Ocwen Financial Corporation
OCWEN FINANCIAL CORP (Form: 10-Q, Received: 08/04/2009 12:22:56)

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 June 30, 2009

 

 

 

or

 

 

o

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

 

For the transition period from: _____________________ to _____________________

Commission File Number: 1-13219

 

 

 

 

Ocwen Financial Corporation

 

 


 

 

(Exact name of registrant as specified in its charter)

 


 

 

 

Florida

 

65-0039856


 


(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 

 

 

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


(Address of principal executive offices) (Zip Code)

 

(561) 682-8000


(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                Yes x      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).            Yes x      No o

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

 

 

 

 

 

 

Large accelerated filer

o

Accelerated filer  

x

 

Non-accelerated filer

o (Do not check if a smaller reporting company)

Smaller reporting company  

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  x

Number of shares of Common Stock, $0.01 par value, outstanding as of July 30, 2009: 67,513,111 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 June 30, 2009 and December 31, 2008

  3

 

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008

  4

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2009 and 2008

  5

 

 

 

 

Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2009

  6

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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

32

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

61

 

 

 

Item 4.

Controls and Procedures

62

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

62

 

 

 

Item 1A.

Risk Factors

62

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

65

 

 

 

Item 6.

Exhibits

66

 

 

 

Signatures

67

1


FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to the following:

 

 

·

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

·

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

·

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

·

assumptions about our ability to grow our business;

·

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

·

our ability to establish additional asset management vehicles;

·

our ability to reduce our cost structure;

·

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

·

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

·

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

·

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

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

 

 

·

availability of adequate and timely sources of liquidity;

·

delinquencies, advances and availability of servicing;

·

general economic and market conditions;

·

uncertainty related to government programs, regulations and policies; and

·

uncertainty related to dispute resolution and litigation.

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

2


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)

 

 

 

 

 

 

 

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

(As Adjusted)

 

Assets

 

 

 

 

 

 

 

Cash

 

$

213,911

 

$

201,025

 

Trading securities, at fair value

 

 

 

 

 

 

 

Auction rate

 

 

243,285

 

 

239,301

 

Subordinates and residuals

 

 

3,440

 

 

4,369

 

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

 

 

39,726

 

 

49,918

 

Advances

 

 

153,732

 

 

102,085

 

Match funded advances

 

 

883,209

 

 

1,100,555

 

Mortgage servicing rights

 

 

132,729

 

 

139,500

 

Receivables, net

 

 

47,923

 

 

42,798

 

Deferred tax assets, net

 

 

161,180

 

 

175,145

 

Intangibles, including goodwill of $11,027 and $9,836

 

 

46,082

 

 

46,227

 

Premises and equipment, net

 

 

11,080

 

 

12,926

 

Investments in unconsolidated entities

 

 

21,269

 

 

25,663

 

Other assets

 

 

76,719

 

 

97,588

 

 

 

   

 

   

 

Total assets

 

$

2,034,285

 

$

2,237,100

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Match funded liabilities

 

$

765,023

 

$

961,939

 

Lines of credit and other secured borrowings

 

 

121,810

 

 

116,870

 

Investment line

 

 

176,668

 

 

200,719

 

Servicer liabilities

 

 

77,774

 

 

135,751

 

Debt securities

 

 

109,534

 

 

133,367

 

Other liabilities

 

 

88,932

 

 

78,813

 

 

 

   

 

   

 

Total liabilities

 

 

1,339,741

 

 

1,627,459

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 21)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

Ocwen Financial Corporation stockholders’ equity

 

 

 

 

 

 

 

Common stock, $.01 par value; 200,000,000 shares authorized; 67,512,096 and 62,716,530 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively

 

 

675

 

 

627

 

Additional paid-in capital

 

 

254,071

 

 

201,831

 

Retained earnings

 

 

437,840

 

 

404,901

 

Accumulated other comprehensive income, net of income taxes

 

 

1,649

 

 

1,876

 

 

 

   

 

   

 

Total Ocwen Financial Corporation stockholders’ equity

 

 

694,235

 

 

609,235

 

Minority interest in subsidiaries

 

 

309

 

 

406

 

 

 

   

 

   

 

Total equity

 

 

694,544

 

 

609,641

 

 

 

   

 

   

 

Total liabilities and equity

 

$

2,034,285

 

$

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 periods ended June 30,

 

Three months

 

Six months

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(As Adjusted)

 

 

 

 

(As Adjusted)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing and subservicing fees

 

$

65,488

 

$

100,688

 

$

144,298

 

$

198,902

 

Process management fees

 

 

40,086

 

 

27,391

 

 

73,778

 

 

54,341

 

Other revenues

 

 

3,605

 

 

3,146

 

 

5,693

 

 

6,233

 

 

 

   

 

   

 

   

 

   

 

Total revenue

 

 

109,179

 

 

131,225

 

 

223,769

 

 

259,476

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

27,254

 

 

32,754

 

 

55,799

 

 

62,840

 

Amortization of servicing rights

 

 

8,543

 

 

14,592

 

 

18,584

 

 

28,606

 

Servicing and origination

 

 

15,835

 

 

11,638

 

 

28,473

 

 

26,049

 

Technology and communications

 

 

4,481

 

 

6,421

 

 

9,289

 

 

11,691

 

Professional services

 

 

8,208

 

 

6,336

 

 

15,394

 

 

21,085

 

Occupancy and equipment

 

 

4,818

 

 

5,807

 

 

10,864

 

 

12,340

 

Other operating expenses

 

 

3,511

 

 

3,718

 

 

6,513

 

 

6,730

 

 

 

   

 

   

 

   

 

   

 

Total operating expenses

 

 

72,650

 

 

81,266

 

 

144,916

 

 

169,341

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

36,529

 

 

49,959

 

 

78,853

 

 

90,135

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

2,254

 

 

3,231

 

 

4,419

 

 

8,044

 

Interest expense

 

 

(17,300

)

 

(21,109

)

 

(33,963

)

 

(47,179

)

Gain (loss) on trading securities

 

 

5,435

 

 

(9,722

)

 

5,055

 

 

(21,745

)

Gain (loss) on debt repurchases

 

 

 

 

(86

)

 

534

 

 

(86

)

Loss on loans held for resale, net

 

 

(2,987

)

 

(5,929

)

 

(7,541

)

 

(10,438

)

Equity in losses of unconsolidated entities

 

 

(576

)

 

(14,655

)

 

(549

)

 

(7,700

)

Other, net

 

 

2,990

 

 

1,423

 

 

2,801

 

 

498

 

 

 

   

 

   

 

   

 

   

 

Other expense, net

 

 

(10,184

)

 

(46,847

)

 

(29,244

)

 

(78,606

)

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

 

26,345

 

 

3,112

 

 

49,609

 

 

11,529

 

Income tax expense

 

 

9,472

 

 

424

 

 

17,509

 

 

3,363

 

 

 

   

 

   

 

   

 

   

 

Income from continuing operations

 

 

16,873

 

 

2,688

 

 

32,100

 

 

8,166

 

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

 

 

1,052

 

 

(5,182

)

 

864

 

 

(5,386

)

 

 

   

 

   

 

   

 

   

 

Net income (loss)

 

 

17,925

 

 

(2,494

)

 

32,964

 

 

2,780

 

Net income attributable to minority interest in subsidiaries

 

 

(95

)

 

(223

)

 

(25

)

 

(225

)

 

 

   

 

   

 

   

 

   

 

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

 

$

17,830

 

$

(2,717

)

$

32,939

 

$

2,555

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to OCN common shareholders

 

$

0.25

 

$

0.04

 

$

0.49

 

$

0.13

 

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

 

 

0.01

 

 

(0.08

)

 

0.02

 

 

(0.09

)

 

 

   

 

   

 

   

 

   

 

Net income (loss) attributable to OCN common shareholders

 

$

0.26

 

$

(0.04

)

$

0.51

 

$

0.04

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to OCN common shareholders

 

$

0.24

 

$

0.04

 

$

0.48

 

$

0.13

 

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

 

 

0.02

 

 

(0.08

)

 

0.01

 

 

(0.09

)

 

 

   

 

   

 

   

 

   

 

Net income (loss) attributable to OCN common shareholders

 

$

0.26

 

$

(0.04

)

$

0.49

 

$

0.04

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

67,316,446

 

 

62,682,783

 

 

65,045,842

 

 

62,625,378

 

Diluted

 

 

72,854,415

 

 

62,892,868

 

 

70,375,555

 

 

62,853,659

 

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 periods ended June 30,

 

Three months

 

Six months

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(As Adjusted)

 

 

 

 

(As Adjusted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

17,925

 

$

(2,494

)

$

32,964

 

$

2,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized foreign currency translation adjustment (1)

 

 

(187

)

 

(170

)

 

(227

)

 

544

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

(194

)

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

 

 

 

 

 

 

 

 

345

 

 

 

   

 

   

 

   

 

   

 

Net change in deferred loss on cash flow hedge losses included in net income (2)

 

 

 

 

 

 

 

 

151

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(187

)

 

(170

)

 

(227

)

 

695

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

17,738

 

 

(2,664

)

 

32,737

 

 

3,475

 

Comprehensive loss (income) attributable to minority interest in subsidiaries

 

 

(5

)

 

(204

)

 

97

 

 

(293

)

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to OCN

 

$

17,733

 

$

(2,868

)

$

32,834

 

$

3,182

 

 

 

   

 

   

 

   

 

   

 


 

 

(1)

Net of tax benefit (expense) of $110 and $89 for the three months ended June 30, 2009 and 2008, respectively, and $133 and $(331) for the six months ended June 30, 2009 and 2008, respectively.

 

(2)

Net of tax expense of $114 for the six months ended June 30, 2008.

 

(3)

Net of tax expense of $202 for the six months ended June 30, 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 SIX MONTHS ENDED JUNE 30, 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

 

$

201,831

 

$

404,901

 

$

1,876

 

$

406

 

$

609,641

 

Net income

 

 

 

 

 

 

 

 

32,939

 

 

 

 

25

 

 

32,964

 

Issuance of common stock

 

 

5,471,500

 

 

55

 

 

60,132

 

 

 

 

 

 

 

 

60,187

 

Repurchase of common stock

 

 

(1,000,000

)

 

(10

)

 

(10,990

)

 

 

 

 

 

 

 

(11,000

)

Repurchase of 3.25% Convertible Notes

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

(4

)

Issuance of common stock awards to employees

 

 

29,907

 

 

 

 

(138

)

 

 

 

 

 

 

 

(138

)

Exercise of common stock options

 

 

282,012

 

 

3

 

 

1,861

 

 

 

 

 

 

 

 

1,864

 

Excess tax benefits related to share-based awards

 

 

 

 

 

 

317

 

 

 

 

 

 

 

 

317

 

Employee compensation – Share-based awards

 

 

 

 

 

 

1,013

 

 

 

 

 

 

 

 

1,013

 

Director’s compensation – Common stock

 

 

12,147

 

 

 

 

49

 

 

 

 

 

 

 

 

49

 

Other comprehensive loss, net of income taxes

 

 

 

 

 

 

 

 

 

 

(227

)

 

(122

)

 

(349

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Balance at June 30, 2009

 

 

67,512,096

 

$

675

 

$

254,071

 

$

437,840

 

$

1,649

 

$

309

 

$

694,544

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

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 six months ended June 30,

 

 

 

 

 

 

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

(As Adjusted)

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

32,964

 

$

2,780

 

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

 

 

 

 

 

 

 

Amortization of mortgage servicing rights

 

 

18,584

 

 

28,606

 

Premium amortization and discount accretion

 

 

1,445

 

 

1,820

 

Depreciation and other amortization

 

 

4,862

 

 

6,291

 

Provision for bad debts

 

 

885

 

 

601

 

Provision for (reversal of) impairment of investment in Bankhaus Oswald Kruber GmbH & Co. KG

 

 

(1,227

)

 

4,980

 

Loss (gain) on trading securities

 

 

(5,055

)

 

21,745

 

Loss on loans held for resale, net

 

 

7,541

 

 

10,438

 

Equity in losses of unconsolidated entities

 

 

549

 

 

7,700

 

Loss (gain) on repurchase of debt securities

 

 

(534

)

 

86

 

Reversal of valuation allowance on deferred tax assets

 

 

(329

)

 

 

Excess tax benefits related to share-based awards

 

 

(186

)

 

(2

)

Net cash provided (used) by trading activities

 

 

2,000

 

 

(240,145

)

Net cash provided by loans held for resale activities

 

 

2,738

 

 

3,310

 

Decrease in advances and match funded advances

 

 

164,979

 

 

60,517

 

Decrease (increase) in deferred tax assets other than reversal of valuation allowance

 

 

12,590

 

 

(1,447

)

Decrease in receivables and other assets, net

 

 

15,089

 

 

26,784

 

Decrease in servicer liabilities

 

 

(57,977

)

 

(81,496

)

Decrease in other liabilities

 

 

(5,626

)

 

(7,362

)

Other

 

 

(173

)

 

2,542

 

 

 

   

 

   

 

Net cash provided (used) by operating activities

 

 

193,119

 

 

(152,252

)

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of mortgage servicing rights

 

 

(10,241

)

 

(3,640

)

Proceeds from the sale of mortgage servicing rights

 

 

 

 

5,985

 

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

 

 

3,246

 

 

8,950

 

Investment in Ocwen Nonperforming Loans, LLC and related entities

 

 

 

 

(1,250

)

Additions to premises and equipment

 

 

(1,110

)

 

(2,111

)

Proceeds from sales of real estate

 

 

1,322

 

 

4,097

 

Other

 

 

396

 

 

60

 

 

 

   

 

   

 

Net cash provided (used) by investing activities

 

 

(6,387

)

 

12,091

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Repayment of match funded liabilities, net

 

 

(195,226

)

 

(9,831

)

Proceeds from (repayment of) lines of credit and other secured borrowings, net

 

 

18,421

 

 

(34,398

)

Proceeds from investment line

 

 

 

 

299,964

 

Repayment of investment line

 

 

(24,051

)

 

(70,190

)

Repurchase of debt securities

 

 

(24,602

)

 

(10,797

)

Exercise of common stock options

 

 

1,515

 

 

3

 

Repurchase of common stock

 

 

(11,000

)

 

 

Issuance of common stock

 

 

60,187

 

 

 

Excess tax benefits related to share-based awards

 

 

186

 

 

2

 

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

 

 

724

 

 

 

 

 

   

 

   

 

Net cash provided (used) by financing activities

 

 

(173,846

)

 

174,753

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Net increase in cash

 

 

12,886

 

 

34,592

 

Cash at beginning of period

 

 

201,025

 

 

114,243

 

 

 

   

 

   

 

Cash at end of period

 

$

213,911

 

$

148,835

 

 

 

   

 

   

 

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

7


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

 

 

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

          Ocwen Financial Corporation (NYSE: OCN) (Ocwen or OCN), through its subsidiaries, is a leading asset manager and business process solutions provider specializing in loan servicing, special servicing, mortgage loan due diligence and receivables management services. At June 30, 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). Given the need to consolidate the businesses to be separated and the domicile of the newly formed entity, Altisource Portfolio Solutions S.A. (Altisource), Ocwen will incur taxes to the extent that the fair market value of Altisource assets exceeds Ocwen’s tax basis in such assets in accordance with section 367 of the Internal Revenue Code. On August 10, 2009, all OCN shareholders of record as of August 4, 2009 will receive a tax-free pro rata distribution of one share of Altisource common stock for every three shares of OCN common stock. Beginning on August 10, 2009, after completion of the Separation, Altisource is expected to be a separate public company listed on the NASDAQ Global Select Market. 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 and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for any other interim period or for the entire year ending December 31, 2009. The unaudited interim consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.

          The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly significant in the near or medium term relate to our determination of the valuation of securities, loans held for resale, mortgage servicing rights (MSRs), 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 January 1, 2009 and the reclassification of charge-offs of loans held for resale. These charge-offs, totaling $2,556 and $6,020 for the three and six months ended June 30, 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

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

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 either were retained at the time of the securitization transaction or were acquired subsequent to the securitization. Because each of the securitization trusts is a “qualifying special purpose entity” (QSPE), we exclude the trusts from our consolidated financial statements. Summary information for these trusts is provided below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the periods ended June 30

 

Three months

 

Six months

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Total cash received on beneficial interests held

 

$

944

 

$

649

 

$

1,434

 

$

1,963

 

Total servicing and subservicing fee revenues

 

 

1,068

 

 

1,551

 

 

2,414

 

 

2,998

 


 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Total collateral balance

 

$

663,672

 

$

740,477

 

Non-performing collateral (1)

 

 

200,464

 

 

219,613

 

Total certificate balance

 

 

661,413

 

 

740,121

 

Total servicing advances

 

 

24,913

 

 

30,683

 

Total beneficial interests held at fair market value (2)

 

 

1,213

 

 

2,216

 

Total mortgage servicing rights at amortized cost

 

 

1,892

 

 

2,066

 


 

 

(1)

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

(2)

Includes investments in subordinate and residual securities that we retained in connection with the loan securitization transactions completed in prior years (primarily 2006). These retained interests had a fair value of $99 and $167 at June 30, 2009 and December 31, 2008, respectively.

          We have no obligation to provide financial support to the trusts and have provided no such support. Our exposure to loss as a result of our continuing involvement in the trusts is limited to the carrying values of our investments in the residual and subordinate securities of the trusts, our mortgage servicing rights that are related to the trusts and our advances to the trusts. We consider the probability of loss arising from our advances to be remote because of their position ahead of most of the other liabilities of the trusts. See Notes 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. Holders of the debt issued by these entities can look only to the assets of the entities themselves for satisfaction of the debt and have no recourse against OCN. However, OLS has guaranteed the payment by one of the entities, Ocwen Servicer Advance Funding (Wachovia), LLC (OSAFW), of its obligations under the securitization documents. The maximum amount payable under the guarantee is limited to 10% of the notes outstanding at the end of the facility’s revolving period in May 2010. As of June 30, 2009, OSAFW had notes outstanding of $179,723. The following table summarizes the assets and liabilities of the four special purpose entities formed in connection with our match funded advance facilities:

 

 

 

 

 

 

 

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Total assets

 

$

896,678

 

$

1,122,404

 

Match funded advances

 

 

888,090

 

 

1,100,555

 

Total liabilities

 

 

810,498

 

 

994,244

 

Match funded liabilities

 

 

761,882

 

 

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.

9


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

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

Mortgage Servicing Fees and Advances

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

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

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

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

 

 

NOTE 2

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 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. Our initial adoption of this FSP during the second quarter of 2009 did not have a material effect 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 by retrospectively applying the provisions of the new guidance to all prior periods. Because the outstanding non-controlling interests in consolidated subsidiaries are not significant, the implementation of SFAS No. 160 did not have a material effect on our consolidated balance sheets or statements of operations.

10


          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.

          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 $19,838 due to the retrospective accretion of the resulting debt discount to interest expense over the expected life of the notes; (2) adjustments to debt issue cost amortization and gains or losses recognized on previous redemptions; and (3) an increase in additional paid-in capital of $21,293. The adjustment to additional paid-in capital includes the recognized debt discount, adjusted for note redemptions, and the effect of deferred taxes, as well as net gains or losses attributable to redemptions of the equity component. Interest expense for the three and six months ended June 30, 2008 has been adjusted to include amortization of debt discount of $899 and $1,970, respectively, and a reduction in the amortization of debt issue costs of $32 and $71, respectively. Prospectively, the consolidated statement of operations will recognize non-cash interest expense over the remaining estimated life of the notes. The gain previously recognized on the redemption of debt securities during the quarter ended June 30, 2008 of $3,595 has been adjusted to reflect a loss of $86 on the debt component of the convertible notes in the statement of operations and a gain of $2,800 in additional paid in capital for the equity component.

          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 a 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 effect 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, this FSP did not have a material effect on our consolidated financial statements upon adoption during the second quarter of 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. The additional disclosures required by this FSP are included in Note 3.

11


          SFAS No. 165, “Subsequent Events.” This statement, which we adopted during the quarter ended June 30, 2009, introduces the concept of financial statements being available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. A public entity is required to evaluate subsequent events through the date that the financial statements are issued. This statement did not result in changes in the subsequent events that we report, either through recognition or disclosure, in our financial statements upon adoption. We have evaluated subsequent events through August 4, 2009 as disclosed in Note 22.

          SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” This statement removes the concept of a qualifying special-purpose entity from SFAS No. 140 and removes the exception from applying FASB Interpretation No. (“FIN”) FIN 46 (revised December 2003), “ Consolidation of Variable Interest Entities.” (FIN 46(R)) to QSPEs.

          This statement clarifies that the objective of paragraph 9 of SFAS No. 140 is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. That determination must consider the transferor’s continuing involvements in the transferred financial asset, including all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. This statement modifies the financial-components approach used in SFAS No. 140 and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset.

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

          The provisions in SFAS No. 140 and SFAS No. 65, “ Accounting for Certain Mortgage Banking Activities, ” for guaranteed mortgage securitizations are removed to require those securitizations to be treated the same as any other transfer of financial assets within the scope of SFAS No. 140, as amended by this statement. If such a transfer does not meet the requirements for sale accounting, the securitized mortgage loans should continue to be classified as loans in the transferor’s statement of financial position.

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

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

 

 

 

 

a.

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

 

 

 

 

b.

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

          In addition to reintroducing the concept of control into the determination of the primary beneficiary of a VIE, this statement makes numerous other amendments to FIN 46(R) to primarily reflect the elimination of the concept of a QSPE. This statement also amends FIN 46(R) to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The enhanced disclosures are required for any enterprise that holds a variable interest in a VIE. The additional disclosures required by this statement are included in Note 1—Principles of Consolidation.

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

          As disclosed in Note 1—Securitizations of Residential Mortgage Loans, we currently exclude certain securitization trusts from our consolidated financial statements because each is a QSPE. Once this statement becomes effective, we will be required to reevaluate these QSPEs to determine if we should include them in our consolidated financial statements. We are evaluating the potential impact of this statement.

12


 

 

NOTE 3

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

 

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

$

243,285

 

$

243,285

 

$

239,301

 

$

239,301

 

Subordinates and residuals

 

 

3,440

 

 

3,440

 

 

4,369

 

 

4,369

 

Loans held for resale

 

 

39,726

 

 

39,726

 

 

49,918

 

 

49,918

 

Advances

 

 

1,036,941

 

 

1,036,941

 

 

1,202,640

 

 

1,202,640

 

Receivables

 

 

47,923

 

 

47,923

 

 

42,798

 

 

42,798

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Match funded liabilities

 

$

765,023

 

$

767,567

 

$

961,939

 

$

965,233

 

Lines of credit and other secured borrowings

 

 

121,810

 

 

121,810

 

 

116,870

 

 

116,870

 

Investment Line

 

 

176,668

 

 

176,668

 

 

200,719

 

 

200,719

 

Servicer liabilities

 

 

77,774

 

 

77,774

 

 

135,751

 

 

135,751

 

Debt securities

 

 

109,534

 

 

104,171

 

 

133,367

 

 

112,764

 

Derivative financial instruments, net

 

$

891

 

$

891

 

$

(533

)

$

(533

)

          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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

Measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

$

243,285

 

$

 

$

 

$

243,285

 

Subordinates and residuals

 

 

3,440

 

 

 

 

 

 

3,440

 

Derivative financial instruments, net (2)

 

 

891

 

 

(66

)

 

 

 

957

 

Measured at fair value on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for resale (3)

 

 

39,726

 

 

 

 

 

 

39,726

 

Mortgage servicing rights (4)

 

 

 

 

 

 

 

 

 

Lines of credit and other secured borrowings (5)

 

 

46,519

 

 

 

 

 

 

46,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

Measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

$

239,301

 

$

 

$

 

$

239,301

 

Subordinates and residuals

 

 

4,369

 

 

 

 

 

 

4,369

 

Derivative financial instruments, net (2)

 

 

(533

)

 

(726

)

 

 

 

193

 

Measured at fair value on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for resale (3)

 

 

49,918

 

 

 

 

 

 

49,918

 

Mortgage servicing rights (4)

 

 

 

 

 

 

 

 

 

13


 

 

(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 19 for additional information on our derivative financial instruments.

(3)

Loans held for resale are measured at fair value on a non-recurring basis. At June 30, 2009 and December 31, 2008, the carrying value of loans held for resale is net of a valuation allowance of $17,570 and $17,491, respectively. Current market illiquidity has reduced the availability of observable pricing data. Consequently, we classify these loans within level 3 of the fair value hierarchy.

(4)

The carrying value of MSRs at June 30, 2009 and December 31, 2008 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 fee reimbursement advance facility. See Note 13 for additional information on this 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value at
beginning of
period

 

Purchases,
collections and
settlements,
net (1)

 

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

 

Transfers in
and/or out of
Level 3

 

Fair value at
June 30

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

$

238,161

 

$

(900

)

$

6,024

 

$

 

$

243,285

 

Subordinates and residuals

 

 

4,028

 

 

1

 

 

(589

)

 

 

 

3,440

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

355

 

 

 

 

602

 

 

 

 

957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

$

289,044

 

$

(26,869

)

$

(7,430

)

$

 

$

254,745

 

Subordinates and residuals

 

 

6,190

 

 

40

 

 

(1,370

)

 

 

 

4,860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

578

 

 

113

 

 

635

 

 

 

 

1,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

$

239,301

 

$

(2,000

)

$

5,984

 

$

 

$

243,285

 

Subordinates and residuals

 

 

4,369

 

 

 

 

(929

)

 

 

 

3,440

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

193

 

 

 

 

764

 

 

 

 

957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

$

 

$

271,114

 

$

(16,369

)

$

 

$

254,745

 

Subordinates and residuals

 

 

7,362

 

 

22

 

 

(2,524

)

 

 

 

4,860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

 

4,867

 

 

(7,037

)

 

3,496

 

 

 

 

1,326

 


 

 

(1)

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

(2)

Total gains (losses) on auction rate securities for the second quarter include unrealized gains (losses) of $6,024 and $(6,768) on auction rate securities held at June 30, 2009 and 2008, respectively. For the year to date periods, unrealized gains (losses) on auction rate securities held at June 30, 2009 and 2008 were $5,984 and $(15,707), respectively. The total losses attributable to subordinates and residuals and derivative financial instruments were comprised exclusively of unrealized losses on assets held at June 30, 2009 and 2008.

14


          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

          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 June 30, 2009:

 

 

 

 

 

·

Expected term

30 months

 

·

Illiquidity premium

1.63%

 

·

Discount rate

2.60 - 13.60%

          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 20% to 45%, and loss assumptions on current balances range from 18% to 28%. Average prepayment assumptions range from 5% to 9%.

          At June 30, 2009, securities amounting to $246,725 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 $57,296 exceeded the estimated fair value of $39,726 at June 30, 2009.

          When we enter into an agreement to sell a loan to an investor at a set price, the loan is valued at the commitment price. The fair value of loans for which we do not have a firm commitment to sell is based upon a discounted cash flow analysis. We stratify our fair value estimate of uncommitted loans held for resale based upon the delinquency status of the loans. We base the fair value of our performing loans 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.

15


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 June 30, 2009 valuation include prepayment speeds ranging from 17.6% to 23.9% (depending on loan type) and delinquency rates ranging from 18.3% to 24.1% (depending on loan type). Other assumptions include an interest rate of 1-month LIBOR plus 5% for computing the cost of financing advances, an interest rate of 1-month LIBOR for computing float earnings and a discount rate of 20%.

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

 

 

 

 

 

 

·

Subprime

·

Re-performing

 

·

ALT A

·

Special servicing

 

·

High-loan-to-value

·

Other

Advances

          We value advances that we make on loans that we service for others at their carrying amounts because they have no stated maturity, generally are realized within a relatively short period of time and do not bear interest.

Receivables

          The carrying value of receivables generally approximates fair value because of the relatively short period of time between their origination and realization. We carry long-term receivables with an implicit fixed rate or floating rate at a discounted value or approximate face value, respectively, which we believe approximates fair value.

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.

Servicer Liabilities

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

 

 

NOTE 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.

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

16


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

Six Months

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

20

 

$

148

 

$

39

 

$

272

 

Operating expenses

 

 

(832

)

 

5,668

 

 

(396

)

 

6,299

 

 

 

   

 

   

 

   

 

   

 

Income (loss) from operations

 

 

852

 

 

(5,520

)

 

435

 

 

(6,027

)

Other income, net

 

 

200

 

 

338

 

 

429

 

 

641

 

 

 

   

 

   

 

   

 

   

 

Income (loss) before income taxes

 

 

1,052

 

 

(5,182

)

 

864

 

 

(5,386

)

Income tax expense (benefit)

 

 

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

   

 

Net income (loss)

 

$

1,052

 

$

(5,182

)

$

864

 

$

(5,386

)

 

 

   

 

   

 

   

 

   

 

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

 

 

 

 

 

 

 

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Cash

 

$

7,332

 

$

4,613

 

Receivables

 

 

8,638

 

 

10,250

 

Other

 

 

62

 

 

33

 

 

 

   

 

   

 

Total assets

 

$

16,032

 

$

14,896

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Total liabilities (including customer deposits of $6,086 and $5,820)

 

$

6,533

 

$

6,280

 

 

 

   

 

   

 


 

 

NOTE 5

TRADING SECURITIES

          Trading securities consisted of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Auction rate (Corporate Items and Other)

 

$

243,285

 

$

239,301

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Subordinates and residuals:

 

 

 

 

 

 

 

Loans and Residuals

 

$

3,341

 

$

4,204

 

Corporate Items and Other

 

 

99

 

 

165

 

 

 

   

 

   

 

 

 

$

3,440

 

$

4,369

 

 

 

   

 

   

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

Six months

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) (1)

 

$

5,435

 

$

(8,140

)

$

5,055

 

$

(20,049

)

Realized losses (2)

 

 

 

 

(1,582

)

 

 

 

(1,696

)

 

 

   

 

   

 

   

 

   

 

 

 

$

5,435

 

$

(9,722

)

$

5,055

 

$

(21,745

)

 

 

   

 

   

 

   

 

   

 


 

 

(1)

Unrealized gains (losses) on auction rate securities were $6,024 and $(6,768) for the three months ended June 30, 2009 and 2008, respectively. Year to date, the unrealized gains (losses) on auction rate securities were $5,984 and $(15,707) for 2009 and 2008, respectively.

(2)

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

Auction Rate Securities

          During the first quarter of 2008, we invested Investment Line borrowings (See Note 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.

17


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

          We did not sell any of our auction rate securities during the first six months of 2009. During the first six months of 2009, issuers redeemed, at par, auction rate securities we held with a face value of $2,000, including $900 during the second quarter. We recognized a $6,024 unrealized gain in the second quarter of 2009, which was due, in part, to the increased probability of a near term liquidity solution for approximately $70,350 principal amount of the auction rate securities.

Subordinates and Residuals

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

 

 

NOTE 6

ADVANCES

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

 

 

 

 

 

 

 

 

 

 

June 30, 2009

 

December 31, 2008

 

Servicing:

 

 

 

 

 

 

 

Principal and interest

 

$

67,140

 

$

36,183

 

Taxes and insurance

 

 

46,770

 

 

32,812

 

Foreclosures and bankruptcy costs

 

 

28,897

 

 

23,122

 

Real estate servicing costs

 

 

244

 

 

225

 

Other

 

 

5,814

 

 

4,756

 

 

 

   

 

   

 

 

 

 

148,865

 

 

97,098

 

Loans and Residuals

 

 

4,739

 

 

4,867

 

Corporate Items and Other

 

 

128

 

 

120

 

 

 

   

 

   

 

 

 

$

153,732

 

$

102,085

 

 

 

   

 

   

 


 

 

NOTE 7

MATCH FUNDED ADVANCES

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

 

 

 

 

 

 

 

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Principal and interest

 

$

438,343

 

$

615,344

 

Taxes and insurance

 

 

303,872

 

 

324,605

 

Foreclosures and bankruptcy costs

 

 

63,153

 

 

70,142

 

Real estate servicing costs

 

 

45,692

 

 

70,658

 

Other

 

 

32,149

 

 

19,806

 

 

 

   

 

   

 

 

 

$

883,209

 

$

1,100,555

 

 

 

   

 

   

 

          Match funded advances on loans serviced for others result from our transfers of residential loan servicing advances to SPEs in exchange for cash. We made these transfers under the terms of four advance facility agreements. We have either retained control of the advances, or the advances were transferred to trusts that are not QSPEs under SFAS No. 140. As a result, we include the SPEs in our consolidated financial statements. The match funded advances are owned by the SPEs and are not available to satisfy general claims of our creditors. Conversely, the holders of the debt issued by the SPEs can look only to the assets of the issuer for satisfaction of the debt and have no recourse against OCN. However, OLS has guaranteed the payment of the obligations of the issuer under the match funded facility that we executed in April 2008. The maximum amount payable under the guarantee is limited to 10% of the notes outstanding at the end of the facility’s revolving period in May 2010.

18


 

 

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

 

 

(7

)

 

 

 

(7

)

Amortization

 

 

(17,005

)

 

 

 

(17,005

)

 

 

   

 

   

 

   

 

Balance at June 30, 2009

 

$

132,729

 

$

 

$

132,729

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Estimated fair value of MSRs:

 

 

 

 

 

 

 

 

 

 

June 30, 2009

 

$

138,427

 

$

 

$

138,427

 

December 31, 2008

 

$

148,135

 

$

 

$

148,135

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance of assets serviced:

 

 

 

 

 

 

 

 

 

 

June 30, 2009:

 

 

 

 

 

 

 

 

 

 

Servicing

 

$

28,596,580

 

$

 

$

28,596,580

 

Subservicing (1)

 

 

9,809,427

 

 

109,747

 

 

9,919,174

 

 

 

   

 

   

 

   

 

 

 

$

38,406,007

 

$

109,747

 

$

38,515,754

 

 

 

   

 

   

 

   

 

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.

          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 $385,100 and $370,200 at June 30, 2009 and December 31, 2008, respectively.

          During 2008, we established a valuation allowance for impairment of $3,624 on the high-loan-to-value stratum of our mortgage servicing rights as the external valuation that we consider in our impairment analysis fell below the carrying value due primarily to the declining 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 June 30, 2009. For all other strata, the external valuation was above the carrying value at June 30, 2009.

          As of June 30, 2009, MSRs with a carrying value of $119,015 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 $4,818 and $3,239 at June 30, 2009 and December 31, 2008, respectively, and are included in other liabilities on the balance sheet. During the six months ended June 30, 2009, the amount of charges we recognized to increase our servicing liability obligations exceeded amortization by $1,579, and we have reported this net expense as amortization of servicing rights in the statement of operations.

19


 

 

NOTE 9

RECEIVABLES

          Receivables consisted of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Accounts receivable by segment:

 

 

 

 

 

 

 

Servicing, net (1)

 

$

5,013

 

$

6,495

 

Loans and Residuals

 

 

1,169

 

 

1,169

 

Asset Management Vehicles

 

 

563

 

 

1,171

 

Mortgage Services

 

 

4,565

 

 

2,668

 

Financial Services

 

 

5,405

 

 

5,747

 

Technology Products

 

 

1,658

 

 

975

 

Corporate Items and Other, net (2)

 

 

11,708

 

 

13,593

 

 

 

   

 

   

 

 

 

 

30,081

 

 

31,818

 

 

 

 

 

 

 

 

 

Other receivables:

 

 

 

 

 

 

 

Income taxes

 

 

2,962

 

 

5,386

 

Term note (3)

 

 

7,000

 

 

 

Security deposits

 

 

4,830

 

 

4,645

 

Other

 

 

3,050

 

 

949

 

 

 

   

 

   

 

 

 

$

47,923

 

$

42,798

 

 

 

   

 

   

 


 

 

(1)

The balances at June 30, 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 $2,909 and $1,604 at June 30, 2009 and December 31, 2008, respectively.

(2)

The balances at June 30, 2009 and December 31, 2008 include $6,858 and $8,286, respectively, of mortgage loans originated by BOK. These loans were net of allowances of $189 and $1,392, respectively. The balances at June 30, 2009 and December 31, 2008 also include receivables totaling $3,053 and $3,324, respectively, that primarily represent payments to be received in future years (through June 2014) of proceeds from the sales of investments in affordable housing properties. These affordable housing receivables are net of reserves for doubtful accounts of $6,466 and $6,400, respectively.

(3)

In March 2009, we issued a note receivable, maturing on April 1, 2014, in connection with advances funded by the Ocwen Servicer Advance Funding, LLC (OSAF) term note pledged as collateral, as described in Note 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.


 

 

NOTE 10

INVESTMENT IN UNCONSOLIDATED ENTITIES


 

 

 

 

 

 

 

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Asset Management Vehicles:

 

 

 

 

 

 

 

Investment in OSI (1)

 

$

12,554

 

$

15,410

 

Investment in ONL and affiliates (2)

 

 

8,636

 

 

10,174

 

 

 

   

 

   

 

 

 

 

21,190

 

 

25,584

 

Corporate Items and Other

 

 

79

 

 

79

 

 

 

   

 

   

 

 

 

$

21,269

 

$

25,663

 

 

 

   

 

   

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

Six months

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

OSI (1) (3)

 

$

(163

)

$

(1,215

)

$

357

 

$

(1,547

)

ONL and affiliates (2) (3)

 

 

(413

)

 

112

 

 

(906

)

 

(487

)

BMS Holdings (4)

 

 

 

 

(13,552

)

 

 

 

(5,666

)

 

 

   

 

   

 

   

 

   

 

 

 

$

(576

)

$

(14,655

)

$

(549

)

$

(7,700

)

 

 

   

 

   

 

   

 

   

 


 

 

(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 six months 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 six months of 2009, we received distributions totaling $496 from ONL and OREO. We have a remaining commitment that expires in September 2010, to invest up to an additional $33,902 in ONL and OREO, collectively.

20


 

 

(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. For the first six months of 2009 and 2008, OLS earned fees of $2,367 and $3,946, respectively, from OSI and from ONL and affiliates. On a consolidated basis, we have recognized approximately 75% of the loan servicing and management fee revenue.

(4)

During the second quarter of 2008, our share of the losses of BMS Holdings reduced our investment to zero. Our investment in BMS Holdings represents an equity interest of approximately 45%. 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:

 

 

 

 

 

 

 

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Debt service accounts (1)

 

$

43,090

 

$

58,468

 

Deferred debt related costs, net

 

 

14,314

 

 

14,758

 

Real estate

 

 

7,360

 

 

7,771

 

Interest earning collateral deposits

 

 

7,623

 

 

9,684

 

Prepaid expenses and other

 

 

4,332

 

 

6,907

 

 

 

   

 

   

 

 

 

$

76,719

 

$

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.


 

 

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, as more fully described in Note 1—Mortgage Servicing Fees and Advances, consisted of the following at the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

Unused Borrowing

 

Balance Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowing Type

 

Interest Rate (1)

 

Maturity

 

Date

 

Capacity (2)

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Funding Note Series 2007-1

 

Commercial paper rate + 200 basis points (3)

 

December 2014

 

December 2009

 

$

185,205

 

$

114,795

 

$

219,722

 

Term Note Series 2006 -1

 

5.335%

 

November 2015 (4)

 

December 2009

 

 

 

 

165,000

 

 

165,000

 

Variable Funding Note (5)

 

Commercial paper rate + 150 basis points (5)

 

December 2013

 

December 2010

 

 

71,258

 

 

178,742

 

 

192,520

 

Advance Receivable Backed Notes

 

1-Month LIBOR + 400 basis points (6)

 

January 2019 (6)

 

January 2010 (6)

 

 

76,378

 

 

123,622

 

 

142,361

 

Advance Receivable Backed Notes

 

1-Month LIBOR + 275 basis points (7)

 

May 2011 (7)

 

May 2010 (7)

 

 

320,277

 

 

179,723

 

 

237,504

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

653,118

 

 

761,882

 

 

957,107

 

Basis adjustment (4)

 

 

 

 

 

 

 

 

 

 

3,141

 

 

4,832

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

$

653,118

 

$

765,023

 

$

961,939

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 


 

 

(1)

1-Month LIBOR was 0.31% and 0.44% at June 30, 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 June 30, 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 that 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.

21


 

 

(5)

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

(6)

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

(7)

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


 

 

NOTE 13

LINES OF CREDIT AND OTHER SECURED BORROWINGS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unused Borrowing

 

Balance Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings

 

Collateral

 

Interest Rate (1)

 

Maturity

 

Capacity

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee reimbursement advance

 

Term note (2)

 

See (2) below

 

March 2014

 

$

 

$

46,519

 

$

 

Term note (3)

 

Advances

 

1-Month LIBOR + 350 basis points

 

March 2014

 

 

 

 

7,000

 

 

 

Senior secured credit agreement - Term note

 

MSRs

 

1-Month LIBOR +187.5 basis points (4)

 

February 2010

 

 

 

 

55,992

 

 

97,987

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

109,511

 

 

97,987

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

Loans and Residuals :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A-1 notes (5)

 

Loans held for resale and real estate

 

1-Month LIBOR + 600 basis points

 

April 2037

 

 

 

 

12,299

 

 

17,760

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

Financial Services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving note (6)

 

Receivables

 

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

 

(6)

 

 

 

 

 

 

1,123

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

$

 

$

121,810

 

$

116,870

 

 

 

 

 

 

 

 

 

   

 

   

 

   

 


 

 

(1)

1-Month LIBOR was 0.31% and 0.44% at June 30, 2009 and December 31, 2008, respectively.

(2)

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

(3)

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

(4)

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

(5)

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

(6)

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


 

 

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 required that we sell the investments and repay the associated borrowings prior to the end of each quarter.

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

22


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

          Under the term note, we receive the interest on the auction rate securities while the proceeds from the redemption or sale of auction rate securities are applied to the outstanding balance. If the proceeds are below the then-effective maximum borrowing percentage, we are required to make up the shortfall. 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.

          The maximum borrowing under the term note was 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. On April 30, 2009, we negotiated a one-year extension of the term note maturity to June 30, 2010. This agreement was renewed under terms substantially similar to the previous agreement. However, in lieu of quarterly advance rate reductions, we now make monthly amortization payments of $3,000 per month. During the first six months of 2009, we made payments totaling $24,051 that reduced the Investment Line obligation to $176,668.

 

 

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 and paid directly to an investment trust or refunded to borrowers. The following table sets forth the components of servicer liabilities at the dates indicated:

 

 

 

 

 

 

 

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Borrower payments due to custodial accounts

 

$

32,934

 

$

67,227

 

Escrow payments due to custodial accounts

 

 

3,920

 

 

5,488

 

Partial payments and other unapplied balances

 

 

40,920

 

 

63,036

 

 

 

   

 

   

 

 

 

$

77,774

 

$

135,751

 

 

 

   

 

   

 


 

 

NOTE 16

DEBT SECURITIES

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

 

 

 

 

 

 

 

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

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

 

$

56,155

 

$

79,988

 

10.875% Capital Trust Securities due August 1, 2027

 

 

53,379

 

 

53,379

 

 

 

   

 

   

 

 

 

$

109,534

 

$

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% Contingent Convertible Unsecured Senior Notes due 2024 (the Convertible Notes). The Convertible Notes are senior general unsecured obligations not guaranteed by any of our subsidiaries and bear interest at the rate of 3.25% per year. Interest is payable on February 1 and August 1 of each year. The Convertible Notes mature on August 1, 2024. 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 June 30, 2009 and December 31, 2008 of $56,445 and $82,355 is reported net of the unamortized debt discount of $290 and $2,367 respectively. Interest expense on the Convertible Notes for the first six months of 2009 and 2008, respectively, includes amortization of debt discount of $1,471 and $1,970 and cash interest expense at the contractual rate of $987 and $1,486. We are recognizing interest on the debt at an effective annual rate of 8.25%.

23


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

          Holders may convert all or a portion of their notes into shares of our common stock under the following circumstances: (1) at any time during any calendar quarter (and only during such calendar quarter) 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.

          The conversion rate is 82.1693 shares of our common stock per $1,000 (actual dollars) principal amount of the notes, subject to adjustment. Events that may cause the conversion rate to be adjusted primarily relate to cash dividends or other distributions to holders of our common stock. Upon conversion, we may at our option choose to deliver, in lieu of our common stock, cash or a combination of cash and common stock. At June 30, 2009 and December 31, 2008, the if-converted value of the Convertible Notes was $60,155 and $62,106 respectively.

          On June 26, 2009, we provided notice to holders of the Convertible Notes of their right to request that we repurchase all or a portion of their notes for cash on August 3, 2009 at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest, if any. Holders that do not choose to exercise their repurchase right on August 3, 2009 will receive the same right to request that we repurchase all or a portion of their notes for cash on August 1, 2014 and August 1, 2019. A similar right is also available to holders of the Convertible Notes in the event of a “fundamental change.” A “fundamental change” is a change of control or a termination of trading in our common stock.

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

          See Note 22 for information regarding the subsequent notice provided to holders of our Convertible Notes of their right to participate in the Altisource Separation and for the impact of the holders’ repurchase right described above.

          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.

24


          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.

 

 

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 and six months ended June 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

Six months

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to OCN

 

$

17,830

 

$

(2,717

)

$

32,939

 

$

2,555

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock

 

 

67,316,446

 

 

62,682,783

 

 

65,045,842

 

 

62,625,378

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

$

0.26

 

$

(0.04

)

$

0.51

 

$

0.04

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to OCN

 

$

17,830

 

$

(2,717

)

$

32,939

 

$

2,555

 

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

 

 

773

 

 

 

 

1,664

 

 

 

 

 

   

 

   

 

   

 

   

 

Adjusted net income (loss) attributable to OCN

 

$

18,603

 

$

(2,717

)

$

34,603

 

$

2,555

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock

 

 

67,316,446

 

 

62,682,783

 

 

65,045,842

 

 

62,625,378

 

Effect of dilutive elements (2):

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Notes (1)

 

 

4,638,046

 

 

 

 

4,638,046

 

 

 

Stock options (3)

 

 

887,720

 

 

199,972

 

 

680,292

 

 

202,695

 

Common stock awards

 

 

12,203

 

 

10,113

 

 

11,375

 

 

25,586

 

 

 

   

 

   

 

   

 

   

 

Dilutive weighted average shares of common stock

 

 

72,854,415

 

 

62,892,868

 

 

70,375,555

 

 

62,853,659

 

 

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

$

0.26

 

$

(0.04

)

$

0.49

 

$

0.04

 

 

 

   

 

   

 

   

 

   

 


 

 

(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 three and six months ended June 30, 2008 because the effect would be anti-dilutive. The effect is anti-dilutive whenever interest expense on the Convertible Notes, net of income tax, per common share obtainable on conversion exceeds basic EPS.

25


 

 

(2)

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

(3)

An average of 749,810 and 2,353,081 options that were anti-dilutive have been excluded from the computation of diluted EPS for the second quarter of 2009 and 2008, respectively. These options were anti-dilutive because their exercise price was greater than the average market price of our stock. Also excluded from the computation of diluted EPS are 5,130,000 options granted on July 14, 2008, for shares that are issuable upon on the achievement of certain performance criteria related to OCN’s stock price and an annualized rate of return to investors. Year to date, an average of 1,106,029 and 2,353,081 options were anti-dilutive for 2009 and 2008, respectively.


 

 

NOTE 18

EQUITY

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

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

 

 

NOTE 19

DERIVATIVE FINANCIAL INSTRUMENTS

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

 

 

 

 

 

 

 

 

 

 

Interest Rate Cap

 

Euro Currency Futures

 

 

 

 

 

 

 

Notional balance at December 31, 2008

 

$

450,000

 

$

10,125

 

Additions

 

 

 

 

19,777

 

Maturities

 

 

(41,667

)

 

(19,730

)

 

 

   

 

   

 

Notional balance at June 30, 2009

 

$

408,333

 

$

10,172

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Fair value (1):

 

 

 

 

 

 

 

June 30, 2009

 

$

957

 

$

(66

)

 

 

   

 

   

 

December 31, 2008

 

$

193

 

$

(726

)

 

 

   

 

   

 

 

 

 

 

 

 

 

 

Maturity

 

 

January 2011 and
December 2013

 

 

September 2009

 


 

 

 

 

(1)

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

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

          In June 2008, we entered into foreign currency futures contracts to hedge our net investment in BOK against adverse changes in the value of the Euro versus the U.S. Dollar. We designated these derivatives as a foreign-currency net investment hedge. Net losses on these foreign currency futures were $558 and $95 for the three and six months ended June 30, 2009, respectively and $169 for the three and six months ended June 30, 2008. These losses were included in the net change in unrealized foreign currency translation adjustment in accumulated other comprehensive income.

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

26


          Net realized and unrealized gains included in other income (expense), net related to derivative financial instruments were $603 and $636 for the second quarter of 2009 and 2008, respectively. Year to date, the net realized and unrealized gains were $764 and $3,258 for 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 20

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

 

·

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

 

·

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.

          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.

27


          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 June 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue (1) (2)

 

$

62,726

 

$

 

$

460

 

$

24,165

 

$

16,471

 

$

12,108

 

$

112

 

$

(6,863

)

$

109,179

 

Operating expenses (1) (3)

 

 

32,955

 

 

747

 

 

1,016

 

 

16,017

 

 

17,557

 

 

7,121

 

 

3,830

 

 

(6,593

)

 

72,650

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from operations

 

 

29,771

 

 

(747

)

 

(556

)

 

8,148

 

 

(1,086

)

 

4,987

 

 

(3,718

)

 

(270

)

 

36,529

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

19

 

 

1,991

 

 

 

 

1

 

 

 

 

 

 

243

 

 

 

 

2,254

 

Interest expense

 

 

(15,982

)

 

(519

)

 

 

 

(11

)

 

(667

)

 

(118

)

 

(3

)

 

 

 

(17,300

)

Other (1) (2)

 

 

1,695

 

 

(3,568

)

 

(846

)

 

710

 

 

20

 

 

66

 

 

6,515

 

 

270

 

 

4,862

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net

 

 

(14,268

)

 

(2,096

)

 

(846

)

 

700

 

 

(647

)

 

(52

)

 

6,755

 

 

270

 

 

(10,184

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from continuing operations before income taxes

 

$

15,503

 

$

(2,843

)

$

(1,402

)

$

8,848

 

$

(1,733

)

$

4,935

 

$

3,037

 

$

 

$

26,345

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue (1) (2)

 

$

92,414

 

$

 

$

1,127

 

$

14,495

 

$

19,030

 

$

12,410

 

$

134

 

$

(8,385

)

$

131,225

 

Operating expenses (1) (3)

 

 

42,723

 

 

551

 

 

926

 

 

10,945

 

 

21,128

 

 

9,799

 

 

3,344

 

 

(8,150

)

 

81,266

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from operations

 

 

49,691

 

 

(551

)

 

201

 

 

3,550

 

 

(2,098

)

 

2,611

 

 

(3,210

)

 

(235

)

 

49,959

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

260

 

 

2,731

 

 

 

 

42

 

 

1

 

 

 

 

197

 

 

 

 

3,231

 

Interest expense

 

 

(18,834

)

 

(423

)

 

 

 

(57

)

 

(491

)

 

(154

)

 

(1,150

)

 

 

 

(21,109

)

Other (1) (2)

 

 

745

 

 

(7,198

)

 

(1,479

)

 

693

 

 

(4

)

 

(13,489

)

 

(8,472

)

 

235

 

 

(28,969

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net

 

 

(17,829

)

 

(4,890

)

 

(1,479

)

 

678

 

 

(494

)

 

(13,643

)

 

(9,425

)

 

235

 

 

(46,847

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from continuing operations before income taxes

 

$

31,862

 

$

(5,441

)

$

(1,278

)

$

4,228

 

$

(2,592

)

$

(11,032

)

$

(12,635

)

$

 

$

3,112

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue (1) (2)

 

$

137,421

 

$

 

$

997

 

$

42,182

 

$

33,787

 

$

22,682

 

$

365

 

$

(13,665

)

$

223,769

 

Operating expenses (1) (3)

 

 

67,173

 

 

1,309

 

 

1,778

 

 

28,909

 

 

35,706

 

 

15,294

 

 

7,813

 

 

(13,066

)

 

144,916

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from operations

 

 

70,248

 

 

(1,309

)

 

(781

)

 

13,273

 

 

(1,919

)

 

7,388

 

 

(7,448

)

 

(599

)

 

78,853

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

78

 

 

3,875

 

 

 

 

2

 

 

 

 

 

 

464

 

 

 

 

4,419

 

Interest expense

 

 

(31,484

)

 

(1,149

)

 

 

 

(22

)

 

(1,138

)

 

(250

)

 

80

 

 

 

 

(33,963

)

Other (1) (2)

 

 

1,858

 

 

(8,398

)

 

(1,148

)

 

742

 

 

23

 

 

121

 

 

6,503

 

 

599

 

 

300

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net

 

 

(29,548

)

 

(5,672

)

 

(1,148

)

 

722

 

 

(1,115

)

 

(129

)

 

7,047

 

 

599

 

 

(29,244

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from continuing operations before income taxes

 

$

40,700

 

$

(6,981

)

$

(1,929

)

$

13,995

 

$

(3,034

)

$

7,259

 

$

(401

)

$

 

$

49,609

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue (1) (2)

 

$

178,926

 

$

 

$

2,178

 

$

31,249

 

$

38,529

 

$

22,895

 

$

142

 

$

(14,443

)

$

259,476

 

Operating expenses (1) (3) (4)

 

 

84,674

 

 

1,469

 

 

1,616

 

 

24,463

 

 

40,139

 

 

18,681

 

 

11,979

 

 

(13,680

)

 

169,341

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from operations

 

 

94,252

 

 

(1,469

)

 

562

 

 

6,786

 

 

(1,610

)

 

4,214

 

 

(11,837

)

 

(763

)

 

90,135

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

659

 

 

6,386

 

 

 

 

82

 

 

14

 

 

 

 

903

 

 

 

 

8,044

 

Interest expense

 

 

(41,839

)

 

(1,279

)

 

 

 

(179

)

 

(983

)

 

(318

)

 

(2,581

)

 

 

 

(47,179

)

Other (1) (2)

 

 

219

 

 

(12,738

)

 

(3,286

)

 

693

 

 

7

 

 

(5,316

)

 

(19,813

)

 

763

 

 

(39,471

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Other income (expense), net

 

 

(40,961

)

 

(7,631

)

 

(3,286

)

 

596

 

 

(962

)

 

(5,634

)

 

(21,491

)

 

763

 

 

(78,606

)

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Income (loss) from continuing operations before income taxes

 

$

53,291

 

$

(9,100

)

$

(2,724

)

$

7,382

 

$

(2,572

)

$

(1,420

)

$

(33,328

)

$

 

$

11,529

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2009

 

$

1,233,929

 

$

54,138

 

$

21,653

 

$

4,958

 

$

61,773

 

$

8,660

 

$

649,420

 

$

(246

)

$

2,034,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

$

1,416,615

 

$

67,317

 

$

26,755

 

$

3,558

 

$

58,707

 

$

8,906

 

$

655,471

 

$

(229

)

$

2,237,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2008

 

$

1,602,703

 

$

82,389

 

$

60,967

 

$

5,127

 

$

65,842

 

$

8,978

 

$

658,791

 

$

(236

)

$

2,484,561

 

28


 

 

(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 June 30, 2009

 

$

1,982

 

$

115

 

$

 

$

8,160

 

$

10,257

 

For the three months ended June 30, 2008

 

 

2,044

 

 

174

 

 

6

 

 

9,802

 

 

12,026

 

For the six months ended June 30, 2009

 

 

4,365

 

 

256

 

 

 

 

16,553

 

 

21,174

 

For the six months ended June 30, 2008

 

 

3,375

 

 

545

 

 

27

 

 

15,915

 

 

19,862

 


 

 

(2)

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

 

(3)

Depreciation and amortization expense are as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing

 

Loans and Residuals

 

Mortgage Services

 

Financial Services

 

Technology Products

 

Corporate Items and Other

 

Business Segments Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

$

14

 

$

 

$

7

 

$

117

 

$

1,245

 

$

336

 

$

1,719

 

Amortization of MSRs

 

 

8,543

 

 

 

 

 

 

 

 

 

 

 

 

8,543

 

Amortization of intangibles

 

 

 

 

 

 

 

 

669

 

 

 

 

 

 

669

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

$

13

 

$

 

$

14

 

$

(32

)

$

2,048

 

$

369

 

$

2,412

 

Amortization of MSRs

 

 

14,529

 

 

 

 

63

 

 

 

 

 

 

 

 

14,592

 

Amortization of intangibles

 

 

 

 

 

 

 

 

629

 

 

 

 

 

 

629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

$

29

 

$

 

$

15

 

$

234

 

$

2,576

 

$

672

 

$

3,526

 

Amortization of MSRs

 

 

18,584

 

 

 

 

 

 

 

 

 

 

 

 

18,584

 

Amortization of intangibles

 

 

 

 

 

 

 

 

1,336

 

 

 

 

 

 

1,336

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

$

26

 

$

2

 

$

51

 

$

214

 

$

3,555

 

$

1,045

 

$

4,893

 

Amortization of MSRs

 

 

28,332

 

 

 

 

274

 

 

 

 

 

 

 

 

28,606

 

Amortization of intangibles

 

 

 

 

 

 

 

 

1,295

 

 

 

 

 

 

1,295

 


 

 

(4)

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


 

 

NOTE 21

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.

29


          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 was 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.

          OCN together with Bankruptcy Management Solutions, Inc. (BMSI) the wholly owned subsidiary of BMS Holdings, commenced separate arbitrations before the Financial Industry Regulatory Authority against Goldman Sachs & Co., 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. OCN and BMSI subsequently voluntarily dismissed their arbitration claims against Citigroup Global Markets, Inc, and filed a complaint in federal court. OCN purchased the SLARS based on the Broker/Dealer representation that the SLARS were liquid securities 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. OCN seeks to require the Broker/Dealers to repurchase the SLARS at par, and pay consequential damages, potentially including damages related to the repayment of the Investment Line and punitive damages.

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

Tax matters

          On December 28, 2006, the India tax authorities issued an income tax assessment order (the Order) with respect to IT-enabled services performed for OCN by its wholly-owned Indian subsidiary, OFSPL. The Order relates to the assessment year 2004-05 and determined that the percent mark-up on operating costs with respect to the IT-enabled and software development services that OFSPL provided to OCN was insufficient. The proposed adjustment would impose upon OFSPL additional tax of INR 45,290 ($946) and interest of INR 14,922 ($312) 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 ($485) and interest of INR 10,200 ($213) 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.

30


          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 22

SUBSEQUENT EVENTS

          On July 23, 2009, we provided notice that all holders of the Convertible Notes as of the close of business on August 4, 2009 will participate in the distribution of Altisource shares based on the conversion ratio of the Convertible Notes, consistent with the pro rata distribution ratio of one share of Altisource common stock for every three shares of OCN common stock, without conversion of the Convertible Notes into common shares of OCN. Accordingly, upon the Separation of Altisource and OCN, there will be no adjustment to the conversion ratio of the Convertible Notes. As of August 4, 2009, there were no requests to repurchase the Convertible Notes pursuant to the notice provided to holders of the Convertible Notes on July 26, 2009. 

          In July 2009, OCN communicated to its employees a plan to close two of its offices within its Financial Services segment. The offices will be closed in August 2009, and will result in severance costs, losses on the disposal of the assets that will be abandoned and lease termination costs. OCN will record the actual and estimated costs in the third quarter of 2009. We are unable to estimate the total costs of these office closures at this time. We are currently negotiating with the landlords for the leased space in order to exit the leases early, and expect to incur additional costs relating to the leases.

          We have evaluated subsequent events through August 4, 2009.

31


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). As more fully described below under Executive Summary—Separation of Ocwen Solutions, on August 10, 2009, the OS line of business, excluding BMS Holdings and GSS, will be separated from Ocwen.

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

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

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

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

EXECUTIVE SUMMARY

           Three Months Ended June 2009 versus June 2008. We generated net income of $17,830 or $0.26 per share in the second quarter of 2009 compared to a net loss of $2,717 or $0.04 per share for the second quarter of 2008. Income from continuing operations before income taxes was $26,345 for the second quarter of 2009 as compared to $3,112 for the second quarter of 2008.

          Our results benefited from the cost reduction efforts that we announced in the fourth quarter of 2008 as evidenced by the 11% decline in operating expenses in the second quarter of 2009 compared to the second quarter of 2008. We achieved this improvement despite $1,850 in professional services expenses, primarily related to the Altisource Separation.

          We recorded unrealized fair value gains of $5,435 on trading securities in the second quarter of 2009. In comparison, the net loss in the second quarter of 2008 included approximately $22,795 of unrealized losses comprised of $8,140 of mark-to-market losses on trading securities and $14,655 in unrealized losses primarily related to derivative mark-to-market losses at an unconsolidated subsidiary.

          Servicing segment revenues declined as expected due to the implementation of new underwriting and documentation requirements to complete modifications under the federal government’s Home Affordable Modification Program (HAMP) (see Segments—Servicing for additional details of this impact) and as a result of lower average UPB. However, this decline was partially offset by higher process management revenues in the second quarter of 2009 as compared to the second quarter of 2008. Servicing also benefited from lower interest expense in the second quarter of 2009 compared to 2008. Both Loans and Residuals and Asset Management Vehicles reported a decrease in unrealized losses due to smaller declines in the estimated market value of loans, real estate and securities.

          Mortgage Services income from continuing operations benefited from geographic expansion, increased penetration of existing clients and the introduction of new default-oriented products. Financial Services experienced a decline in revenue as lower collection rates, due to the current economic climate and consistent with the experience of the collections industry in general, continued to adversely impact results in the second quarter of 2009 as compared to 2008. Technology Products’ income from continuing operations improved in the second quarter of 2009, as compared to 2008, benefiting from the growth of an existing client in the second quarter of 2009 and because we did not recognize any of the losses of BMS Holdings, an unconsolidated subsidiary, in 2009. We suspended the equity method of accounting for our investment in BMS Holdings in the second quarter of 2008 because losses had reduced our investment to zero.

32


           Six Months Ended June 2009 versus June 2008. We generated net income of $32,939 or $0.49 per share in the six months ended June 2009 compared to $2,555 or $0.04 per share for the six months ended June 2008. Income from continuing operations before income taxes was $49,609 as compared to $11,529 for the six months ended June 2009 and 2008, respectively.

          Our results for the six months ended June 2009 benefited from the cost reduction efforts that we announced in the fourth quarter of 2008 as evidenced by the 14% decline in operating expenses in the first half of 2009 compared to 2008. We achieved this improvement despite $2,981 in professional services expenses, primarily related to the Altisource Separation.

          We recorded unrealized fair value gains of $5,055 on trading securities in the six months ended June 2009. In comparison, the net loss in the six months ended June 2008 included approximately $27,749 of unrealized losses comprised of $20,049 of mark-to-market losses on trading securities and $7,700 in unrealized losses primarily related to losses at an unconsolidated subsidiary.

           Strategic Priorities

          Ocwen continues to focus on four initiatives:

 

 

 

 

1.

Liquidity and balance sheet strength

 

2.

Revenue opportunities

 

3.

Quality and cost structure leadership

 

4.

Separation of Ocwen Solutions

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

 

 

 

 

·

Lowest Cost Provider . We believe OLS has the lowest operating cost in the mortgage servicing industry. Based on average industry cost information provided by a third party valuation consultant OLS’ net cost to service a non performing loan was 58% lower than the average net cost for the subprime industry as of May 31, 2009.

 

 

 

 

·

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

 

 

 

 

·

High Barriers to Entry . Our servicing platform runs on a proprietary information technology system developed over a 20-year period at a cost of more than $140,000. Currently, we employ over 270 software developers focused on identifying additional opportunities to automate manual processes to eliminate variability and to increase the quality and timeliness of decision-making processes and information transfers. Our proprietary tools and contractual arrangements are utilized to analyze the data collected and are enhanced by a feedback loop that provides updated information on the latest servicing and property valuation data gathered by various Ocwen entities.

 

 

 

 

·

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

           Liquidity and Balance Sheet Strength. We believe our improved liquidity position and strengthened balance sheet provide us with greater flexibility and a competitive advantage over our peers to pursue attractive investment opportunities. We focused this quarter on further increasing borrowing capacity and were successful, as more fully described in the Executive Summary—Liquidity section below. Furthermore, on July 16, 2009, we filed a Form S-3 enabling us to pursue additional equity funding on an as needed basis. We expect to partially or wholly fund servicing rights acquisition opportunities by issuing additional equity through an equity issuance.

          We believe an offering under the Term Asset-Backed Securities Loan Facility program (TALF) will enhance our liquidity and balance sheet. We are currently working on a TALF offering to replace an existing $165,000 medium term advance note prior to this note entering its amortization period in December 2009 and have secured consent from the holders of the note to repay these notes on August 11, 2009. We may increase this TALF issuance or execute a second TALF deal depending upon our success in acquiring additional servicing rights.

           Revenue Opportunities. We believe that the current economic environment combined with government financial stability initiatives affords us a unique opportunity to capitalize upon our core competitive strengths. Our revenue growth efforts are focused on developing opportunities in each of our lines of business.

33


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

 

 

 

 

·

Acquisition of Servicing Rights. Servicing rights for several loan portfolios are for sale in our industry, and we are in the process of evaluating these opportunities. We expect that any acquisition will be within our core competency of servicing subprime portfolios. We estimate that the total size of the market for such loan portfolios is approximately $800,000,000 UPB, and we are evaluating opportunities to buy the servicing rights for over $75,000,000 UPB.

 

 

 

 

·

Special Servicing Opportunities. We are aggressively pursuing special servicing opportunities that require little capital. In February 2009, we were selected as a special servicer of non-performing loans for Freddie Mac under a high-risk-loan pilot program. This pilot program with Freddie Mac is an example of the kind of business that we are targeting.

 

 

 

 

·

Asset Management Vehicle. Based on our investment track record, our expertise in the mortgage sector and the strength of our servicing platform, we believe the current distressed mortgage market may provide an opportunity to sponsor an asset management vehicle focused on investment opportunities in the mortgage sector including, among others, investments in residential mortgage-backed securities, whole loans and servicing rights. If undertaken, we would expect to earn fee income and a carried interest for investment advisory services as well as sub-servicing fees for any investments by the vehicle in whole loans and servicing rights. Any such opportunity will depend upon a variety of considerations to be evaluated at the relevant time.

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

 

 

 

 

·

Product Diversification. We continue to develop a suite of services addressing the entire 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 grow our revenue base.

          In the second quarter of 2009, our results benefited from our efforts to diversify our product line and expand our geographic footprint at Ocwen Solutions.

           Quality and Cost Structure. We believe that quality and cost are intrinsically related in that errors increase costs and destroy quality. We are beginning to realize quality improvements and cost savings from three specific initiatives that we launched last quarter. 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. On August 1, 2009, we introduced our new Loan Resolution Module specifically designed to increase our HAMP loan modification efforts. We expect numerous additional scripting and technology enhancements in the third quarter as we seek to implement a process that is fully integrated and automated, eliminating unstructured thinking and decisions. 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 (the Separation). Given the need to consolidate the businesses to be separated and the domicile of the newly formed entity, Altisource Portfolio Solutions S.A. (Altisource) (NASDAQ: ASPS), Ocwen will incur taxes to the extent that the fair market value of Altisource assets exceeds Ocwen's tax basis in such assets in accordance with section 367 of the Internal Revenue Code. 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.

          On July 22, 2009, a registration statement on Form 10 was declared effective by the Securities and Exchange Commission (SEC) for the Separation. On August 10, 2009, the shares of Altisource will be distributed to the OCN shareholders and Convertible Notes holders of record as of August 4, 2009, in the form of a pro rata stock distribution. Each OCN shareholder will receive one share of Altisource common stock for every three shares of OCN common stock held as of the close of business on the record date of the distribution, August 4, 2009. Each Convertible Notes holder will participate in the distribution of Altisource shares based on the conversion ratio of the Convertible Notes, consistent with the pro rata distribution ratio of one share of Altisource common stock for every three shares of Ocwen common stock, without conversion of the Convertible Notes into common shares of Ocwen. Accordingly, upon the separation of Altisource and Ocwen there will be no adjustment to the conversion ratio of the Convertible Notes. No action is required by OCN shareholders or Convertible Notes holders to receive the shares of Altisource common stock.

          After the completion of the spin-off, Altisource’s largest customer will initially be Ocwen, and Altisource will enter into long-term servicing contracts with Ocwen for terms of up to eight year. There are other arrangements between Altisource and Ocwen that will continue following the spin-off to govern certain ongoing relationships and to provide for an orderly transition to the status of two independent companies. Under these agreements Altisource and Ocwen will both provide and receive certain corporate services at prevailing market rates.

34


          Although Altisource will be a separate company from Ocwen after the spin-off, Altisource and Ocwen will have the same Chairman of the Board, William C. Erbey. Mr. Erbey is also the current Chief Executive Officer of Ocwen and will remain in that role after the spin-off (Mr. Erbey will serve as Altisource’s Non-executive Chairman). As a result, he has obligations to Ocwen as well as to Altisource.

Outlook

           Ocwen Asset Management. We are currently evaluating acquisition opportunities for mortgage servicing portfolios. In addition, we are aggressively pursuing special servicing opportunities that require limited capital such as our pilot program with Freddie Mac. Advances, including match funded advances, declined $165,699 in the six months of 2009. We expect this trend to continue through the remainder of 2009 although the rate of decline is likely to slow.

          We recognize revenue in the form of deferred servicing fees and ancillary fee income whenever we return a loan to performing status whether it be through a HAMP modification, a non-HAMP modification or otherwise. We completed over 20,000 modifications in both the second quarter of 2008 and the first quarter of 2009, while only completing just over 8,000 HAMP and non-HAMP loan modifications in the second quarter of 2009. The decline in modifications in the second quarter represents delayed modifications, not lost modifications. If a borrower is unable to qualify for the HAMP, we work to complete a non-HAMP loan modification when appropriate. We expect to begin generating revenues under the HAMP in the third quarter of 2009 after qualifying loan modifications pass the 90-day trial period. Additionally, HAMP modifications are expected to provide incremental revenue and pre-tax income versus non-HAMP loan modifications as a result of the government incentive of $1,000 (actual dollars) per completed loan modification. We expect revenue improvement in the third and fourth quarters as the number of completed HAMP modifications accelerates, and the combined HAMP and non-HAMP completed modifications return to normal levels based on our UPB serviced. See Segments—Servicing below for additional details of regarding the HAMP.

          We continue to reduce non-core assets through sales and deploy cash proceeds in our core businesses. We are also currently working on a TALF offering to replace an amortizing medium term advance note with longer term financing at attractive rates. We expect to continue to improve the strength of our balance sheet. We expect to expand the size of the servicing portfolio, thereby utilizing our technological and low cost labor advantages to create significant value for our shareholders.

           Ocwen Solutions. The primary growth engine for Ocwen Solutions in the near term will continue to be Mortgage Services. We continue to expand the array and geographical range of services that we provide to originators and servicers. These services include due diligence, valuation, real estate sales, default processing services, property inspection and preservation services, homeowner outreach, closing and title services and knowledge process outsourcing services.

          We expect limited revenue growth in Financial Services in 2009 but remain focused on implementing our strategic initiatives to favorably position ourselves for future growth when market conditions improve. 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. Most importantly, however, NCI remains a top tier performer for its most important clients. NCI will continue to focus on reducing operating costs by closing offices, improving processes and implementing its strategic initiatives which include scoring, scripting and optimal debtor resolution.

Liquidity

          Cash totaled $213,911, or 11% of total assets at June 30, 2009. This compares to cash of $201,025, or 9% of total assets at December 31, 2008, and cash of $148,835, or 6% of total assets a year ago at June 30, 2008.

          Servicer liabilities, which represent cash collected from borrowers but not yet remitted to securitization trusts, declined by $57,977 from December 31, 2008 to June 30, 2009. Servicer liabilities have a very short duration as funds collected must be remitted to the trust in accordance with the contractual obligation. The $165,699 decline in total advances in the first six months of 2009 is attributable to the success of our efforts to stabilize the delinquency rate which has allowed advances to decline somewhat faster than UPB.

          Our borrowings as of June 30, 2009 include $176,668 borrowed under the Investment Line term note that is used to finance the auction rate securities which we are carrying at a fair value of $243,285. In the first six months of 2009, we repaid $24,051 of the Investment Line term note principal. This amount includes proceeds of $2,000 from the redemption of certain securities. On April 30, 2009, we renewed this term note through June 2010. We renewed this agreement early under terms substantially similar to the previous agreement, except that amortization payments are now $3,000 per month in place of the previous quarterly reductions in the advance rate.

          Excluding the Investment Line, our borrowings have decreased by $215,809 since December 31, 2008, primarily reflecting a reduction in borrowings by the Servicing and Loans and Residuals segments and Corporate Items and Other. 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 February 2009 repurchase of 3.25% Convertible Notes with a face value of $25,910.

35


          Excluding the Investment Line, our total maximum borrowing capacity was $1,536,810 as of June 30, 2009, an increase of $196,063 as compared to December 31, 2008. This increase is primarily due to an increase in borrowing capacity of the Servicing segment offset by a decline in borrowing capacity of the Loans and Residuals and Financial Services segments. The increase in Servicing borrowing capacity is principally the result of entering into two new facilities in March 2009 and expanding an existing facility in May 2009. One of the new facilities represented a $60,000 advance in the form of zero-coupon bonds that we initially recorded at $45,373, net of a discount of $14,627. The other new facility is a $7,000 term note. Both of these new facilities are secured by the pledge of advances. We secured an increase in the maximum borrowing under the existing facility from $300,000 to $500,000 and extended the amortization date by one year to May 4, 2010.

          At June 30, 2009, excluding the Investment Line, $653,118 of our total maximum borrowing capacity remained unused, all attributable to the Servicing business. The unused borrowing capacity in the Servicing business may be utilized in the future by pledging qualifying collateral to our facilities.

          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 cover possible additional principal repayments on our MSR term note in the event that declines in the collateral value as determined by a third party appraiser are greater than the scheduled amortization of this note of $6,999 per month.

          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 meet their commitments to provide us with the cash that is required to make remittances to the Servicing investors. Some of the financial institutions lending to us have experienced significant financial losses and as a result have undergone restructuring and raised additional capital, either as part of or outside of the various government rescue plans. 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 six months of 2009, financing costs declined from the level in the first six months of 2008 due to lower advance balances and a reduction in interest rates. One-month LIBOR, which is the reference rate for most of our borrowings declined significantly in the first six months of 2009, although the effect of this decrease on our cost of borrowing was more than offset by higher facility costs and higher average spreads over LIBOR. As a result, the interest rate we incurred on the average balance of our debt outstanding under match funded facilities and lines of credit and other secured borrowings increased to 6.67% for the first six months of 2009 from 6.29% for the first six months of 2008.

CRITICAL ACCOUNTING POLICIES

          Our ability to measure and report our operating results and financial position is significantly 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 for the year ended December 31, 2008 included in Exhibit 99.1 on Form 8-K filed July 16, 2009.

36


RESULTS OF OPERATIONS AND CHANGES IN FINANCIAL CONDITION

Operations Summary

The following table summarizes our consolidated operating results for the periods ended June 30, 2009 and 2008. We have provided a more complete discussion of operating results by line of business in the Segments section.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

Six months

 

 

 

 

 

 

 

 

 

2009

 

2008

 

% Change

 

2009

 

2008

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

109,179

 

$

131,225

 

(17

)

 

$

223,769

 

$

259,476

 

(14

)

 

Operating expenses

 

 

72,650

 

 

81,266

 

(11

)

 

 

144,916

 

 

169,341

 

(14

)

 

 

 

   

 

   

 

 

 

 

   

 

   

 

 

 

 

Income from operations

 

 

36,529

 

 

49,959

 

(27

)

 

 

78,853

 

 

90,135

 

(13

)

 

Other income (expense), net

 

 

(10,184

)

 

(46,847

)

(78

)

 

 

(29,244

)

 

(78,606

)

(63

)

 

 

 

   

 

   

 

 

 

 

   

 

   

 

 

 

 

Income from continuing operations before taxes

 

 

26,345

 

 

3,112

 

747

 

 

 

49,609

 

 

11,529

 

330

 

 

Income tax expense

 

 

9,472

 

 

424

 

2,134

 

 

 

17,509

 

 

3,363

 

421

 

 

 

 

   

 

   

 

 

 

 

   

 

   

 

 

 

 

Income from continuing operations

 

 

16,873

 

 

2,688

 

528

 

 

 

32,100

 

 

8,166

 

293

 

 

Income (loss) from discontinued operations, net of taxes

 

 

1,052

 

 

(5,182

)

120

 

 

 

864

 

 

(5,386

)

116

 

 

 

 

   

 

   

 

 

 

 

   

 

   

 

 

 

 

Net income

 

 

17,925

 

 

(2,494

)

819

 

 

 

32,964

 

 

2,780

 

1,086

 

 

Net loss (income) attributable to minority interest in subsidiaries

 

 

(95

)

 

(223

)

(57

)

 

 

(25

)

 

(225

)

(89

)

 

 

 

   

 

   

 

 

 

 

   

 

   

 

 

 

 

Net income (loss) attributable to Ocwen Financial Corp

 

$

17,830

 

$

(2,717

)

756

 

 

$

32,939

 

$

2,555

 

1,189

 

 

 

 

   

 

   

 

 

 

 

   

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment income (loss) from continuing operations before taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing

 

$

15,503

 

$

31,862

 

(51

)

 

$

40,700

 

$

53,291

 

(24

)

 

Loans and Residuals

 

 

(2,843

)

 

(5,441

)

(48

)

 

 

(6,981

)

 

(9,100

)

(23

)

 

Asset Management Vehicles

 

 

(1,402

)

 

(1,278

)

10

 

 

 

(1,929

)

 

(2,724

)

(29

)

 

Mortgage Services

 

 

8,848

 

 

4,228

 

109

 

 

 

13,995

 

 

7,382

 

90

 

 

Financial Services

 

 

(1,733

)

 

(2,592

)

(33

)

 

 

(3,034

)

 

(2,572

)

18

 

 

Technology Products

 

 

4,935

 

 

(11,032

)

145

 

 

 

7,259

 

 

(1,420

)

611

 

 

Corporate Items and Other

 

 

3,037

 

 

(12,635

)

124

 

 

 

(401

)

 

(33,328

)

(99

)

 

 

 

   

 

   

 

 

 

 

   

 

   

 

 

 

 

 

 

$

26,345

 

$

3,112

 

747

 

 

$

49,609

 

$

11,529

 

330

 

 

 

 

   

 

   

 

 

 

 

   

 

   

 

 

 

 

          Income from operations declined by 27% in the second quarter of 2009 as compared to 2008, reflecting a significant reduction in revenues that was partially offset by a decline in operating expenses. Lower interest expense and lower fair value adjustments on securities and loans resulted in a $23,233 increase in income from continuing operations before income taxes.

          Total revenues declined by $22,046 or 17% in the second quarter of 2009 as compared to 2008 principally because of a decrease in Servicing revenue. Of the total decline in Servicing revenue in the second quarter of 2009, $8,142 was attributable to the implementation of new underwriting and documentation requirements to complete modifications under the HAMP, while the majority of the remainder was due to lower UPB. Financial Services segment revenue also declined in the second quarter of 2009 largely due to lower collection rates. Mortgage Services revenue increased over the second quarter of 2008 primarily as a result of geographic expansion, increased penetration of existing clients and the introduction of new default-oriented products.

          Total operating expenses were $8,616, or 11% lower in the second quarter of 2009 as compared to 2008. This is primarily due to declines in operating expenses of the Servicing segment. Operating expenses of the Servicing segment declined primarily due to lower amortization of servicing rights on a smaller servicing portfolio, and lower servicing and origination expense as a result of a reduction in loan payoffs and reduced staffing levels.

          Other expense, net, for the second quarter of 2009 was $10,184 as compared to $46,847 for the second quarter of 2008, a favorable variance of $36,663. This variance is the result of several factors:

 

 

 

 

·

In the Servicing segment, interest expense on match funded liabilities and lines of credit was $3,056 lower in the second quarter of 2009. This decline occurred primarily because the decline in the average balance of advances outweighed the impact of an increase in interest rates that resulted from higher spreads over LIBOR and higher facility fees charged by lenders on new and renewed financing facilities.

 

 

 

 

·

In the Loans and Residuals segment, losses on loans declined by $2,942 in the second quarter of 2009 reflecting lower charges to reduce loans to fair value.

37


 

 

 

 

·

In the AMV segment, our equity interest in the losses of OSI and ONL and affiliates for the second quarter of 2009 was $576. This compares to losses of $1,103 for the second quarter of 2008. The losses in 2008 reflect higher charges to reduce residual securities, loans and real estate to fair value.

 

 

 

 

·

In the Technology Products segment, our share of the losses of BMS Holdings was $13,552 for the second quarter of 2008 as compared to zero for the second 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 gain of $6,024 on our auction rate securities in the second quarter of 2009 based on improvements in the underlying collateral markets and liquidity solution discussions with counterparties. This compares to an unrealized loss of $6,768 in the second quarter of 2008.

Financial Condition Summary

          Total assets declined by $202,815, or 9%, in the first six months of 2009. This decrease was due to declines in all asset categories except for cash, auction rate securities and receivables:

 

 

 

 

·

Cash increased by $12,886 to a balance of $213,911 at June 30, 2009.

 

 

 

 

·

Auction rate securities increased by $3,984 due to unrealized gains of $5,984 that were partially offset by $2,000 of redemptions at par value.

 

 

 

 

·

Loans held for resale declined by $10,192 due to foreclosures, charge-offs, payoffs and declines in estimated values.

 

 

 

 

·

Total advances declined by $165,699 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 $217,346 decline in match funded advances and a $51,647 increase in advances as a result of moving collateral from match funded advance facilities to a non-match funded facility.

 

 

 

 

·

MSRs decreased by $6,771 as amortization of $17,005 exceeded acquisitions of $10,241 for the first six months of 2009.

 

 

 

 

·

Investment in unconsolidated entities declined by $4,394 primarily due to $3,246 of distributions received from our asset management entities and charges to reduce residual securities, loans and real estate held by those entities to fair value.

          Total liabilities declined by $287,718, or 18%, in the first six months of 2009. This decrease was the result of declines in all liability categories except for lines of credit and other secured borrowings and other liabilities:

 

 

 

 

·

Match funded liabilities declined by $196,916 as a result of the decline in match funded advances.

 

 

 

 

·

Lines of credit and other secured borrowings increased by $4,940 principally because of $53,519 of borrowings, net of discount, under two new facilities offset in part by $41,995 of repayments of borrowings under the senior secured credit agreement term note that is used to finance MSRs.

 

 

 

 

·

The Investment Line term note declined by $24,051 due to repayments.

 

 

 

 

·

Servicer liabilities declined by $57,977 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 $23,833. 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 June 30, 2009, total equity was $694,544, an increase of $84,903 over December 31, 2008. This increase was primarily due to net income of $32,939 and the sale of 5,471,500 shares of common stock for $60,187, less the repurchase of 1,000,000 shares of common stock for $11,000. The exercise of stock options and the compensation related to employee share-based awards also contributed to the increase in equity in 2009.

38


SEGMENTS

          The following section provides a discussion of changes in the financial condition of our business segments during the six months ended June 30, 2009 and a discussion of the results of continuing operations of our business segments for the three and six months ended June 30, 2009 and 2008.

          The following table presents assets and liabilities of each of our business segments at June 30, 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

 

$

7

 

$

141

 

$

 

$

228

 

$

6,553

 

$

 

$

206,982

 

$

 

$

213,911

 

Cash held for clients

 

 

 

 

 

 

 

 

 

 

416

 

 

 

 

 

 

(416

)

 

 

Trading securities, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

243,285

 

 

 

 

243,285

 

Subordinates and residuals

 

 

 

 

3,341

 

 

 

 

 

 

 

 

 

 

99

 

 

 

 

3,440

 

Loans held for resale

 

 

 

 

39,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39,726

 

Advances

 

 

148,865

 

 

4,739

 

 

 

 

 

 

 

 

 

 

128

 

 

 

 

153,732

 

Match funded advances

 

 

883,209