$

(9,092

)

$

17,531

 

Interest expense on Convertible Notes, net of income tax (2)

 

 

 

 

1,148

 

 

 

 

 

Adjusted net income (loss) attributable to OCN

 

$

(42,031

)

$

16,124

 

$

(9,092

)

$

17,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock

 

 

82,614,456

 

 

62,715,551

 

 

70,966,393

 

 

62,655,655

 

Effect of dilutive elements (3):

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Notes (2)

 

 

 

 

6,767,053

 

 

 

 

 

Stock options (4)

 

 

 

 

252,251

 

 

 

 

219,214

 

Common stock awards

 

 

 

 

16,034

 

 

 

 

22,402

 

Dilutive weighted average shares of common stock

 

 

82,614,456

 

 

69,750,889

 

 

70,966,393

 

 

62,897,271

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

$

(0.51

)

$

0.23

 

$

(0.13

)

$

0.28

 


 

 

(1)

For the three and nine months ended September 30, 2009, we have excluded the effect of the Convertible Notes, stock options and common stock awards from the computation of diluted EPS because of the anti-dilutive impact on our reported net loss.

 

 

(2)

The effect of our Convertible Notes on diluted EPS is computed using the if-converted method. Interest expense and related amortization costs applicable to the Convertible Notes, net of income tax, are added back to net income. Conversion of the Convertible Notes into shares of common stock has not been assumed for purposes of computing diluted EPS for the nine months ended September 30, 2008 because the effect would be anti-dilutive. The effect is anti-dilutive whenever interest expense on the Convertible Notes, net of income tax, per common share obtainable on conversion exceeds basic EPS.

 

 

(3)

Because we have reported discontinued operations, we use income from continuing operations as the “control number” in determining whether potential common shares are dilutive or anti-dilutive. That is, the same number of potential common shares used in computing the diluted per-share amount for income from continuing operations is used in computing all other diluted per-share amounts even though those amounts are anti-dilutive to their respective basic per-share amounts.

 

 

(4)

An average of 3,412,757 and 3,059,532 options that were anti-dilutive have been excluded from the computation of diluted EPS for the three and nine months ended September 2008, respectively. These options were anti-dilutive because their exercise price was greater than the average market price of our stock. Also excluded from the computation of diluted EPS are 1,710,000 of the 5,130,000 options we granted on July 14, 2008, for shares that are issuable upon the achievement of certain performance criteria related to OCN’s stock price and an annualized rate of return to investors. On August 10, 2009, the performance criteria were met for 3,420,000 of these options. However, we have excluded these options from the computation of diluted EPS for the 2009 periods because we have incurred a loss, and, therefore, their effect would be anti-dilutive.

27



 

 

Note 19

Income Taxes

          As described in Note 2, a significant portion of the income tax expense for the three and nine months ended September 30, 2009 pertains to deferred tax expense related to the Separation. The net deferred tax asset was comprised of the following as of:

 

 

 

 

 

 

 

 

 

 

September 30,
2009

 

December 31,
2008

 

Deferred tax assets:

 

 

 

 

 

 

 

Tax residuals and deferred income on tax residuals

 

$

3,606

 

$

3,725

 

State taxes

 

 

4,804

 

 

9,780

 

Accrued incentive compensation

 

 

5,743

 

 

4,208

 

Valuation allowance on real estate owned

 

 

3,473

 

 

3,502

 

Bad debt and allowance for loan losses

 

 

6,308

 

 

8,296

 

Mortgage servicing rights amortization

 

 

53,168

 

 

79,658

 

Foreign currency exchange

 

 

1,328

 

 

1,328

 

Net operating loss carryforward

 

 

22,098

 

 

31,281

 

Partnership losses and low-income housing tax credits

 

 

11,817

 

 

23,963

 

Foreign deferred assets

 

 

2,494

 

 

1,458

 

Net unrealized gains and losses on securities

 

 

18,727

 

 

20,883

 

Equity interest

 

 

 

 

68

 

Other

 

 

 

 

1,348

 

 

 

 

133,566

 

 

189,498

 

Deferred tax liabilities:

 

 

 

 

 

 

 

Deferred interest income on loans

 

 

75

 

 

75

 

Intangibles amortization

 

 

3,161

 

 

12,533

 

Debt discount

 

 

204

 

 

 

Other deferred income

 

 

346

 

 

 

Other

 

 

664

 

 

 

 

 

 

4,450

 

 

12,608

 

 

 

 

129,116

 

 

176,890

 

Valuation allowances

 

 

 

 

(1,745

)

Net deferred tax asset

 

$

129,116

 

$

175,145

 

          The changes in the deferred tax assets and liabilities are primarily due to the Separation. The realization of tax benefits associated with the sale of MSRs also contributed to the decline in net deferred tax asset.

 

 

Note 20

Equity

          In a private placement transaction that closed on April 3, 2009, OCN sold 5,471,500 shares of its common stock for a price of $11.00 per share. We realized $60,187 in proceeds from this issuance. The purchasers, most of whom are existing OCN shareholders, purchased approximately 8% of OCN’s total outstanding shares pursuant to this new issuance. Accordingly, the purchasers owned approximately 9.6% of OCN’s total outstanding shares, after giving effect to the share repurchase below, as of the closing of the transaction. In addition to making customary representations, warranties and covenants, the purchasers have agreed to certain restrictions on the sale of the shares for a one-year period following the closing date. OCN is obligated to register the newly issued shares and will apply to list such shares on the New York Stock Exchange within 270 days of the closing.

          On April 3, 2009, OCN repurchased from William C. Erbey, its Chairman of the Board and Chief Executive Officer, one million shares of its common stock at a per-share price of $11.00. We used a portion of the proceeds received from the above-described private placement transaction to acquire the shares from Mr. Erbey. In addition to making customary representations and warranties, Mr. Erbey agreed to certain restrictions on the sale or transfer of the remainder of his shares for a one-year period following the closing date.

          On August 18, 2009, OCN completed the public offering of 32,200,000 shares of common stock at a per share price of $9.00, including 4,200,000 shares of common stock purchased by the underwriters pursuant to the full exercise of the over-allotment option granted under the underwriting agreement. We received net proceeds of $274,980 from the offering after deducting underwriting fees and other offering costs. We used these proceeds primarily to repay general corporate borrowings.

28



 

 

Note 21

Derivative Financial Instruments

          The following table summarizes our use of derivative financial instruments during the nine months ended September 30, 2009:

 

 

 

 

 

 

 

 

 

 

Interest Rate Caps

 

Euro Currency Futures

 

Notional balance at December 31, 2008

 

$

450,000

 

$

10,125

 

Additions

 

 

 

 

31,121

 

Maturities

 

 

(66,667

)

 

(30,253

)

Notional balance at September 30, 2009

 

$

383,333

 

$

10,993

 

 

 

 

 

 

 

 

 

Fair value (1):

 

 

 

 

 

 

 

September 30, 2009

 

$

883

 

$

(252

)

December 31, 2008

 

$

193

 

$

(726

)

 

 

 

 

 

 

 

 

Maturity

 

 

January 2011 and December 2013

 

 

December 2009

 


 

 

 

 

(1)

We report the fair value of our derivative financial instruments as a component of receivables in the consolidated balance sheets.

          In our Servicing segment, we have entered into interest rate swaps, under which we pay a floating rate and receive a fixed rate, and interest rate caps. In connection with our issuance of a match funded variable funding note in December 2007 with a variable rate of interest and a $250,000 maximum borrowing capacity, we entered into interest rate caps with a notional amount of $250,000 to hedge our exposure to rising interest rates. We designated this cap as a cash flow hedge but de-designated it as of March 31, 2008 because of ineffectiveness. As a result, we reclassified to earnings the unrealized loss of $239 included in other comprehensive income at December 31, 2007. In connection with our renewal and upsizing of a match funded variable funding note in February 2008 that carried a variable interest rate and a maximum borrowing capacity of $200,000, we entered into an interest rate cap with a notional amount of $200,000 to hedge our exposure to rising interest rates. This cap began amortizing at the rate of $8,333 per month in February 2009. We did not designate this cap as a hedge.

          In June 2008, we entered into foreign currency futures contracts to hedge our net investment in BOK against adverse changes in the value of the Euro versus the U.S. Dollar. We designated these derivatives as a foreign-currency net investment hedge. Net losses on these foreign currency futures were $454 and $549 for the three and nine months ended September 30, 2009, respectively and $1,075 and $906 for the three and nine months ended September 30, 2008. These losses were included in the net change in unrealized foreign currency translation adjustment in accumulated other comprehensive income.

          Our operations in India and Canada also expose us to foreign currency exchange rate risk, but we consider this risk to be insignificant.

          Net realized and unrealized losses included in other, net related to derivative financial instruments were $(74) and $(138) for the third quarter of 2009 and 2008, respectively. Year to date, the net realized and unrealized gains were $690 and $3,120 for 2009 and 2008, respectively. Amounts in 2008 include a $239 loss related to the interest rate cap that we de-designated as a cash flow hedge. In addition, we recorded unrealized losses of $3,149 in the first quarter of 2008 that represented fair value basis adjustments on the $165,000 fixed-rate match funded term note that we had designated as part of a fair value hedging relationship that was established using an interest rate swap that we subsequently terminated in the first quarter of 2008.

 

 

Note 22

Business Segment Reporting

          Prior to the Separation on August 10, 2009, we managed our business through two distinct lines of business, Ocwen Asset Management and Ocwen Solutions. Due to the Separation, as of August 10, 2009, neither the assets and liabilities, nor the subsequent operations of the Ocwen Solutions line of business comprising the Mortgage Services, Financial Services and Technology Products segments, except for BMS and GSS, are included in our results. The partial quarter results for Altisource (formerly Ocwen Solutions), recognized in Ocwen’s results prior to August 10, 2009, include a one-time charge of $2,304 for facility closures. 

          A brief description of our current and former business segments aligned within the two lines of business follows:

           Ocwen Asset Management

 

 

 

 

Servicing . This segment provides loan servicing for a fee, including asset management and resolution services, primarily to owners of subprime residential mortgages. Subprime loans represent residential loans we service that were made to borrowers who generally did not qualify under guidelines of Fannie Mae and Freddie Mac (nonconforming loans). This segment is primarily comprised of our core residential servicing business.

 

 

 

 

Loans and Residuals . This segment includes our trading and investing activities and our former subprime loan origination operation. Our trading and investing activities include our investments in subprime residual mortgage backed trading securities as well as the results of our whole loan purchase and securitization activities.

29



 

 

 

 

Asset Management Vehicles . This segment is comprised of our 25% equity investment in OSI and approximately a 25% equity investment in ONL and OREO, unconsolidated entities engaged in the management of residential assets.

 

 

 

 

Ocwen Solutions (distributed as part of the Separation, except for GSS and BMS Holdings)

 

 

 

 

Mortgage Services. This segment provided due diligence, valuation, real estate sales, default processing services, property inspection and preservation services, homeowner outreach, closing and title services and knowledge process outsourcing services. Services provided spanned the lifecycle of a mortgage loan from origination through the disposition of real estate owned properties (REO). This segment also includes the international servicing for commercial loans that we conducted through GSS.

 

 

 

 

Financial Services . This segment comprised our asset recovery management and customer relationship management offerings to the financial services, consumer products, telecommunications and utilities industries. The primary sources of revenues for this segment were contingency collections and customer relationship management for credit card issuers and other consumer credit providers. This segment included the operations of NCI.

 

 

 

 

Technology Products. This segment included revenues from the REAL suite of applications that support our Servicing business as well as the servicing and origination businesses of external customers. These products include REALServicing™, REALResolution™, REALTrans SM , REALSynergy™ and REALRemit™. REALServicing is the core residential loan servicing application used by OCN. This segment also earned fees from providing technology support services to OCN that cover IT enablement, call center services and third-party applications. The results of our 45% equity investment in BMS Holdings are also included in this segment.

          Corporate Items and Other. We report items of revenue and expense that are not directly related to a business, business activities that are individually insignificant, interest income on short-term investments of cash and the related costs of financing these investments and certain other corporate expenses in Corporate Items and Other. Our Convertible Notes and Capital Securities are also included in Corporate Items and Other.

          We allocate interest income and expense to each business segment for funds raised or funding of investments made. We also allocate expenses generated by corporate support services to each business segment.

30


          Financial information for our segments is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ocwen Asset Management

 

Ocwen Solutions

 

 

 

 

 

 

 

 

 

Servicing

 

Loans and
Residuals

 

Asset
Management
Vehicles

 

Mortgage
Services

 

Financial
Services

 

Technology
Products

 

Corporate
Items and
Other

 

Corporate
Eliminations

 

Business
Segments
Consolidated

Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue (1) (2)

 

$

62,118

 

$

 

$

432

 

$

11,869

 

$

6,506

 

$

5,648

 

$

319

 

$

(3,540

)

$

83,352

 

Operating expenses (1) (3) (4)

 

 

30,749

 

 

891

 

 

753

 

 

8,131

 

 

9,295

 

 

3,343

 

 

3,555

 

 

(3,344

)

 

53,373

 

Income (loss) from operations

 

 

31,369

 

 

(891

)

 

(321

)

 

3,738

 

 

(2,789

)

 

2,305

 

 

(3,236

)

 

(196

)

 

29,979

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

126

 

 

1,377

 

 

 

 

 

 

 

 

 

 

489

 

 

 

 

1,992

 

Interest expense

 

 

(15,344

)

 

(288

)

 

 

 

(5

)

 

(147

)

 

(39

)

 

(322

)

 

 

 

(16,145

)

Other (1) (2)

 

 

1,530

 

 

(280

)

 

(1,317

)

 

86

 

 

1

 

 

65

 

 

7,351

 

 

196

 

 

7,632

 

Other income (expense), net

 

 

(13,688

)

 

809

 

 

(1,317

)

 

81

 

 

(146

)

 

26

 

 

7,518

 

 

196

 

 

(6,521

)

Income (loss) from continuing operations before income taxes

 

$

17,681

 

$

(82

)

$

(1,638

)

$

3,819

 

$

(2,935

)

$

2,331

 

$

4,282

 

$

 

$

23,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue (1) (2)

 

$

86,058

 

$

 

$

819

 

$

12,331

 

$

18,654

 

$

11,672

 

$

12

 

$

(8,285

)

$

121,261

 

Operating expenses (1) (3) (4)

 

 

40,218

 

 

812

 

 

885

 

 

9,674

 

 

22,003

 

 

9,528

 

 

2,225

 

 

(7,887

)

 

77,458

 

Income (loss) from operations

 

 

45,840

 

 

(812

)

 

(66

)

 

2,657

 

 

(3,349

)

 

2,144

 

 

(2,213

)

 

(398

)

 

43,803

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

195

 

 

2,344

 

 

 

 

50

 

 

 

 

 

 

859

 

 

 

 

3,448

 

Interest expense

 

 

(16,901

)

 

(785

)

 

 

 

(11

)

 

(468

)

 

(129

)

 

(1,040

)

 

 

 

(19,334

)

Other (1) (2)

 

 

(110

)

 

(1,268

)

 

(3,258

)

 

10

 

 

1

 

 

42

 

 

(322

)

 

398

 

 

(4,507

)

Other income (expense), net

 

 

(16,816

)

 

291

 

 

(3,258

)

 

49

 

 

(467

)

 

(87

)

 

(503

)

 

398

 

 

(20,393

)

Income (loss) from continuing operations before income taxes

 

$

29,024

 

$

(521

)

$

(3,324

)

$

2,706

 

$

(3,816

)

$

2,057

 

$

(2,716

)

$

 

$

23,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue (1) (2)

 

$

199,539

 

$

 

$

1,429

 

$

54,052

 

$

40,293

 

$

28,331

 

$

681

 

$

(17,204

)

$

307,121

 

Operating expenses (1) (3) (4)

 

 

97,922

 

 

2,202

 

 

2,530

 

 

37,039

 

 

45,001

 

 

18,638

 

 

11,367

 

 

(16,410

)

 

198,289

 

Income (loss) from operations

 

 

101,617

 

 

(2,202

)

 

(1,101

)

 

17,013

 

 

(4,708

)

 

9,693

 

 

(10,686

)

 

(794

)

 

108,832

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

205

 

 

5,253

 

 

 

 

2

 

 

 

 

 

 

951

 

 

 

 

6,411

 

Interest expense

 

 

(46,829

)

 

(1,437

)

 

 

 

(28

)

 

(1,285

)

 

(289

)

 

(240

)

 

 

 

(50,108

)

Other (1) (2)

 

 

3,388

 

 

(8,677

)

 

(2,466

)

 

828

 

 

24

 

 

186

 

 

13,855

 

 

794

 

 

7,932

 

Other income (expense), net

 

 

(43,236

)

 

(4,861

)

 

(2,466

)

 

802

 

 

(1,261

)

 

(103

)

 

14,566

 

 

794

 

 

(35,765

)

Income (loss) from continuing operations before income taxes

 

$

58,381

 

$

(7,063

)

$

(3,567

)

$

17,815

 

$

(5,969

)

$

9,590

 

$

3,880

 

$

 

$

73,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue (1) (2)

 

$

264,985

 

$

 

$

2,997

 

$

43,580

 

$

57,182

 

$

34,566

 

$

154

 

$

(22,727

)

$

380,737

 

Operating expenses (1) (3) (4) (5)

 

 

124,893

 

 

2,280

 

 

2,501

 

 

34,137

 

 

62,140

 

 

28,210

 

 

14,206

 

 

(21,568

)

 

246,799

 

Income (loss) from operations

 

 

140,092

 

 

(2,280

)

 

496

 

 

9,443

 

 

(4,958

)

 

6,356

 

 

(14,052

)

 

(1,159

)

 

133,938

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

854

 

 

8,731

 

 

 

 

132

 

 

14

 

 

 

 

1,761

 

 

 

 

11,492

 

Interest expense

 

 

(58,741

)

 

(2,065

)

 

 

 

(190

)

 

(1,451

)

 

(447

)

 

(3,619

)

 

 

 

(66,513

)

Other (1) (2)

 

 

110

 

 

(14,008

)

 

(6,542

)

 

704

 

 

8

 

 

(5,274

)

 

(20,135

)

 

1,159

 

 

(43,978

)

Other income (expense), net

 

 

(57,777

)

 

(7,342

)

 

(6,542

)

 

646

 

 

(1,429

)

 

(5,721

)

 

(21,993

)

 

1,159

 

 

(98,999

)

Income (loss) from continuing operations before income taxes

 

$

82,315

 

$

(9,622

)

$

(6,046

)

$

10,089

 

$

(6,387

)

$

635

 

$

(36,045

)

$

 

$

34,939

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2009

 

$

1,197,215

 

$

53,191

 

$

19,053

 

$

333

 

$

3

 

$

123

 

$

605,135

 

 

 

$

1,875,053

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

$

1,416,615

 

$

67,317

 

$

26,755

 

$

3,558

 

$

58,707

 

$

8,906

 

$

655,471

 

$

(229

)

$

2,237,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2008

 

$

1,452,601

 

$

76,106

 

$

33,306

 

$

3,996

 

$

63,971

 

$

7,033

 

$

664,288

 

$

(169

)

$

2,301,132

 

31



 

 

(1)

Intersegment billings for services rendered to other segments are recorded as revenues, as contra-expense or as other income depending on the type of service that is rendered. Intersegment billings are as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing

 

Asset
Management
Vehicles

 

Mortgage
Services

 

Technology
Products

 

Business
Segments
Consolidated

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2009

 

$

1,023

 

$

109

 

$

59

 

$

3,909

 

$

5,100

For the three months ended September 30, 2008

 

 

1,891

 

 

204

 

 

24

 

 

9,254

 

 

11,373

For the nine months ended September 30, 2009

 

 

5,388

 

 

365

 

 

59

 

 

20,462

 

 

26,274

For the nine months ended September 30, 2008

 

 

5,289

 

 

749

 

 

128

 

 

25,069

 

 

31,235


 

 

(2)

Servicing has a contractual right to receive interest income on float balances. However, Corporate controls investment decisions associated with the float balances. Accordingly, Servicing receives revenues generated by those investments that are associated with float balances but are reported in Corporate Items and Other. Gains and losses associated with corporate investment decisions are recognized in Corporate Items and Other.

 

 

(3)

Depreciation and amortization expense are as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing

 

Loans and
Residuals

 

Mortgage
Services

 

Financial
Services

 

Technology
Products

 

Corporate
Items and
Other

 

Business
Segments
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

$

9

 

$

 

$

9

 

$

48

 

$

574

 

$

236

 

$

876

Amortization of MSRs

 

 

7,159

 

 

 

 

 

 

 

 

 

 

 

 

7,159

Amortization of intangibles

 

 

 

 

 

 

 

 

288

 

 

 

 

 

 

288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

$

13

 

$

8

 

$

11

 

$

103

 

$

2,193

 

$

351

 

$

2,679

Amortization of MSRs

 

 

12,106

 

 

 

 

 

 

 

 

 

 

 

 

12,106

Amortization of intangibles

 

 

 

 

 

 

 

 

629

 

 

 

 

 

 

629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

$

38

 

$

 

$

24

 

$

282

 

$

3,150

 

$

907

 

$

4,401

Amortization of MSRs

 

 

25,743

 

 

 

 

 

 

 

 

 

 

 

 

25,743

Amortization of intangibles

 

 

 

 

 

 

 

 

1,624

 

 

 

 

 

 

1,624

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

$

39

 

$

10

 

$

62

 

$

317

 

$

5,748

 

$

1,394

 

$

7,570

Amortization of MSRs

 

 

40,438

 

 

 

 

274

 

 

 

 

 

 

 

 

40,712

Amortization of intangibles

 

 

 

 

 

 

 

 

1,925

 

 

 

 

 

 

1,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(4)

Corporate Items and Other operating expenses include advisory expenses related to the Separation transaction of $520 and $3,501 for the three and nine months ended September 30, 2009, respectively.

 

 

(5)

Corporate Items and Other operating expenses for 2008 include $9,532 of due diligence and other costs recognized in the first quarter related to the “going private” proposal terminated in March 2008 by mutual agreement of the parties.


 

 

Note 23

Related Party Transactions

          Although Altisource is a separate company from Ocwen after the Separation, Altisource and Ocwen have the same Chairman of the Board, William C. Erbey. Mr. Erbey is also the Chief Executive Officer of Ocwen. As a result, he has obligations to Ocwen as well as to Altisource. Mr. Erbey currently owns 18.8% of the common stock of Ocwen and owns 27.8% of the common stock of Altisource immediately following the Separation.

          For purposes of governing certain of the ongoing relationships between Ocwen and Altisource after the Separation, and to provide for an orderly transition to the status of two independent companies, we entered into certain agreements with Altisource. A brief description of these agreements follows.

 

 

 

 

Separation Agreement . This agreement provides for, among other things, the principal corporate transactions required to effect the Separation and certain other agreements relating to the continuing relationship between Altisource and Ocwen after the Separation.

32



 

 

 

 

Transition Services Agreement . Under this agreement, Altisource and Ocwen provide to each other services in such areas as human resources, vendor management, corporate services, six sigma, quality assurance, quantitative analytics, treasury, accounting, risk management, legal, strategic planning, compliance and other areas where we, and Altisource, may need transition assistance and support following the Separation.

 

 

 

 

Tax Matters Agreement . This agreement sets out each party’s rights and obligations with respect to deficiencies and refunds, if any, of federal, state, local or foreign taxes for periods before and after the Separation and related matters such as the filing of tax returns and the conduct of Internal Revenue Service and other audits.

 

 

 

 

Employee Matters Agreement . This agreement provides for the transition of employee benefit plans and programs sponsored by us for employees of Altisource.

 

 

 

 

Services Agreement. This agreement provides for Altisource’s offering of certain services to us in connection with our business following the Separation for an initial term of eight years, subject to renewal, with pricing terms intended to reflect market rates. Services provided to us under this agreement include residential property valuation, residential property preservation and inspection services, title services and REO sales.

 

 

 

 

Technology Products Services Agreement . This agreement provides for Altisource’s offering of certain technology products and support services to us in connection with our business, also for an initial term of eight years, subject to renewal, with pricing terms intended to reflect market rates. Technology products provided to us under this agreement include the REAL suite of applications that support our Servicing business.

 

 

 

 

Intellectual Property Agreement . This agreement provides for the transfer of intellectual property assets to Altisource.

 

 

 

 

Data Center and Disaster Recovery Services Agreement . This agreement provides for Altisource’s offering of certain data center and disaster recovery services in connection with our business.

          Our business is currently dependent on many of the services and products provided under these long-term contracts with Altisource. These contracts are effective for up to eight years with renewal rights. Certain services provided by Altisource under these contracts are charged to the borrower and/or loan investor. Accordingly, such services, while derived from our loan servicing portfolio, are not presented as expenses to Ocwen. We believe the rates charged under these agreements are market rates as they are materially consistent with one or more of the following: the fees charged by Altisource to other customers for comparable services and the rates Ocwen pays to or observes from other service providers.

          Altisource provides the following services under the terms of the foregoing commercial agreements:

 

 

 

Mortgage Services

 

 

Valuation services

 

 

Residential due diligence

 

 

Residential fulfillment support services

 

 

Real estate management and sales

 

 

Property inspection and preservation services

 

 

Closing and title services

 

 

Homeowner outreach

 

 

Trustee foreclosure services

 

Technology Products

 

 

Residential loan servicing software

 

 

Vendor management and order fulfillment software

 

 

Default resolution services

 

 

IT infrastructure support

 

 

Invoice presentment and payment software

 

 

Commercial loan servicing software

 

Financial Services

 

 

Mortgage charge-off and deficiency collections

          As of September 30, 2009, the net payable to Altisource was $2,693. For the period from August 10, 2009 through September 30, 2009, the impact of transition services was negligible as the cost of services received was offset by the cost of services provided to Altisource.

 

 

Note 24

Commitments and Contingencies

Litigation

          The liability, if any, for the claims noted below against Ocwen Federal Bank FSB (the Bank) has been assumed by OLS as successor in interest under an Assignment and Assumption Agreement, dated June 28, 2005, whereby OLS assumed all of the Bank’s remaining assets and liabilities, including contingent liabilities, in connection with its voluntary termination of its status as a federal savings bank.

          We are named as a defendant in lawsuits brought in various federal and state courts challenging the Bank’s mortgage servicing practices, including charging improper or unnecessary fees, misapplying borrower payments, etc. In April 2004, our petition was granted to transfer and consolidate a number of lawsuits filed against the Bank, OCN and various third parties into a single proceeding pending in the United States District Court for the Northern District of Illinois (the MDL Proceeding). Additional lawsuits similar to the MDL proceeding have been brought in other courts, some of which may be transferred to and consolidated in the MDL Proceeding. The borrowers in many of these lawsuits seek class action certification. Others have brought individual actions. No class has been certified in the MDL Proceeding or any related lawsuits. In April 2005, the trial court entered a partial summary judgment in favor of defendants holding that plaintiffs’ signed loan contracts authorized the collection of certain fees by Ocwen as servicer for the related mortgages. In May 2006, plaintiffs filed an amended complaint containing various claims under several federal statutes, state deceptive trade practices statutes and common law. No specific amounts of damages are asserted, however, plaintiffs may amend the complaint to seek damages should the matter proceed to trial. In June 2007, the United States Court of Appeals for the Seventh Circuit issued an opinion holding that many of the claims were preempted or failed to satisfy the pleading requirements of the applicable rules of procedure and directing the trial judge to seek clarification from the plaintiffs so as to properly determine which particular claims are to be dismissed. In March 2009, the Court struck the amended complaint in its entirety on the grounds of vagueness. Plaintiffs filed a third amended complaint on April 20, 2009. Ocwen’s response to the Third Amended Complaint was filed on June 19, 2009. Plaintiffs filed their opposition to Ocwen’s motion to dismiss on August 18, 2009. Ocwen’s reply was filed on October 15, 2009. We believe the allegations in the MDL Proceeding are without merit and will continue to vigorously defend against them.

33


          In November 2004, a final judgment was entered in litigation brought by Cartel Asset Management, Inc. (Cartel) against OCN, the Bank and Ocwen Technology Xchange, Inc. (OTX), a subsidiary that has been dissolved. This matter involved allegations of misappropriation of trade secrets and contract-related claims brought by a former vendor. Initially, a jury verdict awarded damages of $9,320. However, the November 2004 judgment awarded $520 against OTX and nominal damages of two dollars against the Bank. Additionally, the Bank was assessed a statutory award to Cartel for attorneys’ fees in an additional amount of $170. The Bank and OTX were further assessed costs in the amount of $9. In September 2007, the United States Court of Appeals for the Tenth Circuit upheld the damage award against OTX and remanded the case for a new trial on damages against the Bank. In December 2007, we paid the full amount of the judgment against OTX, including accrued interest. In March 2008, the trial court entered an order joining OLS, as the Bank’s successor-in-interest, and OCN, as guarantor of the Bank’s obligations, as additional defendants. The trial court has not yet set a date for the new trial against the Bank, OLS and OCN. We do not believe that Cartel is entitled to additional damages, if any, in an amount that would be material to our financial condition, results of operations or cash flows, and we intend to continue to vigorously defend against this matter.

          In September 2006, the Bankruptcy Trustee in Chapter 7 proceedings involving American Business Financial Services, Inc. (ABFS) brought an action against multiple defendants, including OLS, in Bankruptcy Court. The action arises out of Debtor-in-Possession financing to ABFS by defendant Greenwich Capital Financial Products, Inc. and the subsequent purchases by OLS of MSRs and certain residual interests in mortgage-backed securities previously held by ABFS. OLS brought a separate action against the Trustee seeking damages of approximately $2,500 arising out of the ABFS MSRs purchase transaction. OLS’ separate action against the Trustee was dismissed by agreement without prejudice with the right to replead such claims or otherwise file a separate action should the Trustee’s action be dismissed. In February 2007, the court granted OLS’ motion to dismiss some claims but refused to dismiss others. The Trustee filed an amended complaint in March 2007. This complaint sets forth claims against all of the original defendants. The claims against OLS include turnover, fraudulent transfers, accounting, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of contract, fraud, civil conspiracy and conversion. The Trustee seeks compensatory damages in excess of $100,000 and punitive damages jointly and severally against all defendants. In March 2008, the court denied OLS’ motion to dismiss. In April 2008, OLS denied all charges and filed a counterclaim for breach of contract, fraud, negligent misrepresentation and indemnification in connection with the MSR purchase transaction. Fact discovery is complete and both Ocwen and the Trustee have filed motions for partial summary judgment. We believe that the Trustee’s allegations against OLS are without merit and intend to continue to vigorously defend against this matter.

          OCN together with Bankruptcy Management Solutions, Inc. (BMSI) the wholly owned subsidiary of BMS Holdings, commenced separate arbitrations before the Financial Industry Regulatory Authority against Goldman Sachs & Co. and Banc of America Securities LLC (collectively the Broker/Dealers) primarily alleging fraud, breach of duty and statutory violations arising out of the sale of AAA-rated student loan auction rate securities (SLARS) backed by the Federal Family Education Loan Program. OCN and BMSI subsequently voluntarily dismissed their arbitration claims against Citigroup Global Markets, Inc, and filed a complaint in federal court. OCN purchased the SLARS based on the Broker/Dealer representation that the SLARS were liquid securities that could be sold at regularly scheduled auctions to meet the investment line requirement to pay the borrowings at quarter end. The Broker/Dealers represented that the SLARS would remain liquid because if there were not sufficient buyers in the auctions, the Broker/Dealers would purchase to make the auctions succeed. Contrary to those representations, in February 2008, the Broker/Dealers stopped supporting the SLARS auctions and the market for SLARS became illiquid. OCN seeks to require the Broker/Dealers to repurchase the SLARS at par, and pay consequential damages, potentially including damages related to the repayment of the investment line and punitive damages.

          OCN is subject to various other pending legal proceedings. In our opinion, the resolution of these proceedings and those noted above will not have a material effect on our financial condition, results of operations or cash flows.

Tax matters

          On December 28, 2006, the India tax authorities issued an income tax assessment order (the Order) with respect to IT-enabled services performed for OCN by its wholly-owned Indian subsidiary, OFSPL. The Order relates to the assessment year 2004-05 and determined that the percent mark-up on operating costs with respect to the IT-enabled and software development services that OFSPL provided to OCN was insufficient. The proposed adjustment would impose upon OFSPL additional tax of INR 45,290 ($943) and interest of INR 14,922 ($311) for the assessment year 2004-05. In December 2008, the India tax authorities issued an additional income tax assessment order (the Second Order) with respect to assessment year 2005-06. The proposed adjustment would impose upon OFSPL additional tax of INR 23,225 ($483) and interest of INR 10,200 ($212) for the assessment year 2005-06. In accordance with standard Indian procedures, penalties may also be assessed in the future in connection with the assessment.

34


          OCN and OFSPL intend to vigorously contest the Order, the Second Order and the imposition of tax and interest and do not believe they have violated any statutory provision or rule. OFSPL has filed a domestic appeal with the India Commissioner of Income Tax (Appeals) in response to the Order and Second Order. In March 2007, OCN filed a request for Competent Authority Assistance with the Internal Revenue Service under the United States – India Income Tax Treaty. In January 2009, OCN filed a request with the Internal Revenue Service to include assessment year 2005-2006 in its Competent Authority case.

          Due to the uncertainties inherent in the appeals and Competent Authority processes, OCN and OFSPL cannot currently estimate any additional exposure beyond the amount detailed in the Order. We can also not predict when these tax matters will be resolved. The Competent Authority Assistance filing should preserve OCN’s right to credit any potential India taxes against OCN’s U.S. taxes.

 

 

Note 25

Subsequent Events

          In October 2009, Ocwen entered into a liquidity option related to $92,850 face amount of auction rate securities. Under the terms of this agreement we have the right to sell specific securities for cash. We also have the right to repurchase the same following the initial sale at the same price. When the first option is exercised, we expect to record the arrangement as a borrowing secured by contractually specified auction rate securities. We will continue to report these auction rate securities as pledged securities at fair value on the balance sheet until maturity of the liquidity option in three years or such time as the underlying auction rate securities are sold. Once exercised, we will no longer receive cash interest income on the pledged securities nor will we pay cash interest on the secured borrowing.

          We have evaluated subsequent events through November 9, 2009, the date this Form 10-Q was issued.

35



 

 

I TEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except share data)

INTRODUCTION

          Ocwen is among the leaders in our industry in realizing loan values for investors and in keeping Americans in their homes, as evidenced by our high cure rate. Our primary goal is to make our clients’ loans worth more by leveraging our superior processes and innovative technology. In a recent comparison of servicer performance in servicing non-performing residential loans, Moody’s reported that we had a “cure and cash flowing rate” that exceeded the average rate for Moody’s highest-rated servicers as a group.

          Our current and former business segments, aligned within the two lines of business, are as follows:

 

 

Ocwen Asset Management

 

 

 

Servicing

 

Loans and Residuals

 

Asset Management Vehicles (AMV)

 

 

 

Ocwen Solutions

 

 

 

Mortgage Services

 

Financial Services

 

Technology Products

 

          In addition to our core residential servicing business, Ocwen Asset Management (OAM) includes our equity investments in asset management vehicles and our remaining investments in subprime loans and residual securities.

          In addition to our unsecured collections business, Ocwen Solutions (OS) includes our residential fee-based loan processing businesses, all of our technology platforms and our equity interest in BMS Holdings, Inc. (BMS Holdings). As more fully described below under Executive Summary—Separation of Ocwen Solutions, on August 10, 2009, the OS line of business, excluding BMS Holdings and GSS, was separated from Ocwen.

          We are focused on growing our core business of servicing loans, as more fully described below under Executive Summary—Revenue Opportunities. At the same time, we continue to sell our non-core assets, including BOK and our remaining Global Servicing Solutions, LLC (GSS) partnerships. On June 19, 2009, we completed the sale of GSS Germany for $1,180, resulting in a gain of approximately $715.

          This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Interim Consolidated Financial Statements and the related notes, included in Item 1 in this Quarterly Report on Form 10-Q, with our Consolidated Financial Statements and the related notes, included as Exhibit 99.1 to the Form 8-K filed July 16, 2009, and with our Annual Report on Form 10-K for the year ended December 31, 2008.

          Unless specifically stated otherwise, all references to September 2009, December 2008 and September 2008 refer to our fiscal periods ended, or the dates, as the context requires, September 30, 2009, December 31, 2008 and September 30, 2008, respectively.

          When we use the terms “Ocwen,” “we,” “us” and “our,” we refer to Ocwen Financial Corporation (Ocwen) and its consolidated subsidiaries.

EXECUTIVE SUMMARY

           Three Months Ended September 2009 versus September 2008. We incurred a net loss of $42,031 or $0.51 per share in the third quarter of 2009 compared to net income of $14,976 or $0.23 per share for the third quarter of 2008. Income from continuing operations before income taxes was $23,458 for the third quarter of 2009 as compared to $23,410 for 2008. The net loss for the third quarter of 2009 is due to the income tax that Ocwen recognized on the gain resulting from the separation of Altisource Portfolio Solutions S.A. (Altisource) (formerly Ocwen Solutions). The distributed assets are taxable at the excess of fair market value over the tax basis of each asset. The total impact on our income tax expense for the third quarter of 2009 is $50,631.

          Servicing segment revenues declined as expected due to our implementation of new underwriting and documentation requirements to complete modifications under the federal government’s Home Affordable Modification Program (HAMP) (see Segments—Servicing for additional details of this impact) and as a result of lower average unpaid principal balance (UPB). Servicing results benefited from our cost reduction efforts and lower interest expense as evidenced by the 24% decline in operating expenses and the 9% reduction in interest expense in the third quarter of 2009 compared to the third quarter of 2008.

          Both Loans and Residuals and Asset Management Vehicles reported a decrease in unrealized losses due to smaller declines in the estimated fair value of loans, real estate and securities. We recorded unrealized fair value gains of $8,291 on trading securities in the third quarter of 2009 compared to unrealized losses of $621 in 2008.

          Our Ocwen Solutions line of business, consisting of the Mortgage Services, Financial Services and Technology Products segments, was separated as of August 10, 2009. For the six weeks of the third quarter for which Ocwen Solutions is included in our results, revenue was $24,023 and pre-tax income was $3,215. Operating expenses included a one-time charge of $2,304 for the closure of two locations. These partial quarter results of Ocwen Solutions may not be indicative of results for the full quarter, and were ahead of the previous quarter’s results for the same period, excluding the one time charge mentioned. As a separate, publicly-traded company, Altisource (NASDAQ:ASPS) will file a Form 10-Q with the Securities and Exchange Commission.

36


          Nine Months Ended September 2009 versus September 2008. We incurred a net loss of $9,092, or $0.13 per share for the nine months ended September 2009 compared to net income of $17,531, or $0.28 per share for the nine months ended September 2008. Income from continuing operations before income taxes was $73,067 as compared to $34,939 for the nine months ended September 2009 and 2008, respectively. The net loss for the nine months ended September 2009 is solely due to the $50,631 of tax expense recognized by Ocwen on the gain on the distribution of assets to Altisource.

          Our operating results for the nine months ended September 2009 benefited from a 20% decline in operating expenses in the first nine months of 2009 compared to 2008. We achieved this improvement despite $3,501 in professional services expenses related to the Ocwen Solutions Separation (the “Separation”). We also recorded unrealized fair value gains of $13,346 on trading securities, compared to $22,366 of unrealized fair value losses on trading securities for the nine months ended September 2009 and 2008, respectively.

Strategic Priorities

          Our competitive strengths are:

 

 

 

 

Lowest Cost Provider . We believe OLS has the lowest operating cost in the sub-prime mortgage servicing industry. Based on average industry cost information provided by a third party valuation consultant, OLS’ net cost to service a non performing loan was 57% lower than the average net cost for the subprime industry as of August 31, 2009.

 

 

 

 

Superior Loss Mitigation and Cash Management . Two recent independent studies comparing servicer performance in servicing non-performing residential loans confirmed that we lead the industry in realizing cash flows for investors and keeping families in their homes. A Moody’s Investors Service study in January 2007 showed that we achieved double the cure rate of subprime servicers rated “average” by Moody’s and 6% higher than the cure rate of subprime servicers rated “strong” despite having a more challenging portfolio consisting of older mortgages with lower credit quality and a higher proportion of second liens. Similarly, in July 2009, Bank of America/Merrill Lynch found that we have the highest “roll rate from 90+ days delinquent to current” for both subprime fixed and adjustable rate loans. We believe these studies, together with our selection by Freddie Mac as a special servicer (as described below), demonstrate our capability to work effectively with delinquent borrowers and generate greater cash flows than any other servicer. This success in returning loans to performing status enables us to decrease our need for advances which, in turn, reduces our interest expense.

 

 

 

 

High Barriers to Entry . Our servicing platform runs on a proprietary information technology system developed over a 20-year period at a cost of more than $140,000. We license this technology from Altisource under long-term agreements. These licensed tools are enhanced by a feedback loop that provides updated information on the latest servicing and property valuation data gathered by Ocwen and its affiliates. Currently, Altisource employs over 270 software developers focused on identifying additional opportunities to automate manual processes to eliminate variability and to increase the quality and timeliness of decision-making processes and information transfers.

 

 

 

 

Scalability and Flexibility. With our highly automated, artificial intelligence driven technology platforms and global workforce, we can quickly scale our servicing platform to handle acquired loan portfolios with modest infrastructure additions.

          To enhance our competitive strengths, we continue to focus on three initiatives having completed the Separation on August 10, 2009:

 

 

 

 

1.

Liquidity and balance sheet strength

 

 

 

2.

Revenue opportunities

 

 

 

3.

Quality and cost structure leadership

Achieving these initiatives, as more fully described in the following sub-sections, will reinforce our competitive strengths.

           Liquidity and Balance Sheet Strength