Ocwen Financial Corporation
OCWEN FINANCIAL CORP (Form: 10-Q, Received: 05/07/2009 14:38:31)

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 March 31, 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
of incorporation or organization)

 

(I.R.S. Employer
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 May 1, 2009: 67,434,998 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 March 31, 2009 and December 31, 2008

3

 

 

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and 2008

4

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2009 and 2008

5

 

 

 

 

 

 

Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2009

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008

7

 

 

 

 

 

 

Notes to Interim Consolidated Financial Statements

8

 

 

 

 

 

Item 2.

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

28

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

 

 

 

 

 

Item 4.

Controls and Procedures

54

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

55

 

 

 

 

 

Item 1A.

Risk Factors

55

 

 

 

 

 

Item 6.

Exhibits

55

 

 

 

 

 

Signatures

56

 

1


FORWARD-LOOKING STATEMENTS

This Annual 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


PART I – FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 


 


 

 

 

 

 

(As Adjusted)

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash

 

$

158,855

 

$

201,025

 

Trading securities, at fair value

 

 

 

 

 

 

 

Investment grade auction rate

 

 

238,161

 

 

239,301

 

Subordinates and residuals

 

 

4,028

 

 

4,369

 

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

 

 

44,670

 

 

49,918

 

Advances

 

 

172,459

 

 

102,085

 

Match funded advances

 

 

881,244

 

 

1,100,555

 

Mortgage servicing rights

 

 

140,603

 

 

139,500

 

Receivables, net

 

 

49,433

 

 

42,798

 

Deferred tax assets, net

 

 

167,913

 

 

175,145

 

Intangibles, including goodwill of $9,836

 

 

45,589

 

 

46,227

 

Premises and equipment, net

 

 

11,799

 

 

12,926

 

Investments in unconsolidated entities

 

 

22,115

 

 

25,663

 

Other assets

 

 

92,647

 

 

97,588

 

 

 

   

 

   

 

Total assets

 

$

2,029,516

 

$

2,237,100

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Match funded liabilities

 

$

790,300

 

$

961,939

 

Lines of credit and other secured borrowings

 

 

144,065

 

 

116,870

 

Investment line

 

 

186,568

 

 

200,719

 

Servicer liabilities

 

 

90,365

 

 

135,751

 

Debt securities

 

 

108,843

 

 

133,367

 

Other liabilities

 

 

82,697

 

 

78,813

 

 

 

   

 

   

 

Total liabilities

 

 

1,402,838

 

 

1,627,459

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

Ocwen Financial Corporation stockholders’ equity

 

 

 

 

 

 

 

Common stock, $.01 par value; 200,000,000 shares authorized; 62,963,498 and 62,716,530 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively

 

 

630

 

 

627

 

Additional paid-in capital

 

 

205,262

 

 

203,195

 

Retained earnings

 

 

418,646

 

 

403,537

 

Accumulated other comprehensive income, net of income taxes

 

 

1,836

 

 

1,876

 

 

 

   

 

   

 

Total Ocwen Financial Corporation stockholders’ equity

 

 

626,374

 

 

609,235

 

Minority interest in subsidiaries

 

 

304

 

 

406

 

 

 

   

 

   

 

Total equity

 

 

626,678

 

 

609,641

 

 

 

   

 

   

 

Total liabilities and equity

 

$

2,029,516

 

$

2,237,100

 

 

 

   

 

   

 

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

3


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

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

(As Adjusted)

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

Servicing and subservicing fees

 

$

78,810

 

$

98,214

 

Process management fees

 

 

33,692

 

 

26,950

 

Other revenues

 

 

2,088

 

 

3,087

 

 

 

   

 

   

 

Total revenue

 

 

114,590

 

 

128,251

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

Compensation and benefits

 

 

28,545

 

 

30,086

 

Amortization of servicing rights

 

 

10,041

 

 

14,014

 

Servicing and origination

 

 

12,638

 

 

14,411

 

Technology and communications

 

 

4,808

 

 

5,270

 

Professional services

 

 

7,186

 

 

14,749

 

Occupancy and equipment

 

 

6,046

 

 

6,533

 

Other operating expenses

 

 

3,002

 

 

3,012

 

 

 

   

 

   

 

Total operating expenses

 

 

72,266

 

 

88,075

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Income from operations

 

 

42,324

 

 

40,176

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

 

2,165

 

 

4,813

 

Interest expense

 

 

(16,663

)

 

(26,070

)

Loss on trading securities

 

 

(380

)

 

(12,023

)

Gain on debt repurchases

 

 

534

 

 

 

Loss on loans held for resale, net

 

 

(4,554

)

 

(4,509

)

Equity in earnings of unconsolidated entities

 

 

27

 

 

6,955

 

Other, net

 

 

(189

)

 

(925

)

 

 

   

 

   

 

Other expense, net

 

 

(19,060

)

 

(31,759

)

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

 

23,264

 

 

8,417

 

Income tax expense

 

 

8,037

 

 

2,939

 

 

 

   

 

   

 

Income from continuing operations

 

 

15,227

 

 

5,478

 

Loss from discontinued operations, net of income taxes

 

 

(188

)

 

(204

)

 

 

   

 

   

 

Net income

 

 

15,039

 

 

5,274

 

Net loss (income) attributable to minority interest in subsidiaries

 

 

70

 

 

(2

)

 

 

   

 

   

 

Net income attributable to Ocwen Financial Corporation (OCN)

 

$

15,109

 

$

5,272

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

Income from continuing operations attributable to OCN common shareholders

 

$

0.24

 

$

0.09

 

Loss from discontinued operations attributable to OCN common shareholders

 

 

 

 

(0.01

)

 

 

   

 

   

 

Net income attributable to OCN common shareholders

 

$

0.24

 

$

0.08

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

Income from continuing operations attributable to OCN common shareholders

 

$

0.24

 

$

0.09

 

Loss from discontinued operations attributable to OCN common shareholders

 

 

 

 

(0.01

)

 

 

   

 

   

 

Net income attributable to OCN common shareholders

 

$

0.24

 

$

0.08

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

Basic

 

 

62,750,010

 

 

62,567,972

 

Diluted

 

 

67,871,466

 

 

62,814,449

 

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

4


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

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

(As Adjusted)

 

 

 

 

 

 

 

 

 

Net income

 

$

15,039

 

$

5,274

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes:

 

 

 

 

 

 

 

Change in unrealized foreign currency translation adjustment (1)

 

 

(40

)

 

714

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

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

 

 

 

 

(194

)

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

 

 

 

 

345

 

 

 

   

 

   

 

Net change in deferred loss on cash flow hedge

 

 

 

 

151

 

 

 

   

 

   

 

 

 

 

(40

)

 

865

 

 

 

   

 

   

 

Comprehensive income

 

 

14,999

 

 

6,139

 

Comprehensive loss (income) attributable to minority interest in subsidiaries

 

 

102

 

 

(92

)

 

 

   

 

   

 

Comprehensive income attributable to OCN

 

$

15,101

 

$

6,047

 

 

 

   

 

   

 


 

 

(1)

Net of tax benefit (expense) of $23 and $(420) for the three months ended March 31, 2009 and 2008, respectively.

 

(2)

Net of tax benefit of $114 for the three months ended March 31, 2008.

 

(3)

Net of tax expense of $202 for the three months ended March 31, 2008.

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

5


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2009
(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OCN Shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional
Paid-in

 

Retained

 

Accumulated
Other Comprehensive
Income,

 

Minority
interest in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Net of Taxes

 

subsidiaries

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2008 (As Adjusted – See Note 2)

 

 

62,716,530

 

$

627

 

$

203,195

 

$

403,537

 

$

1,876

 

$

406

 

$

609,641

 

Net income

 

 

 

 

 

 

 

 

15,109

 

 

 

 

(70

)

 

15,039

 

Repurchase of 3.25% Convertible Notes

 

 

 

 

 

 

(3

)

 

 

 

 

 

 

 

(3

)

Issuance of common stock awards to employees

 

 

29,907

 

 

 

 

(138

)

 

 

 

 

 

 

 

(138

)

Exercise of common stock options

 

 

217,061

 

 

3

 

 

1,477

 

 

 

 

 

 

 

 

1,480

 

Excess tax benefits related to share-based awards

 

 

 

 

 

 

186

 

 

 

 

 

 

 

 

186

 

Employee compensation – Share-based awards

 

 

 

 

 

 

522

 

 

 

 

 

 

 

 

522

 

Director’s compensation – Common stock

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

23

 

Other comprehensive loss, net of income taxes

 

 

 

 

 

 

 

 

 

 

(40

)

 

(32

)

 

(72

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Balance at March 31, 2009

 

 

62,963,498

 

$

630

 

$

205,262

 

$

418,646

 

$

1,836

 

$

304

 

$

626,678

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

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

6


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

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

(As Adjusted)

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

15,039

 

$

5,274

 

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

 

 

 

 

 

 

 

Amortization of mortgage servicing rights

 

 

10,041

 

 

14,014

 

Premium amortization and discount accretion

 

 

754

 

 

1,018

 

Depreciation and other amortization

 

 

2,444

 

 

3,144

 

Provision for bad debts

 

 

328

 

 

(97

)

Loss on trading securities

 

 

380

 

 

12,023

 

Loss on loans held for resale, net

 

 

4,554

 

 

4,509

 

Equity in earnings of unconsolidated entities

 

 

(27

)

 

(6,955

)

Gain on repurchase of debt securities

 

 

(534

)

 

 

Excess tax benefits related to share-based awards

 

 

(186

)

 

 

Net cash provided (used) by trading activities

 

 

1,100

 

 

(286,640

)

Net cash provided by loans held for resale activities

 

 

1,137

 

 

1,303

 

Decrease (increase) in advances and match funded advances

 

 

148,509

 

 

(30,761

)

Decrease in deferred tax asset

 

 

7,232

 

 

496

 

Increase in receivables and other assets, net

 

 

(4,735

)

 

(7,223

)

Decrease in servicer liabilities

 

 

(45,386

)

 

(15,029

)

Decrease in other liabilities, net

 

 

(12,382

)

 

(4,346

)

Other

 

 

1,826

 

 

2,324

 

 

 

   

 

   

 

Net cash provided (used) by operating activities

 

 

130,094

 

 

(306,946

)

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of mortgage servicing rights

 

 

(10,241

)

 

(3,626

)

Distributions from Ocwen Structured Investments, LLC and Ocwen Nonperforming Loans, LLC and related entities

 

 

3,246

 

 

3,875

 

Investment in Ocwen Nonperforming Loans, LLC and related entities

 

 

 

 

(1,250

)

Additions to premises and equipment

 

 

(849

)

 

(940

)

Proceeds from sales of real estate

 

 

1,196

 

 

1,967

 

Other

 

 

 

 

136

 

 

 

   

 

   

 

Net cash provided (used) by investing activities

 

 

(6,648

)

 

162

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from (repayment of) match funded liabilities, net

 

 

(170,797

)

 

63,843

 

Proceeds from lines of credit and other secured borrowings, net

 

 

41,822

 

 

19,546

 

Proceeds from investment line

 

 

 

 

299,964

 

Repayment of investment line

 

 

(14,151

)

 

(16,128

)

Repurchase of debt securities

 

 

(24,602

)

 

 

Exercise of common stock options

 

 

1,202

 

 

 

Excess tax benefits related to share-based awards

 

 

186

 

 

 

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

 

 

724

 

 

 

 

 

   

 

   

 

Net cash provided (used) by financing activities

 

 

(165,616

)

 

367,225

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

(42,170

)

 

60,441

 

Cash at beginning of period

 

 

201,025

 

 

114,243

 

 

 

   

 

   

 

Cash at end of period

 

$

158,855

 

$

174,684

 

 

 

   

 

   

 

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

7


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Dollars in thousands, except share data)

 

 

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

          Ocwen Financial Corporation (NYSE:OCN), through its subsidiaries, is a leading asset manager and business process solutions provider specializing in loan servicing, special servicing, mortgage loan due diligence and receivables management services. At March 31, 2009, OCN owned all of the outstanding stock of its primary subsidiaries: Ocwen Loan Servicing, LLC (OLS); Ocwen Financial Solutions, Private Limited (OFSPL); Investors Mortgage Insurance Holding Company; and NCI Holdings, Inc. (NCI). 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 November 12, 2008 our Board of Directors authorized management to pursue a plan to separate, through a tax-free spin-off, into a newly formed publicly-traded company, all of our operations included within our Ocwen Solutions line of business except for BMS Holdings and GSS (the Separation). The ownership interest in this new company will be distributed to OCN’s existing shareholders in the form of a pro rata stock distribution. Each OCN shareholder will receive one share of Ocwen Solutions common stock for every three shares of OCN common stock held as of the close of business on the record date of the distribution.

          We are currently moving forward with our efforts to address the legal and regulatory requirements related to the Separation with the goal of effecting the transaction in the third quarter of 2009. These efforts include filing a registration statement with the Securities and Exchange Commission for the proposed transaction in the second quarter of 2009. A vote of OCN shareholders is not required in connection with the Separation.

Basis of Presentation

          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 months ended March 31, 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), intangibles and the deferred tax asset.

          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 in the period and the reclassification of charge-offs of loans held for resale. These charge-offs, totaling $3,464 for the three months ended March 31, 2008, were reclassified from other operating expenses to loss on loans held for resale, net, in the consolidated statements of operations. See Note 2 for information regarding our adoption of recent accounting pronouncements.

Principles of Consolidation

Securitizations or Asset Backed Financing Arrangements

          Ocwen or its subsidiaries have been the transferor in connection with a number of securitizations or asset-backed financing arrangements over the years. As of March 31, 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.

8


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 were either 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.

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Total cash received on beneficial interests held

 

$

489

 

$

1,314

 

Total servicing and subservicing fee revenues

 

 

1,346

 

 

1,447

 


 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Total collateral balance

 

$

697,357

 

$

740,477

 

Non-performing collateral (1)

 

 

212,944

 

 

219,613

 

Total certificate balance

 

 

696,723

 

 

740,121

 

Total servicing advances

 

 

23,605

 

 

30,683

 

Total beneficial interests held at fair market value

 

 

1,861

 

 

2,216

 

Total mortgage servicing rights at amortized cost

 

 

1,984

 

 

2,066

 


 

 

(1)

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

          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 5, 6, 7 and 8 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. Generally, 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 April 2009. As of March 31, 2009, OSAFW had notes outstanding of $198,516. The following table summarizes the assets and liabilities of the four special purpose entities formed in connection with our match funded advance facilities:

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Total assets

 

$

909,642

 

$

1,122,404

 

Match funded advances

 

 

881,244

 

 

1,100,555

 

Total liabilities

 

 

834,440

 

 

994,244

 

Match funded liabilities

 

 

790,300

 

 

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.

9


          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.

 

 

NOTE 2

RECENT ACCOUNTING PRONOUNCEMENTS

          In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, “Effective Date of FASB Statement No. 157.” This FSP deferred the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). The adoption of FSP FAS 157-2 on January 1, 2009 did not have an impact on our consolidated financial statements. Fair value measurements of non-financial assets will require the tabular disclosure prescribed by SFAS No. 157 as well as disclosures with respect to the methodologies and assumptions utilized to determine fair value.

          In April 2009, the FASB issued FASB FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This FSP provides additional guidance for estimating fair value when the level of activity for the asset or liability has significantly decreased. The FSP is effective for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. We plan to adopt the FSP during the second quarter of 2009 and do not anticipate that the initial adoption of this FSP will have a significant impact on our consolidated financial statements.

          SFAS No. 141 (R), “Business Combination — a replacement of FASB Statement No. 141.” SFAS No. 141(R) 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 SFAS No. 141 (R) on January 1, 2009 did not have an impact on our consolidated balance sheets or statements of operations.

          SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51 .” The FASB issued SFAS No. 160 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 SFAS No. 160 on January 1, 2009. Because the outstanding non-controlling interests in consolidated subsidiaries are not significant, the implementation of SFAS No. 160 did not have a material impact on our consolidated balance sheets or statements of operations.

          SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133 .” The FASB issued SFAS No. 161 in March 2008. This statement requires enhanced disclosures about an entity’s derivative and hedging activities. Under this statement, entities are required to provide enhanced disclosures relating to: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedge items are accounted for; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The adoption of SFAS No. 161 on January 1, 2009 did not have a material effect on our consolidated balance sheets or statements of operations.

          Proposed amendment of SFAS No. 140 and FIN 46(R) and issuance of FSP No. FAS 140-4 and FIN 46(R)-8. In April 2008, the FASB voted to eliminate the QSPE concept from SFAS No. 140 and to remove the scope exception for QSPEs from FIN 46(R). During September 2008, the FASB issued three separate but related exposure drafts for public comment. The proposed FASB Statements address amendments to SFAS No. 140 and to FIN 46(R). The proposed changes will require an analysis of all QSPEs which are currently exempt from the consolidation provisions of FIN 46(R), to determine if consolidation as VIEs is required.

          FSP FAS 140-4 and FIN 46(R)-8 was issued in December 2008 and requires improved disclosures by public entities until the pending amendments to SFAS No. 140 and FIN No. 46(R) are effective. This FSP amends SFAS No. 140 and FIN 46(R) to require enhanced disclosures by public entities about transfers of financial assets and interests in VIEs. Additionally, the FSP requires certain disclosures by a public entity that is (a) a sponsor that has a variable interest in a VIE (irrespective of the significance of the variable interest) and (b) an enterprise that holds a significant variable interest in a QSPE but was not the transferor of financial assets to the QSPE. The additional disclosures required by FSP FAS 140-4 and FIN 46(R)-8 are included in Note 1.

          We have retained investments in certain subordinate and residual securities in connection with loan securitization transactions completed in prior years (primarily 2006). Our subordinate and residual securities at March 31, 2009 include retained interests with a fair value of $107.

10


          FSP No. APB 14-1, “ Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” This FSP clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “ Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants .” Additionally, this FSP 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 FSP 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 $21,202 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 $22,657. The adjustment to additional paid-in capital includes the recognized debt discount, adjusted for note redemptions, and the effect of deferred taxes. Interest expense for the quarter ended March 31, 2008 has been restated to include non-cash interest of $1,071. Prospectively, the consolidated statement of operations will recognize non-cash interest expense over the remaining estimated life of the notes.

          FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets .” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “ Goodwill and Other Intangible Assets .” The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), “ Business Combinations .” The FSP eliminates the previous useful-life assessment criterion that precluded an entity from using its own assumptions where there is likely to be substantial cost or modification and replaces it with a requirement that an entity shall consider its own experience in renewing similar arrangements. If the entity has no relevant experience, it would consider market participant assumptions regarding renewal. We adopted FSP FAS 142-3 on January 1, 2009 without material effect on our consolidated financial statements.

          Emerging Issues Task Force (EITF) Issue No. 08-6, “Equity Method Investment Accounting Considerations” (EITF 08-6) . The Task Force considered the effects of the issuances of SFAS Nos. 141(R) and 160 on an entity’s application of the equity method under APB Opinion No. 18. The Task Force reached a consensus that (1) an entity should determine the initial carrying value of an equity method investment by applying the cost accumulation model described in SFAS No. 141(R); (2) an entity should use the other-than-temporary impairment model of APB Opinion No. 18 when testing equity method investments for impairment; (3) share issuances by the investee should be accounted for as if the equity method investor had sold a proportionate share of its investment (i.e., any gain or loss is recognized in earnings); and (4) when an investment is no longer within the scope of equity method accounting the investor should prospectively apply the provisions of APB Opinion No. 18 or SFAS No. 115, “ Accounting for Certain Investments in Debt and Equity Securities,” and use the current carrying amount of the investment as its initial cost. The adoption of EITF Issue No. 08-6 on January 1, 2009 did not have a material impact on our consolidated balance sheets or statements of operations.

          FSP No. FAS 115-2 and FAS 124-2 “Recognition of Other-Than-Temporary-Impairments”. This FSP 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 FSP 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, we do not anticipate that this FSP will have a significant impact on our consolidated financial statements upon adoption during the second quarter 2009.

          FSP FAS No. 107-1 and APB 28-1 Interim Disclosures about Fair Value of Financial Instruments. This FSP extends the annual disclosure requirements of SFAS No. 107 Disclosure about Fair Value of Financial Instruments to interim periods for all publicly traded companies. Interim disclosures are required to include the estimated fair value and carrying value of financial instruments, a description of the methods and inputs to estimate fair value as well as any changes in the methods and significant assumptions, if any, during the period. Consequently, our consolidated financial statements for the quarter ended June 30, 2009, will reflect the additional disclosures as required by this FSP.

 

 

NOTE 3

FAIR VALUE OF FINANCIAL INSTRUMENTS

          SFAS No. 157 establishes a fair value 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.

11


          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 at March 31, 2009, categorized by input level within the fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade auction rate

 

$

238,161

 

$

 

$

 

$

238,161

 

Subordinates and residuals

 

 

4,028

 

 

 

 

 

 

4,028

 

Derivative financial instruments, net (2)

 

 

8

 

 

(347

)

 

 

 

355

 

Measured at fair value on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for resale (3)

 

 

44,670

 

 

 

 

 

 

44,670

 

Mortgage servicing rights (4)

 

 

 

 

 

 

 

 

 

Lines of credit and other secured borrowings (5)

 

 

45,373

 

 

 

 

 

 

45,373

 


 

 

(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 18 for additional information on our derivative financial instruments.

(3)

Loans held for resale are measured at fair value on a non-recurring basis. At March 31, 2009, the carrying value of loans held for resale is net of a valuation allowance of $18,166. 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 March 31, 2009 is net of a valuation allowance for impairment of $3,624 established during the third and fourth quarters of 2008. 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 zero. The estimated fair value exceeded amortized cost for all other strata. See Note 8 for additional information on MSRs.

(5)

Lines of credit and other secured borrowings measured at fair value on a nonrecurring basis consist of a fixed-rate term note outstanding under the advance fee reimbursement facility. See Note 13 for more information on the facility.

          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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2009:

 

Fair value at January 1

 

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
March 31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade auction rate

 

$

239,301

 

$

(1,100

)

$

(40

)

$

 

$

238,161

 

Subordinates and residuals

 

 

4,369

 

 

(1

)

 

(340

)

 

 

 

4,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

193

 

 

 

 

162

 

 

 

 

355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade auction rate

 

$

 

$

297,983

 

$

(8,939

)

$

 

$

289,044

 

Subordinates and residuals

 

 

7,362

 

 

(18

)

 

(1,154

)

 

 

 

6,190

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

4,867

 

 

(7,150

)

 

2,861

 

 

 

 

578

 


 

 

(1)

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

 

(2)

Total losses on investment grade auction rate securities include unrealized losses of $40 and $8,939 on auction rate securities held at March 31, 2009 and 2008, respectively. The total losses attributable to subordinates and residuals and derivative financial instruments were comprised exclusively of unrealized losses on assets held at March 31, 2009 and 2008.

12


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

Trading Securities

          Investment Grade Auction Rate Securities. We estimated the fair value of the auction rate securities based on a combination of actual sales and redemptions of the auction rate securities that we hold and a discounted cash flow analysis. When available, we use observable market inputs provided by actual orderly sales of similar auction rate securities. We also discount 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 March 31, 2009:

 

 

 

 

 

·

Expected term

33 months

 

·

Illiquidity premium

1.16%

 

·

Discount rate

3.62% - 14.12%

          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 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 30% 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 15% to 40%, and loss assumptions range from 14% to 28%. Average prepayment assumptions range from 5% to 9%.

          At March 31, 2009, securities amounting to $242,189 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 since the cost of $62,836 exceeded the estimated fair value of $44,670 at March 31, 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 upon 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 to the loan and the estimated period and cost of disposition.

13


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

·

Interest rate used for computing float earnings

 

·

Discount rate

·

Compensating interest expense

 

·

Interest rate used for computing the cost of servicing advances

 

 

          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 March 31, 2009 valuation include prepayment speeds ranging from 14% to 23% (depending on loan type) and delinquency rates ranging from 14% to 28% (depending on loan type). Other assumptions include an interest rate of 5% for computing the cost of financing advances, an interest rate of 0.5% for computing float earnings and a discount rate of 19%.

Lines of credit and other secured borrowings

          Borrowings not subject to a hedging relationship are carried at amortized cost. The carrying value of obligations outstanding under lines of credit that are either short-term or bear interest at a rate that is adjusted monthly based on a market index approximates fair value. The fair value of fixed-rate notes is determined by discounting the contractual future principal and interest repayments at a market rate commensurate with the risk of the estimated cash flows.

 

 

NOTE 4

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, its operations have been reclassified 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. We recorded no additional write-downs in 2008 or in the first quarter of 2009.

          Results of BOK’s operations for the three months ended March 31 are as follows:

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Revenue

 

$

19

 

$

124

 

Operating expenses

 

 

436

 

 

631

 

 

 

   

 

   

 

Loss from operations

 

 

(417

)

 

(507

)

Other income, net

 

 

229

 

 

303

 

 

 

   

 

   

 

Loss before income taxes

 

 

(188

)

 

(204

)

Income tax expense (benefit)

 

 

 

 

 

 

 

   

 

   

 

Net loss

 

$

(188

)

$

(204

)

 

 

   

 

   

 

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

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Cash

 

$

5,783

 

$

4,613

 

Receivables

 

 

8,396

 

 

10,250

 

Other

 

 

66

 

 

33

 

 

 

   

 

   

 

Total assets

 

$

14,245

 

$

14,896

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Total liabilities (including customer deposits of $5,805 and $5,820)

 

$

6,262

 

$

6,280

 

 

 

   

 

   

 

14


 

 

NOTE 5

TRADING SECURITIES

          Trading securities consisted of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade auction rate (Corporate Items and Other)

 

$

238,161

 

$

239,301

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Subordinates and residuals:

 

 

 

 

 

 

 

Loans and Residuals

 

$

3,921

 

$

4,204

 

Corporate Items and Other

 

 

107

 

 

165

 

 

 

   

 

   

 

 

 

$

4,028

 

$

4,369

 

 

 

   

 

   

 

          Gain (loss) on trading securities for the three months ended March 31 was comprised of the following:

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Unrealized losses (1)

 

$

(380

)

$

(11,909

)

Realized losses

 

 

 

 

(114

)

 

 

   

 

   

 

 

 

$

(380

)

$

(12,023

)

 

 

   

 

   

 


 

 

(1)

Unrealized losses on auction rate securities were $40 and $8,939 for the first three months of 2009 and 2008, respectively.

Investment Grade Auction Rate Securities

          During the first quarter of 2008, we invested Investment Line borrowings (See Note 14) in AAA-rated auction rate securities backed by student loans originated under the U. S. Department of Education’s Federal Family Education Loan Program. 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 March 31, 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 March 31, 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.

          There were no sales during the first quarter of 2009. During the first quarter of 2009, one issuer redeemed, at par, notes we held with a face value of $1,100.

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.

15


 

 

NOTE 6

ADVANCES

          Advances, representing payments made on behalf of borrowers or on foreclosed properties, but which receive priority repayment under the terms of the large majority of our pooling and servicing agreements, consisted of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing:

 

 

 

 

 

 

 

Principal and interest

 

$

75,074

 

$

36,183

 

Taxes and insurance

 

 

57,658

 

 

32,812

 

Foreclosures and bankruptcy costs

 

 

33,605

 

 

23,122

 

Real estate servicing costs

 

 

231

 

 

225

 

Other

 

 

1,076

 

 

4,756

 

 

 

   

 

   

 

 

 

 

167,644

 

 

97,098

 

Loans and Residuals

 

 

4,689

 

 

4,867

 

Corporate Items and Other

 

 

126

 

 

120

 

 

 

   

 

   

 

 

 

$

172,459

 

$

102,085

 

 

 

   

 

   

 


 

 

NOTE 7

MATCH FUNDED ADVANCES

          Match funded advances on residential loans we service for others are comprised of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Principal and interest

 

$

446,138

 

$

615,344

 

Taxes and insurance

 

 

291,991

 

 

324,605

 

Foreclosures and bankruptcy costs

 

 

66,023

 

 

70,142

 

Real estate servicing costs

 

 

59,175

 

 

70,658

 

Other

 

 

17,917

 

 

19,806

 

 

 

   

 

   

 

 

 

$

881,244

 

$

1,100,555

 

 

 

   

 

   

 


 

 

NOTE 8

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

 

 

(12

)

 

 

 

(12

)

Amortization

 

 

(9,126

)

 

 

 

(9,126

)

 

 

   

 

   

 

   

 

Balance at March 31, 2009

 

$

140,603

 

$

 

$

140,603

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Estimated fair value of MSRs:

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

$

146,876

 

$

 

$

146,876

 

December 31, 2008

 

$

148,135

 

$

 

$

148,135

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance of assets serviced:

 

 

 

 

 

 

 

 

 

 

March 31, 2009:

 

 

 

 

 

 

 

 

 

 

Servicing

 

$

30,360,145

 

$

 

$

30,360,145

 

Subservicing(1)

 

 

10,428,990

 

 

1,248,553

 

 

11,677,543

 

 

 

   

 

   

 

   

 

 

 

$

40,789,135

 

$

1,248,553

 

$

42,037,688

 

 

 

   

 

   

 

   

 

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 under a high risk loan pilot program that it announced on February 3, 2009.

16


          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 $345,400 and $370,200 at March 31, 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 market 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. Net of the valuation allowance, the carrying value of this stratum was zero at March 31, 2009. For all other strata, the external valuation was above the carrying value at March 31, 2009.

          As of March 31, 2009, MSRs with a carrying value of $125,770 had been pledged as collateral for borrowings under the senior secured credit agreement that was converted to a term note secured by MSRs in August 2008. See Note 13 for additional information regarding this agreement.

          We have recognized a servicing liability for those agreements that are not expected to adequately compensate us for performing the servicing. Servicing liabilities were $4,154 and $3,239 at March 31, 2009 and December 31, 2008, respectively, and are included in other liabilities on the balance sheet. During the three months ended March 31, 2009, the amount of charges we recognized to increase our servicing liability obligations exceeded amortization by $915, and we have reported this net expense as amortization of servicing rights in the statement of operations.

 

 

NOTE 9

RECEIVABLES

          Receivables consisted of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Accounts receivable by segment:

 

 

 

 

 

 

 

Servicing, net (1)

 

$

6,474

 

$

6,495

 

Loans and Residuals

 

 

1,169

 

 

1,169

 

Asset Management Vehicles

 

 

854

 

 

1,171

 

Mortgage Services

 

 

3,695

 

 

2,668

 

Financial Services

 

 

5,600

 

 

5,747

 

Technology Products

 

 

776

 

 

975

 

Corporate Items and Other, net (2)

 

 

11,705

 

 

13,593

 

 

 

   

 

   

 

 

 

 

30,273

 

 

31,818

 

Other receivables:

 

 

 

 

 

 

 

Income taxes

 

 

5,426

 

 

5,386

 

Term note (3)

 

 

7,000

 

 

 

Security deposits

 

 

4,570

 

 

4,645

 

Other

 

 

2,164

 

 

949

 

 

 

   

 

   

 

 

 

$

49,433

 

$

42,798

 

 

 

   

 

   

 


 

 

(1)

The balances at March 31, 2009 and December 31, 2008 primarily include reimbursable expenses due from investors. The total balance of receivables for this segment is net of reserves of $1,733 and $1,604 at March 31, 2009 and December 31, 2008, respectively.

(2)

The balances at March 31, 2009 and December 31, 2008 include receivables totaling $3,324 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 $6,400. The balances at March 31, 2009 and December 31, 2008 also include $6,746 and $8,286, respectively, of mortgage loans originated by BOK. These loans were net of allowances of $1,336 and $1,392, 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 13. We receive 1-Month LIBOR plus 300 bps under the terms of this note receivable. We are obligated to pay 1-Month LIBOR plus 350 bps under the terms of a five- year note payable to the same counterparty. We do not have a contractual right to offset these payments.

17


 

 

NOTE 10

INVESTMENT IN UNCONSOLIDATED ENTITIES


 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Asset Management Vehicles:

 

 

 

 

 

 

 

Investment in OSI (1)

 

$

12,933

 

$

15,410

 

Investment in ONL and affiliates (2)

 

 

9,103

 

 

10,174

 

 

 

   

 

   

 

 

 

 

22,036

 

 

25,584

 

Technology Products:

 

 

 

 

 

 

 

Investment in BMS Holdings (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Items and Other

 

 

79

 

 

79

 

 

 

   

 

   

 

 

 

$

22,115

 

$

25,663

 

 

 

   

 

   

 

          Equity in earnings (losses) of unconsolidated entities was as follows for the three months ended March 31:

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

OSI (1) (3)

 

$

520

 

$

(332

)

ONL and affiliates (2) (3)

 

 

(493

)

 

(599

)

BMS Holdings (4)

 

 

 

 

7,886

 

 

 

   

 

   

 

 

 

$

27

 

$

6,955

 

 

 

   

 

   

 


 

 

(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 quarter of 2009, we received distributions from OSI totaling $2,750. We have no remaining commitment to invest in OSI.

(2)

Our investment in ONL and OREO represent equity interests of approximately 25%. ONL resolves non-performing loans purchased at a discount. OREO purchases real estate for sale, including real estate that ONL may obtain through foreclosure. During the first quarter of 2009, we received distributions totaling $496 from ONL and OREO. We have a remaining commitment which expires on September 13, 2010, to invest up to an additional $33,902 in ONL and OREO, collectively.

(3)

OLS earns 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. During the first quarter of 2009 and 2008, OLS earned $1,327 and $1,216, respectively, of fees 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)

Our investment in BMS Holdings represents an equity interest of approximately 45%. During the second quarter of 2008, our share of the losses of BMS Holdings reduced our investment to zero. Since 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 application of the equity method of accounting for our investment in BMS Holdings. We will not resume applying the equity method 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 11

OTHER ASSETS

          Other assets consisted of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Debt service accounts (1)

 

$

58,440

 

$

58,468

 

Deferred debt related costs, net

 

 

17,232

 

 

14,758

 

Real estate

 

 

6,756

 

 

7,771

 

Interest earning collateral deposits

 

 

5,000

 

 

9,684

 

Prepaid expenses and other

 

 

5,219

 

 

6,907

 

 

 

   

 

   

 

 

 

$

92,647

 

$

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.

18


 

 

NOTE 12

MATCH FUNDED LIABILITIES

          Match funded liabilities, representing obligations secured by related match funded advances and repaid through the cash proceeds arising from those assets, consisted of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unused

 

Balance Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowing Type

 

Interest Rate (1)

 

Maturity

 

Amortization Date

 

Borrowing
Capacity (2)

 

March 31,
2009

 

December 31,
2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Funding Note Series 2007-1

 

Commercial paper rate + 200 basis points (3)

 

December 2014

 

December 2009

 

$

195,225

 

$

104,775

 

$

219,722

 

Term Note Series 2006 -1

 

5.335%

 

November 2015 (4)

 

November 2009

 

 

 

 

165,000

 

 

165,000

 

Variable Funding Note (5)

 

Commercial paper rate + 150 basis points (5)

 

December 2013

 

December 2010

 

 

66,403

 

 

183,597

 

 

192,520

 

Advance Receivable Backed Notes

 

1-Month LIBOR + 400 basis points

 

January 2019

 

January 2010

 

 

65,578

 

 

134,422

 

 

142,361

 

Advance Receivable Backed Notes

 

1-Month LIBOR + 250 basis points

 

April 2009

 

April 2009 (6)

 

 

101,484

 

 

198,516

 

 

237,504

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

428,690

 

 

786,310

 

 

957,107

 

Basis adjustment (4)

 

 

 

 

 

 

 

 

 

 

3,990

 

 

4,832

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

$

428,690

 

$

790,300

 

$

961,939

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 


 

 

(1)

1-Month LIBOR was 0.50% and 0.44% at March 31, 2009 and December 31, 2008, respectively.

(2)

Unused borrowing capacity is available for use only to the extent that there are assets that have been pledged as collateral to a facility but against which no funds have been drawn. All eligible advances had been pledged to a facility at March 31, 2009. As a result, none of our available borrowing capacity was readily available because we had no additional assets pledged as collateral but not drawn under our facilities.

(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 which has approximated 1-Month LIBOR plus 200 basis points over time.

(4)

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.

(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 which has approximated 1-Month LIBOR plus 150 basis points over time.

(6)

In April 2009, the lender agreed to extend the amortization date for this facility to May 16, 2009. On May 5, 2009, we negotiated an increase in the borrowing capacity and a one-year extension of the amortization date. See Note 21 for additional information.

19


 

 

NOTE 13

LINES OF CREDIT AND OTHER SECURED BORROWINGS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unused

 

Balance Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings

 

Collateral

 

Interest Rate (1)

 

Maturity

 

Borrowing
Capacity (2)

 

March 31,
2009

 

December 31,
2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advance fee reimbursement

 

Term note (3)

 

See (3) below

 

March 2014

 

$

 

$

45,373

 

$

 

Term note (4)

 

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 (5)

 

February 2010

 

 

 

 

76,990

 

 

97,987

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

129,363

 

 

97,987

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and Residuals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A-1 notes (6)

 

Loans held for resale and real estate

 

1-Month LIBOR + 600 basis points

 

April 2037

 

 

 

 

14,702

 

 

17,760

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving note (7)

 

Receivables

 

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

 

July 2011

 

 

10,000

 

 

 

 

1,123

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

$

10,000

 

$

144,065

 

$

116,870

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 


 

 

(1)

1-Month LIBOR was 0.50% and 0.44% at March 31, 2009 and December 31, 2008, respectively.

(2)

Unused borrowing capacity is available for use only to the extent that there are assets that have been pledged as collateral to a facility but against which no funds have been drawn. At March 31, 2009, we had $4,096 of available borrowing capacity based on the amount of eligible collateral that was available.

(3)

This advance is secured by the pledge to the lender of our interest in a $60,000 term note issued by OSAF. The OSAF note, in turn, is secured by advances on loans serviced for others, similar to match funded advances and liabilities. The 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 payment of fees due from the lender over the five-year term of the advance. Accordingly, the advance has been recorded as a zero-coupon bond issued at an implied discount of $14,627. We calculated the discount using an implicit market rate.

(4)

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.

(5)

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.

(6)

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 a discount of $928 which is being amortized to interest expense over the estimated remaining life of the notes.

(7)

In February 2009, we agreed to an increase in the interest rate on floating rate advances to prime plus 125 basis points in exchange for favorable modifications to the financial covenants under this facility.


 

 

NOTE 14

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 require 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 fully 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.

20


          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 is secured by our investment in the auction rate securities. Interest on the term note is 0.35% to the extent that we have available balances on deposit with the lender. For any portion of the outstanding balance of the term note that is in excess of the available balances, the interest rate is 1-month LIBOR plus 35 basis points. In the event that the 0.35% rate does not fairly reflect the cost to the lender in providing the funds, the lender may, with notice, adjust the rate upward to a rate not exceeding 3.35%.

          The maximum borrowing under the term note has been reduced from approximately 85% of the face value of the auction rate securities at the time that the note was executed to 75% on December 31, 2008 and to 70% on March 30, 2009. 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. If the application of proceeds to the outstanding balance results in the total outstanding balance of this note falling below 70% of the face value of the auction rate securities held, we receive one-half of sales or redemptions, and the remainder is used to pay down the Investment Line. During the first quarter of 2009, we made payments totaling $14,151 that reduced the Investment Line obligation to $186,568, or 70% of face value .

          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.

          On April 30, 2009, we negotiated a one-year extension of the term note maturity to June 30, 2010. See Note 21 for additional information.

 

 

NOTE 15

SERVICER LIABILITIES

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

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Borrower payments due to custodial accounts

 

$

14,418

 

$

67,227

 

Escrow payments due to custodial accounts

 

 

7,063

 

 

5,488

 

Partial payments and other unapplied balances

 

 

68,884

 

 

63,036

 

 

 

   

 

   

 

 

 

$

90,365

 

$

135,751

 

 

 

   

 

   

 


 

 

NOTE 16

DEBT SECURITIES

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

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

December 31, 2008

 

 

 

 

 

 

 

3.25% Convertible Notes due August 1, 2024

 

$

55,464

 

$

79,988

 

10.875% Capital Trust Securities due August 1, 2027

 

 

53,379

 

 

53,379

 

 

 

   

 

   

 

 

 

$

108,843

 

$

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 are currently in compliance with these covenants.

          Convertible Notes. In July 2004, OCN issued $175,000 aggregate principal amount of 3.25% Convertible Notes due 2024. 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. As a result of our adoption of FSP No. APB 14-1, we recognized a discount on the Convertible Notes. We are amortizing the debt discount over the period from the date of issuance to August 1, 2009, the first date at which holders may require us to repurchase their notes.

          The principal outstanding on March 31, 2009 and December 31, 2008 of $56,445 and $82,355 is reported net of the unamortized debt discount of $981 and $2,367 respectively. Interest expense on the Convertible Notes for the first quarter of 2009 and 2008, respectively, include amortization of debt discount of $754 and $1,071 and cash interest expense at the contractual rate of $572 and $787. We are recognizing interest on the debt at an effective annual rate of 8.25%.

          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 total gains 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) commencing after December 31, 2004, 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.

21


          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. Upon the occurrence of a prorata stock distribution in connection with the Separation, the conversion price will be adjusted based on the 20-day average trading price of OCN’s common stock, subsequent to the ex-dividend date. At March 31, 2009 and December 31, 2008 the if-converted value of the Convertible Notes was $53,013 and $62,106 respectively.

          Holders may require us to repurchase all or a portion of their notes for cash on August 1, 2009, August 1, 2014 and August 1, 2019. Also, upon the occurrence of a “fundamental change”, Holders may redeem the notes at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest, if any. A “fundamental change” is a change of control or a termination of trading in our common stock.

          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 subsidiary and, accordingly, the accounts of OCT are included in our consolidated financial statements.

          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 therefore.

          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

 

 

 

 

 

2008

 

104.894

%

 

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.

22


 

 

NOTE 17

BASIC AND DILUTED EARNINGS PER SHARE

          Basic EPS excludes common stock equivalents and is calculated by dividing net income by the weighted average number of common shares outstanding during the period. We calculate diluted EPS by dividing net income, as adjusted to add back interest expense net of 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 months ended March 31:

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

Net income attributable to OCN

 

$

15,109

 

$

5,272

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock

 

 

62,750,010

 

 

62,567,972

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Basic EPS

 

$

0.24

 

$

0.08

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

Net income attributable to OCN

 

$

15,109

 

$

5,272

 

Interest expense on Convertible Notes, net of income tax (1)

 

 

935

 

 

 

 

 

   

 

   

 

Adjusted net income attributable to OCN

 

$

16,044

 

$

5,272

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock

 

 

62,750,010

 

 

62,567,972

 

Effect of dilutive elements:

 

 

 

 

 

 

 

Convertible Notes (1)

 

 

4,638,046

 

 

 

Stock options (2)

 

 

472,863

 

 

205,418

 

Common stock awards

 

 

10,547

 

 

41,059

 

 

 

   

 

   

 

Dilutive weighted average shares of common stock

 

 

67,871,466

 

 

62,814,449

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Diluted EPS

 

$

0.24

 

$

0.08

 

 

 

   

 

   

 


 

 

(1)

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 first quarter of 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.

(2)

Excludes an average of 1,462,248 and 2,497,372 options that were anti-dilutive for the first quarter of 2009 and 2008, respectively, because their exercise price was greater than the average market price of our stock. Also excluded are 5,130,000 options granted on July 14, 2008, for shares that would be issuable contingent on the achievement of certain performance criteria related to OCN’s stock price and an annualized rate of return to investors.


 

 

NOTE 18

DERIVATIVE FINANCIAL INSTRUMENTS

          The following table summarizes our use of derivative financial instruments during the three months ended March 31, 2009:

 

 

 

 

 

 

 

 

 

 

Interest Rate Cap

 

Euro Currency Futures

 

 

 

 

 

 

 

Notional balance at December 31, 2008

 

$

450,000

 

$

10,125

 

Additions

 

 

 

 

9,605

 

Maturities

 

 

(16,667

)

 

(10,125

)

 

 

   

 

   

 

Notional balance at March 31, 2009

 

$

433,333

 

$

9,605

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Fair value (1):

 

 

 

 

 

 

 

March 31, 2009

 

$

355

 

$

(347

)

 

 

   

 

   

 

December 31, 2008

 

$

193

 

$

(726

)

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Maturity

 

 

January 2011 and
December 2013

 

 

June 2009

 


 

 

(1)

Reported as a component of receivables in the consolidated balance sheets.

23


          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 gains on these foreign currency futures were $463 for the first quarter of 2009. These gains 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 gains included in other income (expense), net related to derivative financial instruments were $161 and $2,622 for the first quarter of 2009 and 2008, respectively, including in 2008 the $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 19

BUSINESS SEGMENT REPORTING

          We manage our business through two distinct lines of business, Ocwen Asset Management and Ocwen Solutions. Ocwen Asset Management includes our core residential servicing business, equity investments in asset management vehicles and our remaining investments in subprime loans and residual securities. Ocwen Solutions, our knowledge-based business process outsourcing (BPO) operation, includes our residential fee-based loan processing businesses, all of our technology platforms, our unsecured collections business and our equity interest in BMS Holdings. We have aligned our internal planning and operating structure to give support and focus to these operations. Our business segments reflect the internal reporting that we have used to evaluate operating performance and to assess the allocation of our resources. Our segments are based upon our organizational structure that focuses primarily on the products and services offered.

          A brief description of our current business segments aligned within our 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.

 

·

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

 

 

 

 

·

Mortgage Services. This segment provides fee-based mortgage and default services including residential property valuation, mortgage due diligence, mortgage underwriting and insurance support. This segment also includes international servicing for commercial loans which we conduct through GSS.

 

·

Financial Services . This segment primarily generates fees by providing collection services for owners of delinquent and charged-off receivables. This segment includes the results of NCI, a receivables management company specializing in contingency collections and customer relationship management for credit card issuers and other consumer and credit providers.

 

·

Technology Products. This segment includes revenues from our 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 earns 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, which provides technology-based case management solutions to trustees, law firms and debtor companies that administer cases in the federal bankruptcy system, is also included in this segment. During the second quarter of 2008, Technology Products began charging Servicing and other segments for technology services according to a market-based rate card instead of the cost-based method that was previously used. As a result, the revenues of Technology Products are approximately $664 greater for the first quarter of 2009 than they would have been if the cost-based system had continued to be used. This increase in revenues by segment for the first quarter of 2009 was approximately $411 for Servicing, $189 for Financial Services and $64 for all other segments and Corporate Items and Other.

24


          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.

          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 March 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue (1) (2)

 

$

74,694

 

$

 

$

537

 

$

18,017

 

$

17,318

 

$

10,573

 

$

253

 

$

(6,802

)

$

114,590

 

Operating expenses (1) (3)

 

 

34,218

 

 

561

 

 

762

 

 

12,892

 

 

18,151

 

 

8,173

 

 

3,982

 

 

(6,473

)

 

72,266

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from operations

 

 

40,476

 

 

(561

)

 

(225

)

 

5,125

 

 

(833

)

 

2,400

 

 

(3,729

)

 

(329

)

 

42,324

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

59

 

 

1,883

 

 

 

 

2

 

 

 

 

 

 

221

 

 

 

 

2,165

 

Interest expense

 

 

(15,503

)

 

(629

)

 

 

 

(12

)

 

(470

)

 

(132

)

 

83

 

 

 

 

(16,663

)

Other (1) (2)

 

 

164

 

 

(4,831

)

 

(302

)

 

33

 

 

2

 

 

56

 

 

(13

)

 

329

 

 

(4,562

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net

 

 

(15,280

)

 

(3,577

)

 

(302

)

 

23

 

 

(468

)

 

(76

)

 

291

 

 

329

 

 

(19,060

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from continuing operations before income taxes

 

$

25,196

 

$

(4,138

)

$

(527

)

$

5,148

 

$

(1,301

)

$

2,324

 

$

(3,438

)

$

 

$

23,264

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue (1) (2)

 

$

86,512

 

$

 

$

1,051

 

$

16,755

 

$

19,499

 

$

10,484

 

$

5

 

$

(6,055

)

$

128,251

 

Operating expenses (1) (3) (4)

 

 

41,952

 

 

917

 

 

690

 

 

13,519

 

 

19,008

 

 

8,882

 

 

8,636

 

 

(5,529

)

 

88,075

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from operations

 

 

44,560

 

 

(917

)

 

361

 

 

3,236

 

 

491

 

 

1,602

 

 

(8,631

)

 

(526

)

 

40,176

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

399

 

 

3,656

 

 

 

 

39

 

 

13

 

 

 

 

706

 

 

 

 

4,813

 

Interest expense

 

 

(23,005

)

 

(856

)

 

 

 

(122

)

 

(492

)

 

(164

)

 

(1,431

)

 

 

 

(26,070

)

Other (1) (2)

 

 

(525

)

 

(5,541

)

 

(1,807

)

 

 

 

11

 

 

8,173

 

 

(11,339

)

 

526

 

 

(10,502

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net

 

 

(23,131

)

 

(2,741

)

 

(1,807

)

 

(83

)

 

(468

)

 

8,009

 

 

(12,064

)

 

526

 

 

(31,759

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from continuing operations before income taxes

 

$

21,429

 

$

(3,658

)

$

(1,446

)

$

3,153

 

$

23

 

$

9,611

 

$

(20,695

)

$

 

$

8,417

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2009

 

$

1,279,134

 

$

60,025

 

$

22,790

 

$

4,002

 

$

59,886

 

$

8,489

 

$

595,435

 

$

(245

)

$

2,029,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

1,416,615

 

 

67,317

 

 

26,755

 

 

3,558

 

 

58,707

 

 

8,906

 

 

655,471

 

 

(229

)

 

2,237,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2008

 

 

1,746,667

 

 

92,885

 

 

67,350

 

 

16,128

 

 

64,822

 

 

24,660

 

 

739,165

 

 

(276

)

 

2,751,401

 


 

 

(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 March 31, 2009

 

$

2,383

 

$

141

 

$

 

$

8,392

 

$

10,916

 

For the three months ended March 31, 2008

 

 

1,333

 

 

370

 

 

21

 

 

6,112

 

 

7,836

 


 

 

(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.

25


 

 

(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 March 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

$

15

 

$

 

$

9

 

$

117

 

$

1,331

 

$

335

 

$

1,807

 

Amortization of MSRs

 

 

10,041

 

 

 

 

 

 

 

 

 

 

 

 

10,041

 

Amortization of intangibles

 

 

 

 

 

 

 

 

637

 

 

 

 

 

 

637

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

$

13

 

$

2

 

$

37

 

$

245

 

$

1,507

 

$

676

 

$

2,480

 

Amortization of MSRs

 

 

13,804

 

 

 

 

210

 

 

 

 

 

 

 

 

14,014

 

Amortization of intangibles

 

 

 

 

 

 

 

 

666

 

 

 

 

 

 

666

 


 

 

(4)

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


 

 

NOTE 20

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. Our deadline to answer the latest complaint is May 20, 2009. We believe the allegations in the MDL Proceeding are without merit and will continue to vigorously defend against them.

          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 expert discovery is in progress. We believe that the Trustee’s allegations against OLS are without merit and intend to continue to vigorously defend against this matter.

26


          Ocwen 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., Banc of America Securities LLC, and Citigroup Global Markets, Inc. (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. Ocwen and BMSI subsequently voluntarily dismissed their arbitration claims against Citigroup Global Markets, Inc, and filed a complaint in federal court. Ocwen purchased the SLARS based on the Broker/Dealer representation that the SLARS were liquid securities which 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. Ocwen seeks to require the Broker/Dealers to repurchase the SLARS at par (aggregating $199,275), 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 ($889) and interest of INR 14,922 ($293) 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 ($456) and interest of INR 10,200 ($200) 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.

          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 21

SUBSEQUENT EVENTS

          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 approximately $60,000 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 own approximately 9.6% of OCN’s total outstanding shares 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 April 30, 2009, we renewed through June 2010 our Investment Line term note used to finance auction rate securities. This agreement was renewed early under terms substantially similar to the previous agreement. Amortization payments will now be $3,000 per month in place of the previous quarterly reductions in the advance rate.

          On May 5, 2009, we negotiated an increase in a $300,000 advance facility to $500,000 and extended the amortization date by one year to May 4, 2010. Under the terms of the new facility, we pay interest on drawn balances at 1-Month LIBOR plus 275 basis points.

27


 

 

ITEM 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 business segments, aligned within our two lines of business, are as follows:

 

 

 

Ocwen Asset Management

 

Ocwen Solutions

 

 

 

 

 

 

Servicing

 

Mortgage Services

Loans and Residuals

 

Financial Services

Asset Management Vehicles (AMV)

 

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).

          Our plans are to continue to sell our non-core assets, including BOK, or to finance them. In November 2008, our Board of Directors authorized management to investigate the possible sale of our remaining Global Servicing Solutions, LLC (GSS) partnerships.

          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 and with our Annual Report on Form 10-K for the year ended December 31, 2008.

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

          March 2009 versus March 2008. We generated net income of $15,109 or $0.24 per share in the first quarter of 2009 compared to $5,272 and $0.08 per share for the first quarter of 2008. Income from continuing operations before taxes was $23,264 for the first quarter of 2009 as compared to $8,417 for the first quarter of 2008.

          Our results benefited from cost reduction efforts announced last quarter. This was evidenced by an 18% improvement in operating expenses in the first quarter of 2009 compared to the first quarter of 2008.

          No significant non-cash unrealized fair value adjustments on trading securities were recorded in the first quarter of 2009. In comparison, net income in the first quarter of 2008 included approximately $5,068 in net unrealized losses comprised of a $12,023 mark-to-market loss on trading securities and $6,955 in unrealized earnings primarily related to derivative mark-to-market gains at an unconsolidated subsidiary.

          While Servicing segment revenues continued to decline as a result of lower average unpaid principal balances (UPB), this was partially offset by higher process management revenues in the first quarter of 2009 as compared to the first quarter of 2008. Servicing benefited from lower interest expense in the first quarter of 2009 compared to 2008. Loans and Residuals were adversely impacted by lower interest income primarily due to reduced loan balances. Asset Management Vehicles reported a decrease in unrealized losses due to smaller declines in the estimated market value of loans, real estate and securities at unconsolidated subsidiaries.

          Mortgage Services benefited from new lines of business and from higher order volumes in existing businesses. These increases were offset by revenue declines in Financial Services as lower collection rates, due to the current economic climate and consistent with the collections industry in general, adversely impacted results in the first quarter of 2009 compared to 2008. Technology Products’ income from continuing operations declined in the first quarter of 2009, as compared to 2008, because we did not recognize any earnings of BMS Holdings, an unconsolidated subsidiary, in the first quarter of 2009. We suspended the equity method of accounting for our investment in BMS Holdings in the second quarter of 2008 because of losses that reduced our investment to zero.

28


Strategic Priorities

          Ocwen is focused on a strategic plan centered on four essential initiatives:

 

 

 

 

1.

Liquidity and balance sheet strength

 

2.

Revenue opportunities

 

3.

Quality and cost structure leadership

 

4.

Separation of Ocwen Solutions

We are aggressively pursuing each of these priorities as more fully discussed in the following sub-sections. We believe our efforts will significantly increase shareholder value by building on our core competitive strengths to capture existing economic opportunities.

          Liquidity and Balance Sheet Strength. We believe maintaining liquidity and strengthening our balance sheet will provide us with greater flexibility to pursue attractive investment opportunities that we believe are on the horizon. We focused this quarter on adding borrowing capacity and term advance financing. We were successful on both fronts, as more fully described in the Executive Summary—Liquidity section below. We believe we will benefit from the inclusion of servicer advances in the Term Asset-Backed Securities Loan Facility program (TALF), which will lead to improved access to term financing for servicer advances.

          Revenue Opportunities. We believe the current economic environment combined with government financial stability actions affords us a unique opportunity to capitalize upon our long track record of: (1) demonstrated expertise with servicing rights, legacy loans and assets; (2) exceptional loss mitigation capabilities; and (3) successfully providing business processes services to the mortgage industry. Our revenue growth efforts are focused on developing opportunities in each of our segments.

          Opportunities for revenue growth in the Ocwen Asset Management line of business include:

 

 

 

 

·

Special Servicing Arrangements. We began to perform under a special servicing arrangement with Freddie Mac as part of a high risk loan pilot program announced in February 2009. We are in discussions with various counter parties on how we can assist them with their special servicing needs.

 

·

Loan Modifications. We expect to accelerate work with qualifying borrowers to modify loans consistent with the federal government’s Home Affordable Modification Program (HMP).

 

·

Acquisition of Servicing Rights. We are actively pursuing several initiatives to provide us with an increased supply of servicing.

          Our Ocwen Solutions line of business is focused on two primary opportunities to grow revenues:

 

 

 

 

·

Product Diversification. We continue our efforts to offer a balanced service across all aspects of the mortgage lifecycle. We believe our technological capabilities are a differentiating factor across our entire product platform.

 

 

 

 

·

Geographic Expansion. We are expanding our product offering into new states. We expect to continue to build our national footprint for services as part of our strategy to diversify our revenue base.

          Quality and Cost Structure. According to a third-party industry study, our cost to service non-performing and performing residential loans are 60% and 21%, respectively, lower than the subprime industry. An industry trade association study shows that we are 28% less expensive than the nearest competitor in terms of servicing expense per loan. We believe that quality and cost are intrinsically related in that errors increase costs and destroy quality.

          We have launched three specific initiatives which we believe are designed to not only maintain, but improve our profitability even with a declining portfolio of serviced loans. These three initiatives are: (1) consolidation and automation of manual processes; (2) improvement of process uniformity to eliminate variability; and (3) job function analyses to improve supervisory effectiveness. We are implementing our next generation of technology and processes to achieve this step function improvement in cost and quality. By eliminating variability in our processes, we can grow our industry leading programs that keep more people in their homes, generate greater cash flow for investors and reduce our costs.

          Separation of Ocwen Solutions. On November 12, 2008, our Board of Directors authorized management to pursue a plan to separate, through a tax-free spin-off into a newly formed publicly-traded company, all of our business operations currently included within the OS business line except for BMS Holdings and GSS. We made our decision based upon a strategic analysis that concluded that the Separation would:

 

 

 

 

·

Allow each of Ocwen and Altisource to separately focus on their core business and be better able to respond to initiatives and market challenges;

 

·

Better position OS to pursue business opportunities with other servicers;

 

·

Provide OS the option of offering its stock as consideration to potential acquisition targets (subject to certain limitations);

 

·

Grant OS flexibility in creating its own capital structure which may include a subsequent raise of equity or debt; and

 

·

Allow potential investors to choose between the contrasting business models of knowledge processing or servicing, each of which may be valued differently by the equity markets.

29


          The ownership interest in this new company will be distributed to OCN’s existing shareholders in the form of a pro rata stock distribution. Each OCN shareholder will receive one share of OS common stock for every three shares of OCN common stock held as of the close of business on the record date of the distribution. We continue to move ahead with our efforts to address the legal and regulatory requirements for the Separation with the goal of effecting the transaction in the third quarter of 2009. We believe this transaction does not require OTS approval. These efforts include filing a registration statement on Form 10 with the Securities and Exchange Commission (SEC) for the proposed transaction in the second quarter of 2009. A vote of OCN shareholders is not required in connection with the Separation.

          In connection with the Separation, OAM expects to enter into contractual agreements at prevailing market rates with OS to both provide certain corporate services as well as receive commercial services.

Outlook

          Ocwen Asset Management. We are aggressively pursuing special servicing opportunities that require little capital such as our pilot program with Freddie Mac. Advances declined significantly in the first quarter. We expect this trend to continue in 2009, although the rate of decline is likely to slow.

          Under the HMP, we expect to generate revenues after qualifying loan modifications pass the 90-day trial period. Late fee revenues must be waived for loan modifications included in the HMP. Accordingly, second quarter revenues will likely not include HMP qualifying loan modifications.

          With the inclusion of servicer advances in TALF, we may issue TALF notes to increase the amount and duration of advance financing. We will also continue to reduce non-core assets and deploy that cash in our core businesses.

          Ocwen Solutions. The primary growth engine for Ocwen Solutions will be Mortgage Services, which we are expanding by increasing the array and geographical range of the mortgage and default services that we provide to originators and servicers. These services include default processing, property inspection and preservation, homeowner outreach, real estate sales and title services.

          We expect limited revenue growth but increased profitability in Financial Services in 2009. The difficult collection environment that all receivables management firms currently are facing stems from growing unemployment and consumers’ limited access to credit. These issues have lowered NCI’s collection rate, but NCI remains a top performer for its most important clients. NCI will continue to focus on reducing operating costs by improving processes and implementing its strategic initiatives which include: scoring, scripting and optimal debtor resolution. As NCI begins to experience positive results from these efforts, it will turn its attention toward revenue growth.

Liquidity

          Cash totaled $158,855, or 7.8% of total assets at March 31, 2009. This compares to cash of $201,025, or 9% of total assets at December 31, 2008, and cash of $174,684, or 6.4% of total assets a year ago at March 31, 2008.

          Servicer liabilities, which represent cash collected from borrowers but not yet remitted to securitization trusts, declined by $45,386 from December 31, 2008 to March 31, 2009. Servicer liabilities have a very short duration as funds collected must be remitted to the trust in accordance with the contractual obligation. The $148,937 decline in total advances in the first quarter of 2009 is attributable to the success of our efforts to stabilize the delinquency rate which has allowed advances to decline significantly faster than UPB.

          Our borrowings as of March 31, 2009 include $186,568 borrowed under the Investment Line term note that is used to finance the investment grade auction rate securities which we are carrying at a fair value of $238,161. In the first quarter of 2009, we repaid $14,151 of Investment Line term note principal. This amount includes proceeds of $1,100 from the redemption of certain securities. On April 30, 2009, we renewed this term note through June 2010. This agreement was renewed early under terms substantially similar to the previous agreement, except amortization payments will now be $3,000 per month in place of the previous quarterly reductions in the advance rate.

          Excluding the Investment Line, our borrowings have decreased by $168,968 since December 31, 2008. This decline reflects a reduction in borrowings by the Servicing segment, Loans and Residuals segment, Financial Services segment and Corporate Items and Other of $140,263, $3,058, $1,123 and $24,524, respectively. The decline in borrowings of the Servicing segment reflects a decline in advances. The decline in borrowings of the Loans and Residuals segment is primarily the result of a decline in the balance of the loans pledged as collateral. Corporate Items and Other borrowings declined as a result of the repurchase of 3.25% Convertible Notes with a face value of $25,910.

30


          Excluding the Investment Line, our total maximum borrowing capacity was $1,369,065 as of March 31, 2009, an increase of $28,318 as compared to December 31, 2008. This increase is primarily due to a $31,376 increase in borrowing capacity of the Servicing segment and a $3,058 decline in borrowing capacity of the Loans and Residuals segment. The increase in Servicing borrowing capacity is principally the result of entering into two new facilities in March 2009. One facility represented an advance in the form of zero-coupon bonds that we recorded at $45,373, net of a discount of $14,627. The other is a $7,000 term note. Both facilities are secured by the pledge of advances.

          At March 31, 2009, excluding the Investment Line, $438,690 of our total maximum borrowing capacity remained unused, including $428,690 attributed to the Servicing business. Of the unused borrowing capacity of the Servicing business, none was readily available because we had no additional assets pledged as collateral but not drawn under our facilities.

          In January 2009, we negotiated an early renewal of a $200,000 facility. The start of the amortization period for this note is now January 2010. With the continuing decline of our advance balances and the success of our other liquidity initiatives, we believe that we will have sufficient borrowing capacity to finance advances on our current servicing portfolio through the remainder of 2009 even if we are unable to negotiate any new facilities or any renewals or increases of existing facilities. We will endeavor to retain sufficient cash to repay any advances in excess of our borrowing capacity if such borrowing capacity declines under this worst-case scenario for financing. Another reason that we will retain cash is to cover possible additional principal repayments on our MSR term note in the event that the collateral value determined by a third party appraiser declines faster than the scheduled amortization of this note.

          During these challenging times in the financial markets, we have given careful consideration to counterparty risk. Our advance facilities revolve, and in a typical monthly cycle, we repay up to one-third of the borrowings from collections. During the remittance cycle, which starts in the middle of each month, we must depend on our lenders to provide us with the cash that is required to make remittances to the Servicing investors. However, this is possible only when new advances represent eligible collateral under our advance facilities, and we can borrow additional funds against this collateral. Some of the financial institutions lending to us have experienced significant financial losses and have been the subject of investor concern. Several of these lenders are undergoing restructuring activities, including merging with stronger institutions or raising additional capital, either as part of or outside of the various government rescue plans that have been announced. These actions appear to have succeeded in stabilizing our largest lenders and thereby reducing our counterparty risk, but we continue to monitor closely the financial condition of our lenders.

          In the first quarter of 2009, financing costs came down from the level in the first quarter of 2008 due to lower advance balances and a reduction in interest rates. The one-month LIBOR, which is the reference rate for most of our borrowings declined significantly in the first quarter of 2009, and this decrease was partly offset by higher average spreads over LIBOR. The rate paid on the average balance of our debt outstanding under our match funded facilities and our lines of credit and other secured borrowings was 6.01% and 6.87% in the first quarter of 2009 and 2008, respectively.

CRITICAL ACCOUNTING POLICIES

          Our ability to measure and report our operating results and financial position is heavily influenced by the need to estimate the impact or outcome of risks in the marketplace or other future events. Our critical accounting policies are those that relate to the estimation and measurement of these risks. Because they inherently involve significant judgments and uncertainties, an understanding of these policies is fundamental to understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. Our significant accounting policies are discussed in detail on pages 24 through 27 of Management’s Discussion and Analysis of Results of Operations and Financial Condition and in Note 1 of our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.

31


RESULTS OF OPERATIONS AND CHANGES IN FINANCIAL CONDITION

Operations Summary

The following table summarizes our consolidated operating results for the three months ended March 31, 2009 and 2008. We have provided a more complete discussion of operating results by line of business in the Segments section.

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

% Change

 

 

 

 

 

 

 

 

 

Consolidated:

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

114,590

 

$

128,251

 

(11

)

 

Operating expenses

 

 

72,266

 

 

88,075

 

(18

)

 

 

 

   

 

   

 

 

 

 

Income from operations

 

 

42,324

 

 

40,176

 

5

 

 

Other income (expense), net

 

 

(19,060

)

 

(31,759

)

(40

)

 

 

 

   

 

   

 

 

 

 

Income from continuing operations before taxes

 

 

23,264

 

 

8,417

 

176

 

 

Income tax expense

 

 

8,037

 

 

2,939

 

173

 

 

 

 

   

 

   

 

 

 

 

Income from continuing operations

 

 

15,227

 

 

5,478

 

178

 

 

Loss from discontinued operations, net of taxes

 

 

(188

)

 

(204

)

(8

)

 

 

 

   

 

   

 

 

 

 

Net income

 

 

15,039

 

 

5,274

 

185

 

 

Net loss (income) attributable to minority interest in subsidiaries

 

 

70

 

 

(2

)

3,600

 

 

 

 

   

 

   

 

 

 

 

Net income attributable to Ocwen Financial Corp

 

$

15,109

 

$

5,272

 

187

 

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment income (loss) from continuing operations before taxes:

 

 

 

 

 

 

 

 

 

 

Servicing

 

$

25,196

 

$

21,429

 

18

 

 

Loans and Residuals

 

 

(4,138

)

 

(3,658

)

13

 

 

Asset Management Vehicles

 

 

(527

)

 

(1,446

)

(64

)

 

Mortgage Services

 

 

5,148

 

 

3,153

 

63

 

 

Financial Services

 

 

(1,301

)

 

23

 

(5,757

)

 

Technology Products

 

 

2,324

 

 

9,611

 

(76

)

 

Corporate Items and Other

 

 

(3,438

)

 

(20,695

)

(83

)

 

 

 

   

 

   

 

 

 

 

 

 

$

23,264

 

$

8,417

 

176

 

 

 

 

   

 

   

 

 

 

 

          Income from operations improved by 5% in the first quarter of 2009 as compared to 2008, reflecting a significant reduction in operating expenses that was partially offset by a decline in revenues. Lower interest expense and lower fair value adjustments on securities and loans resulted in a 176% increase in income from continuing operations.

          Total revenues declined by $13,661, or 11%, in the first quarter of 2009 as compared to 2008 principally because of a decrease in Servicing revenue due to a smaller servicing portfolio. Revenue of the Financial Services segment also declined in the first quarter of 2009 largely due to lower liquidation rates in contingency collections. Mortgage Services revenue increased over the first quarter of 2008 primarily as a result of a broader array of product offerings across the mortgage life cycle (i.e. default products) and selectively expanding in new states considering the market opportunities in each.

          Total operating expenses were $15,809, or 18%, lower in the first quarter of 2009 as compared to 2008. This is primarily due to declines in operating expenses of the Servicing segment and Corporate Items and Other. Operating expenses of the Servicing segment declined primarily due to lower amortization on a smaller servicing portfolio, lower servicing and origination expense as a result of a reduction in loan payoffs and reduced staffing levels. In Corporate Items and Other, operating expenses declined largely because the first quarter of 2008 included $9,532 of due diligence and other costs related to the “going private” transaction which was initiated in January 2008 and which the parties mutually terminated in March 2008.

          Other expense, net, for the first quarter of 2009 was $19,060 as compared to $31,759 for the first quarter of 2008, a favorable variance of $12,699. This variance is the result of several factors:

 

 

 

 

 

·

In the Servicing segment, interest expense on match funded liabilities and lines of credit was $7,744 lower in the first quarter of 2009 because of a decline in the average balance of advances and a decline in interest rates.

 

 

 

 

 

 

·

In the Loans and Residuals segment, interest income on loans and residual securities declined by $1,773 in the first quarter of 2009 because of declines in assets.

 

 

 

 

 

 

·

In the AMV segment, our consolidated share of the earnings of OSI and ONL and affiliates for the first quarter of 2009 was $27. This compares to losses of $931 for the first quarter of 2008. The losses in 2008 reflect higher charges to reduce residual securities, loans and real estate to fair value.

 

32


 

 

 

 

 

·

In the Technology Products segment, our share of the earnings of BMS Holdings was $7,886 for the first quarter of 2008 as compared to zero for the first quarter of 2009. Unrealized gains on derivatives in the first quarter of 2008 were largely reversed in the second quarter of 2008 as a result of volatility in LIBOR during those periods. During the second quarter of 2008, our share of the losses of BMS Holdings reduced our investment to zero and we suspended the application of the equity method of accounting for our investment.

 

 

 

 

 

 

·

In Corporate Items and Other, we recorded an unrealized loss of $40 on our investment grade auction rate securities in the first quarter of 2009. This compares to an unrealized loss of $8,939 in the first quarter of 2008. In addition, the first quarter of 2008 included $1,813 of unrealized losses on CMOs which were sold in the second quarter of 2008.

 

Financial Condition Summary

          Total assets declined by $207,584, or 9%, in the first three months of 2009. This decrease was due to declines in all asset categories other than receivables and MSRs:

 

 

 

 

·

Cash declined by $42,170 to a balance of $158,855 at March 31, 2009.

 

 

 

 

·

Loans held for resale declined by $5,248 due to foreclosures, charge-offs, payoffs and declines in estimated values.

 

 

 

 

·

Total advances declined by $148,937 primarily because of declines in UPB serviced and because we were able to stabilize the rate of loan delinquencies and reduce average delinquencies per loan. This decline is the net result of a $219,311 decline in match funded advances and a $70,374 increase in advances as a result of moving collateral from match funded advance facilities to a non-match funded facility.

 

 

 

 

·

MSRs increased by $1,103 as acquisitions of $10,241 exceeded amortization of $9,126 for the first quarter of 2009.

 

 

 

 

·

Investment in unconsolidated entities declined by $3,548 primarily due to $3,246 of distributions received from our asset management entities.

          Total liabilities declined by $224,621, or 14%, in the first three months of 2009. This decrease was the result of declines in all liability categories other than lines of credit and other secured borrowings:

 

 

 

 

·

Match funded liabilities declined by $171,639 as a result of the decline in match funded advances.

 

 

 

 

·

Lines of credit and other secured borrowings increased by $27,195 principally because of $52,373 of borrowings, net of discount, under two new facilities offset in part by $20,997 of repayments of borrowings under the senior secured credit agreement term note that is used to finance MSRs.

 

 

 

 

·

The Investment Line declined by $14,151 due to repayments.

 

 

 

 

·

Servicer liabilities declined by $45,386 largely because of a decrease in the amount of borrower payments that have not yet been remitted to custodial accounts. The decline in borrower payments is the result of slower repayments and a decline in UPB serviced.

 

 

 

 

·

Debt securities declined by $24,524. During 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 total gains of $534 on these repurchases, net of the write-off of discount and unamortized issuance costs.

          At March 31, 2009, total equity was $626,678, an increase of $17,037 over December 31, 2008 that was primarily due to net income of $15,109 for the first quarter of 2009, the exercise of stock options and compensation related to employee share-based awards.

33


SEGMENTS

          The following section provides a discussion of changes in the financial condition of our business segments during the three months ended March 31, 2009 and a discussion of the results of continuing operations of our business segments for the three months ended March 31, 2009 and 2008.

          The following table presents assets and liabilities of each of our business segments at March 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

8

 

$

141

 

$

 

$

264

 

$

5,189

 

$

 

$

153,253

 

$

 

$

158,855

 

Cash held for clients

 

 

 

 

 

 

 

 

 

 

414

 

 

 

 

 

 

(414

)

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade auction rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

238,161

 

 

 

 

238,161

 

Subordinates and residuals

 

 

 

 

3,921

 

 

 

 

 

 

 

 

 

 

107

 

 

 

 

4,028

 

Loans held for resale

 

 

 

 

44,670

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44,670

 

Advances

 

 

167,644

 

 

4,689

 

 

 

 

 

 

 

 

 

 

126

 

 

 

 

172,459

 

Match funded advances

 

 

881,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

881,244

 

Mortgage servicing rights

 

 

140,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

140,603

 

Receivables

 

 

15,343

 

 

1,369

 

 

854

 

 

3,702

 

 

5,703

 

 

776

 

 

21,686

 

 

 

 

49,433

 

Deferred tax asset, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

167,913

 

 

 

 

167,913

 

Goodwill and intangibles

 

 

 

 

 

 

 

 

 

 

43,971

 

 

1,618

 

 

 

 

 

 

45,589

 

Premises and equipment

 

 

55

 

 

 

 

 

 

12

 

 

3,802

 

 

4,950

 

 

2,980

 

 

 

 

11,799

 

Investment in unconsolidated entities

 

 

 

 

 

 

22,036

 

 

 

 

 

 

 

 

79

 

 

 

 

22,115

 

Other assets

 

 

74,237

 

 

5,235

 

 

(100

)

 

24

 

 

807

 

 

1,145

 

 

11,130

 

 

169

 

 

92,647

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Total assets

 

$

1,279,134

 

$

60,025

 

$

22,790

 

$

4,002

 

$

59,886

 

$

8,489

 

$

595,435

 

$

(245

)

$

2,029,516

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Match funded liabilities

 

$

790,300

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

790,300

 

Lines of credit and other secured borrowings

 

 

129,363

 

 

14,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

144,065

 

Investment line

 

 

 

 

 

 

 

 

 

 

 

 

 

 

186,568

 

 

 

 

186,568

 

Servicer liabilities

 

 

90,262

 

 

 

 

 

 

 

 

 

 

 

 

103

 

 

 

 

90,365

 

Cash due to clients

 

 

 

 

 

 

 

 

 

 

414

 

 

 

 

 

 

(414

)

 

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

108,843

 

 

 

 

108,843

 

Other liabilities

 

 

37,536

 

 

1,322

 

 

 

 

1,898

 

 

6,972

 

 

2,500

 

 

32,188

 

 

281

 

 

82,697

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Total liabilities

 

$

1,047,461

 

$

16,024

 

$

 

$

1,898

 

$

7,386

 

$

2,500

 

$

327,702

 

$

(133

)

$

1,402,838

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

34


          The following table presents the statements of continuing operations before income taxes for each of our business segments for the three months ended March 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing and subservicing fees

 

$

64,979

 

$

 

$

 

$

321

 

$

13,831

 

$

 

$

3

 

$

(324

)

$

78,810

 

Process management fees

 

 

9,715

 

 

 

 

 

 

17,654

 

 

3,487

 

 

806

 

 

 

 

2,030

 

 

33,692

 

Other revenues

 

 

 

 

 

 

537

 

 

42

 

 

 

 

9,767

 

 

250

 

 

(8,508

)

 

2,088

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Total revenue

 

 

74,694

 

 

 

 

537

 

 

18,017

 

 

17,318

 

 

10,573

 

 

253

 

 

(6,802

)

 

114,590

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

8,613

 

 

6

 

 

988

 

 

2,799

 

 

8,555

 

 

2,236

 

 

5,348

 

 

 

 

28,545

 

Amortization of servicing rights

 

 

10,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,041

 

Servicing and origination

 

 

2,032

 

 

 

 

 

 

7,252

 

 

3,354

 

 

 

 

 

 

 

 

12,638

 

Technology and communications

 

 

2,819

 

 

8

 

 

103

 

 

914

 

 

2,160

 

 

4,259

 

 

882

 

 

(6,337

)

 

4,808

 

Professional services

 

 

1,914

 

 

(100

)

 

 

 

208

 

 

718

 

 

3

 

 

4,443

 

 

 

 

7,186

 

Occupancy and equipment

 

 

2,862

 

 

 

 

36

 

 

291

 

 

1,239

 

 

635

 

 

983

 

 

 

 

6,046

 

Other operating expenses

 

 

5,937

 

 

647

 

 

(365

)

 

1,428

 

 

2,125

 

 

1,040

 

 

(7,674

)

 

(136

)

 

3,002

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Total operating expenses

 

 

34,218

 

 

561

 

 

762

 

 

12,892

 

 

18,151

 

 

8,173

 

 

3,982

 

 

(6,473

)

 

72,266

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

40,476

 

 

(561

)

 

(225

)

 

5,125

 

 

(833

)

 

2,400

 

 

(3,729

)

 

(329

)

 

42,324

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

59

 

 

1,883

 

 

 

 

2

 

 

 

 

 

 

221

 

 

 

 

2,165

 

Interest expense

 

 

(15,503

)

 

(629

)

 

 

 

(12

)

 

(470

)

 

(132

)

 

83

 

 

 

 

(16,663

)

Loss on trading securities

 

 

 

 

(282

)

 

 

 

 

 

 

 

 

 

(98

)

 

 

 

(380

)

Gain on debt repurchases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

534

 

 

 

 

534

 

Loss on loans held for resale, net

 

 

 

 

(4,554

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,554

)

Equity in earnings of unconsolidated entities

 

 

 

 

 

 

(302

)

 

 

 

 

 

 

 

 

 

329

 

 

27

 

Other, net

 

 

164

 

 

5

 

 

 

 

33

 

 

2

 

 

56

 

 

(449

)

 

 

 

(189

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net

 

 

(15,280

)

 

(3,577

)

 

(302

)

 

23

 

 

(468

)

 

(76

)

 

291

 

 

329

 

 

(19,060

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from continuing operations before income taxes

 

$

25,196

 

$

(4,138

)

$

(527

)

$

5,148

 

$

(1,301

)

$

2,324

 

$

(3,438

)

$

 

$

23,264

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

          We report the operating results of BOK, which are included in Corporate Items and Other, as discontinued operations. See Note 4 to the Interim Consolidated Financial Statements for additional information.

Servicing

          Servicing continues to be our most profitable segment despite a 14% decline in total revenue in the first quarter of 2009 as compared to 2008. Servicing fees have declined due to a decline in the average balance of loans serviced. The UPB of loans that we service for others increased in the first quarter of 2009 for the first time since 2007, as the UPB for newly acquired servicing agreements exceeded the reduction of our existing servicing portfolio. This increase did not result in an increase in revenue because the servicing acquisition occurred relatively late in the quarter. Lower float balances and lower interest rates have resulted in a decline in float earnings. The decline in revenue was somewhat offset by a 18% decline in operating expenses. Amortization of MSRs declined due to a decline in projected prepayment speeds. Servicing and origination expense declined as a result of a decline in voluntary loan payoffs, and compensation and benefits expense declined as a result of an 18% reduction in average staffing levels. As a result, income from operations declined by $4,084, or 9% in the first quarter of 2009 as compared to 2008. However, pre-tax income improved by $3,767, or 18%, in the first quarter of 2009 as total interest expense declined by $7,502.

          The delinquency rate has remained relatively stable and total advances have continued to decline in 2009. In part, advances declined as a result of increased loan modifications and sales of foreclosed real estate. We expect delinquency rates to remain flat for the remainder of 2009 which will lead to further reductions in advances as our seasoned portfolio matures.

          Excluding non-performing loans serviced for Freddie Mac but including the newly acquired servicing agreements, the number of non-performing loans serviced declined by 8,130 in the first quarter of 2009. While the number of non-performing loans declined, the UPB of non-performing loans as a percentage of the portfolio serviced increased during the first quarter of 2009 to 25.1% at March 31, 2009 from 24.3% at December 31, 2008, as the average size of delinquent loans increased. Servicing advances declined by 12% in the first quarter of 2009 as compared to an increase of 2% for the first quarter of 2008. Interest expense on borrowings of the Servicing segment was 37% lower for the first quarter of 2009, as compared to 2008, and declined by 14% as compared to the fourth quarter of 2008. Servicing and subservicing fees, excluding float earnings and ancillary income, declined by 17% in the first quarter of 2009 as compared to 2008 due to the decline in UPB serviced. Prepayment speed averaged 22% in the first quarter of 2009 as compared to 23% in the same period of 2008. Prepayment speed declined in the first quarter of 2009 primarily due to a decline in loan payoffs offset by an increase in real estate sales. Real estate sales and other involuntary liquidations accounted for approximately 85% of prepayments during the first quarter of 2009 as compared to approximately 58% for the first quarter of 2008. We expect prepayment speed to decline somewhat in the future as the number of loans in foreclosure and properties awaiting liquidation decrease. Another factor contributing to the decline in prepayment speed is an increase in the fixed rate portion of our loan portfolio as ARM loans continue to prepay at a faster rate and become a smaller portion of total loans.

35


          During the first quarter of 2009, the President and U.S. Department of the Treasury announced and issued guidelines for HMP. The HMP provides a financial incentive for us to modify qualifying loans in accordance with the plan’s guidelines and requirements. On April 13, 2009, we announced our active participation in this plan and expect it to impact our revenue and profits for the full year 2009. However, we expect an adverse impact in the second quarter of 2009 as the program ramps up and modifications that ordinarily would have completed in this quarter are delayed. In order to qualify for the initial and subsequent financial incentives, each loan modification must meet specific guidelines and criteria. A significant part of the process is a trial modification period which must last for 90 days in order to qualify for the initial base incentive fee of $1,000 (actual dollars) or $1,500 (actual dollars) per loan. The higher initial payment is earned on loans that are still performing when modified but where default is likely. The subsequent annual success incentive fee of up to $1,000 (actual dollars) per loan is earned annually, provided the borrower continues to perform under the modification in accordance with program guidelines. We expect to recognize revenue only after all conditions are met, including the fulfillment of the 90 day trial period. In addition, for loans modified under the HMP, we will be required to forego accrued late fees incurred in the year of the modification. Of the 20,651 loans modified in the first quarter of 2009, we believe 12,741 would have qualified under the HMP.

          The following table provides key business drivers and other selected revenue and expense items of our residential servicing business at or for the three months ended March 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

% Change

 

 

 

 

 

 

 

 

 

Average UPB of loans and real estate serviced

 

$

40,116,314

 

$

51,754,789

 

(22

)%

 

Prepayment speed (average CPR)

 

 

22

%

 

23

%

(4

)

 

UPB of non-performing loans and real estate serviced as a % of total at March 31 (1)(2)

 

 

25.1

%

 

21.8

%

15

 

 

Average number of loans and real estate serviced

 

 

313,093

 

 

401,623

 

(22

)

 

Number of non-performing loans and real estate serviced as a % of total at March 31 (1)(2)

 

 

17.2

%

 

16.8

%

2

 

 

Average float balances

 

$

361,300

 

$

408,800

 

(12

)

 

Average balance of advances and match funded advances (3)

 

$

1,123,776

 

$

1,350,706

 

(17

)

 

Average balance of MSRs

 

$

134,348

 

$

188,831

 

(29

)

 

Collections on loans serviced for others

 

$

1,843,200

 

$

3,072,811

 

(40

)

 

Servicing and subservicing fees (excluding float and ancillary income)

 

$

45,878

 

$

55,187

 

(17

)

 

Float earnings

 

$

1,850

 

$

4,433

 

(58

)

 

Amortization of servicing rights (4)

 

$

9,126

 

$

13,804

 

(34

)

 

Interest expense on match funded liabilities and lines of credit

 

$

13,045

 

$

20,789

 

(37

)

 

Compensating interest expense

 

$

275

 

$

1,110

 

(75

)

 

Operating expenses directly related to loss mitigation activities

 

$

7,193

 

$

6,778

 

6

 

 


 

 

(1)

Excluding non-performing loans serviced for Freddie Mac. Also excludes real estate serviced pursuant to our contract with the VA which expired on July 24, 2008.

(2)

At December 31, 2008, the UPB of non-performing assets comprised 24.3% of the total and the number of non-performing assets serviced comprised 19% of the total.

(3)

The combined average balance of advances and match funded advances was $1,146,613 for the fourth quarter of 2008.

(4)

During the three months ended March 31, 2009, the amount of charges we recognized to increase our servicing liability obligations exceeded amortization by $915, and we reported this net expense as amortization of servicing rights. The total amount of amortization of servicing rights reported by the servicing segment for the first quarter of 2009 is $10,041.

36


          The following table sets forth information regarding residential loans and real estate serviced for others:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1)

 

Real Estate (2)

 

Total (4)(5)

 

 

 

 

 

 

 

 

 

 

 

Amount

 

Count

 

Amount

 

Count

 

Amount

 

Count

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

29,880,797

 

 

248,215

 

$

 

 

 

$

29,880,797

 

 

248,215

 

Non-performing (3)

 

 

8,118,175

 

 

43,657

 

 

2,790,163

 

 

12,228

 

 

10,908,338

 

 

55,885

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

$

37,998,972

 

 

291,872

 

$

2,790,163

 

 

12,228

 

$

40,789,135

 

 

304,100

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

December 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

30,416,049

 

 

261,387

 

$

 

 

 

$

30,416,049

 

 

261,387

 

Non-performing

 

 

6,937,002

 

 

47,611

 

 

2,818,481

 

 

13,517

 

 

9,755,483

 

 

61,128

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

$

37,353,051

 

 

308,998

 

$

2,818,481

 

 

13,517

 

$

40,171,532

 

 

322,515

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

March 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

38,573,686

 

 

328,783

 

$

 

 

 

$

38,573,686

 

 

328,783

 

Non-performing

 

 

7,294,604

 

 

48,623

 

 

4,256,286

 

 

26,298

 

 

11,550,890

 

 

74,921

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

$

45,868,290

 

 

377,406

 

$

4,256,286

 

 

26,298

 

$

50,124,576

 

 

403,704

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 


 

 

(1)

Performing loans include those loans that are current or have been delinquent for less than 90 days in accordance with their original terms and those loans for which borrowers are making scheduled payments under modification, forbearance or bankruptcy plans. We consider all other loans to be non-performing.

(2)

Real estate includes $804,814 of foreclosed residential properties serviced for the VA at March 31, 2008. We elected not to renew our contract with VA in July 2008.

(3)

Non-performing loans at March 31, 2009 include loans serviced for Freddie Mac.

(4)

At March 31, 2009, we serviced 213,802 subprime loans and real estate with a UPB of $30,951,647 as compared to 227,929 with a UPB of $32,776,696 at December 31, 2008. At March 31, 2008, we serviced 277,660 subprime loans and real estate with a UPB of $40,161,725.

(5)

We serviced under subservicing contracts 87,256 residential loans with a UPB of $10,428,990 as of March 31, 2009. This compares to 108,545 residential loans with a UPB of $10,340,878 as of December 31, 2008 and 121,725 residential loans and real estate with a UPB of $11,967,956 at March 31, 2008.

 

 

 

The following table sets forth information regarding the changes in our portfolio of residential assets serviced for others:


 

 

 

 

 

 

 

 

 

 

Amount

 

Count

 

 

 

 

 

 

 

Servicing portfolio at December 31, 2007

 

$

53,545,985

 

 

435,616

 

Additions

 

 

518,439

 

 

4,483

 

Runoff

 

 

(3,939,848

)

 

(36,395

)

 

 

   

 

   

 

Servicing portfolio at March 31, 2008

 

 

50,124,576

 

 

403,704

 

Additions

 

 

255,912

 

 

2,421

 

Runoff

 

 

(4,712,421

)

 

(37,347

)